2 asset classes to watch as the Fed shrinks: Morning Brief

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Wednesday, November 3, 2021

Bonds and dollar

Look at bonds and the dollar, the forgotten stepchildren of a sparkling market.

Once upon a time, inflation-wary investors telegraphed their dissatisfaction by selling Treasury debt, which drove up yields and the value of the U.S. dollar (someday I will explore the fascinating world of rate differentials). interest, but that day is not today).

For obvious reasons – mainly massive government stimulus and a central bank that has been committed to keeping its foot on the pedal of monetary policy since at least 2009 – the days of bond and dollar vigilantes have since passed. long time.

Yet with price pressures entering uncharted territory north of 5%, and if – as Wall Street widely expects the Federal Reserve to withdraw its stimulus measures in times of crisis – these same classes of assets are the ones that investors may want to start paying more attention to.

To be sure, with part of the Fed’s stimulus package rolled back, there will be a little less liquidity in a system that has raised major stock indexes to record highs.

However, yields and the greenback have not lost their usefulness as barometers of inflation expectations, which go through the figurative roof even with slower growth. One of the main causes of this is that the federal government should still stimulate the economy with fiscal stimulus (although it remains to be seen to what extent).

Step into the dollar, which has seen an uneven but decisive stealth rally for most of this year against its major counterparts. Bank of America predicts “risks to the US dollar are on the upside,” with price action reflecting “messages from the Fed regarding future rate hikes and related inflation outlook updates , an increasingly urgent matter “.

According to Marc Chandler of Bannockburn Global Forex, the dollar’s year-to-date gains against the yen are approaching 10%, with investors “taking into account a very aggressive Federal Reserve tightening. The Bank of Japan will lag behind most high-income countries in the tightening cycle, and rising US yields are a key driver of the greenback’s gains against the yen.

Blame the insatiable demand that drove everything from labor shortages to backed-up freighters on the West Coast, with Chandler noting that “three main forces are shaping the business and investment climate: Soaring oil prices. energy, spectacular support for short-term interest rates in Anglo-American countries and continued supply chain disruptions.

Since the word “transient” has become both imprecise and ironic to describe stubbornly high prices, equity investors will analyze exactly when and how the Fed will withdraw its quantitative easing.

And for the reasons outlined above, bond bears are likely to pay even more attention.

“The Fed will also likely tackle large movements in short-term rates in developed markets around the world – increases that have been very large compared to historical trends,” said Eric Stein, CIO of fixed income at Eaton. Vance Management.

“It appears that central banks in developed markets have tried to outdo themselves, as inflation is not only proving to be transient but rather a bit stickier, with results higher than expected,” the investor said. .

Shorter-term government debt, which tends to be the most sensitive to inflation, has led to “significant flattening of yield curves globally,” Stein said. “In the United States, this resulted in lower rates at the back end of the curve – still not lower than in other developed markets, but a massive flattening of the curve nonetheless.”

The combination of higher inflation, faster-than-expected decline and the massive reduction in the Fed’s balance sheet could “maintain or extend the recent flattening trend in the US Treasury curve,” according to Bank of America.

All of this suggests that the central bank “has its plate full” to try and manage investor expectations, according to Eaton Vance’s Stein.

With biased downside risks to growth and an exuberant market that is notoriously sensitive to changes in Fed policy, this could end up being the understatement of the year.

Through Javier E. David, editor of Yahoo finance. Follow him on @Teflongeek

What to watch today

Economy

  • 7:00 am ET: MBA Mortgage Applications, week ended October 29 (0.3% in the previous week)

  • 8:15 a.m.ET: ADP job change, Oct (400,000 expected, 568,000 in September)

  • 9:45 a.m.ET: Markit US Services PMI, October final (expected 58.2, 58.2 in the previous version)

  • 9:45 a.m.ET: Markit US Composite PMI, October Final (57.3 in previous print)

  • 10:00 am ET: ISM Services Index, October (62.0 expected, 61.9 in September)

  • 10:00 am ET: Factory orders, September (0.1% expected, 1.2% in August)

  • 10:00 am ET: Durable goods orders, September final (-0.4% in previous impression

  • 10:00 am ET: Durable goods orders excluding transport, September final (0.4% in previous impression)

  • 10:00 am ET: Orders of non-defense capital goods excluding aircraft, September final (0.8% in previous impression)

