Who would have thought that after yesterday’s actions by the FOMC that the market would rally? It’s hard to believe but yes, the market – and that’s bonds, commodities, and stocks – all rallied because once again the Fed was going to hold rates steady.
No rate rises in the near future. It’s not as though the Fed does not have form. Each time it has told us that there would be rate rises and the number for the last few years, the smart money has bet against the Fed knowing what it was doing and has done so again.
The upshot is, today was gravy day and everything rallied. Well, many things did. Tech shares, real estate, and consumer sectors rallied. Financials slipped because the yield curve is not working for them and for traders, at least, they can now focus on momentum trades.
The economic data is indicating ebbing momentum. GDP estimates for the first quarter are as low as 0.4%. The Philadelphia Fed business conditions index jumped from -4.1 in February to 13.7 in March. There is a slowdown in employment growth (understandable given the already low level).
Manufacturers’ perceptions about the outlook were the least favourable for three years and expectations for capital spending were weak. If anything, the abrupt turnaround by the Fed and its inability to lift inflation to its target level perhaps demonstrates that the Fed hiked too far in the first instance.
The secular stagnation story is starting to gain currency. And maybe also the Fed’s credibility is being questioned.
At heart, the issue now is whether we see the current slow growth expansion continue indefinitely in the “hoped for Fed soft landing scenario”. Markets are looking for signs of a global downturn.
The yield curve just keeps flattening. The spread between three-month treasury bills and 10-year notes shrank to the lowest since 2007. The narrowing spread is also a pointer towards market expectations of a recession. The bills are around 2.607 and the tens about 2.54 with the inversion of about 6bp.
The spread is also the Fed’s favourite measure of the yield curve because the curve shows the strongest historical correlation between inversion and forthcoming recessions. The 10-years are now at or near a 14-month low (they rose 3 bp Wednesday). The 2-year has now fallen 7 bp or so. The narrative from the Fed has also changed. In Q4, the Fed was not interested in anywhere except the U.S. and now they are concerned about developments outside the U.S.
For corporates, the turnaround by the Fed has been somewhat of a watershed moment. Since Powell’s dovish comments, signalling a change of thinking by the FOMC, corporate IG spreads have tightened on average 33 bp and HY spreads have tightened 136 bp. Demand for bonds has come from far and wide, with overseas buyers seeking out attractive yields from U.S. issuers. The IG primary has seen 209 deals totalling $294.84 bio priced (IFR data).
Across the pond, gilts had a Brexit fit. Demand for triple A securities to meet regulatory requirements has seen gilts rally. Bunds also rallied strongly with the 10-year bund barely above 0% at 0.04%.
Christian Sewing, the CEO of Deutsche Bank, has stated that he sees a strong case for the Commerzbank merger. This sets up a showdown with German unions as 30,000 jobs may be cut. Both supervisory boards met Thursday to discuss the merger. Sewing sees the merger bringing scale and a lower cost of funding.
Equities: The S&P 500 gained 1.1% and the Dow rose 0.8%. The Vix closed at 13.64 while the Stoxx Europe 600 Index was slightly down at 0.05%.
Currencies: The Bloomberg Dollar index rose 0.5% while the euro fell 0.4% and the pound fell 0.8%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.539%. The 2-year is trading at 2.41% and the 30-year is at 2.965%. The U.S. curve closed on the day with the following closes 2/10 at 12.7bp, 2/30 at 55.7bp and the 10/30 closed at 42.6bp.
The U.S. 5-year closed at 2.341% while the 2/5 spread is now -6.9bp. The ten-year bund closed at 0.042% and the British gilt closed at 1.06%. The 10-year yen gilt is trading -0.035%. Norway bucked the trend and tightened and signalled another hike mid-year. The krone rallied 0.56% versus the dollar.
Commodities: WTI fell 0.7% after hitting its highest price in 2019. Brent fell 1.26% and gold fell 0.2% and copper shed 0.38%.
Bitcoin is trading at around $3,971.
Aussie Market Today.
Get on board, it all looks good. Cash rates look likely to remain low and stocks for the moment are back on the momentum trade scenario. With rates low and demand for commodities strong, the equity environment looks solid.
Bonds to continue to rally. Demand for yield will drive bond rates as much as slowing economic data in Australia. Credit to tighten further as demand is clearly outstripping supply.