  • 2:00 p.m. ET: Monetary policy decision of the Federal Open Market Committee

Earnings

Pre-marketing

  • 6:30 a.m.ET: Humana (HUM) Expected to Report Adjusted Earnings of $ 4.69 per Share on Revenue of $ 20.85 Billion

  • 6:30 p.m. ET: CVS Health Corp. (CVS) Expected to Report Adjusted Earnings of $ 1.78 per Share on Revenue of $ 70.48 Billion

  • 7:00 am ET: Discovery Inc. (DISCA) Expected to Report Adjusted Earnings of 43 cents a Share on Revenue of $ 3.15 Billion

  • 7:00 am ET: The New York Times (NYT) expected to report adjusted earnings of 20 cents per share on revenue of $ 499.14 million

  • 7:00 am ET: Norwegian Cruise Line Holdings (NCLH) Expected to Report Adjusted Losses of $ 1.96 per Share on Revenue of $ 265.89 Million

  • 7:00 am ET: Marriott International (MAR) Expected to Report Adjusted Earnings of 99 cents per Share on Revenue of $ 3.77 Billion

  • 7:30 a.m. ET: Sinclair Broadcast Group (SBGI) Expected to Report Adjusted Losses of $ 1.10 per Share on Revenue of $ 1.58 Billion

Post market

  • 4 p.m. ET: Reserve assets (BKNG) Expected to Report Adjusted Earnings of $ 32.23 per Share on Revenue of $ 4.30 Billion

  • 4 p.m. ET: Qorvo (QRVO) Expected to Report Adjusted Earnings of $ 3.26 per Share on Revenue of $ 1.25 Billion

  • 4 p.m. ET: Electronic Arts (EA) Expected to Report Adjusted Earnings of $ 1.17 per Share on Revenue of $ 1.76 Billion

  • 4 p.m. ET: Qualcomm (QCOM) Expected to Report Adjusted Earnings of $ 2.26 per Share on Revenue of $ 8.86 Billion

  • 4:05 p.m. ET: Vimeo (VMEO) Expected to Report Adjusted Losses of 10 cents per Share on Revenue of $ 99.85 Million

  • 4:05 p.m. ET: Roku (ROKU) expected to report adjusted earnings of 9 cents per share on revenue of $ 681.13 million

  • 4:05 p.m. ET: Etsy (ETSY) Expected to Report Adjusted Earnings of 67 cents per Share on Revenue of $ 519.00 Million

  • 4:05 p.m. ET: Come on daddy (GDDY) Expected to Report Adjusted Earnings of 39 cents per Share on Revenue of $ 945.18 Million

  • 4:05 p.m. ET: Take-Two interactive software (OF THEM) Expected to Report Adjusted Earnings of $ 1.36 per Share on Revenue of $ 865.95 Million

  • 4:15 p.m. ET: The Allstate Company (ALL) Expected to Report Adjusted Earnings of $ 1.60 per Share on Revenue of $ 11.78 Billion

  • 4:15 p.m. ET: MGM Resorts International (MGM) Expected to Report Adjusted Losses of 3 cents a Share on $ 2.41 Billion in Revenue

  • 4:15 p.m. ET: Marathon Oil Corp. (MRO) Expected to Report Adjusted Earnings of 32 cents a Share on Revenue of $ 1.32 Billion

Politics

  • Democrat Eric Adams was elected mayor of New York, the attempt to dissolve the Minneapolis police force failed and the Republicans Glenn youngkin wins the race for governor of Virginia, according to the latest results of Tuesday’s elections. The race for governor of New Jersey is still too close to be announced.

Top news

Ether Rises to $ 4,600 to Record High Bitcoin Tracks [Reuters]

U.S. CDC Advisors Recommend Pfizer / BioNTech COVID-19 Vaccine For Young Children [Reuters]

Yellen calls for “a global transformation of our carbon-intensive economies” [Yahoo Finance]

Activision Blizzard Profits Surpass Net Income Expectations But Miss Fourth Quarter Outlook [Yahoo Finance]

Yahoo Finance Highlights

Avis shares rampage to close 108% higher after beating earnings

Why Coca-Cola is buying BodyArmor for $ 5.6 billion is a good thing

New Southwest Airlines CEO “had no idea” he was up for the job

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