- Markets settle down after the FOMC’s hawkish turn on WednesdayÂ
- Bipartisan infrastructure proposal picks up some Republican support
- U.S. Covid infections fall to new 14-3/4 month low
Markets settle down after the FOMC’s hawkish turn on Wednesday — The markets on Thursday settled down after the FOMC surprised the markets on Wednesday by turning more hawkish. The S&P 500 index on Thursday closed just slightly lower by -0.04%, after Wednesday’s mild decline of -0.54%. Meanwhile, the Nasdaq 100 index on Thursday closed with a solid gain of +1.29%, overcoming Wednesday’s mild decline of -0.34%. Tech stocks seemed largely unperturbed by the Fed’s more hawkish stance.
Meanwhile, the 10-year T-note yield on Thursday fell by -7 bp to 1.50%, reversing nearly all of Wednesday’s +8 bp increase. The 30-year T-bond yield on Thursday fell sharply by -11 bp to 2.09%, more than reversing Wednesday’s small +2 bp rise.
The yield curve flattened on Thursday. The 2-10 yield spread yesterday fell by -7 bp to 130 bp, which was just slightly above last week’s 3-1/2 month low of 129 bp. The 2-10 yield spread has fallen sharply from March’s 6-year high of 1.58%, which was caused by the surge in the 10-year T-note yield in Q1 due to the fading pandemic and the surging economy.
Thursday’s decline in longer-term Treasury yields suggested that bond investors were actually pleased that the FOMC on Wednesday showed some gumption by turning more hawkish. Certainly, a more hawkish outlook is appropriate given that U.S. GDP this year is expected to surge by +6.6% and remain strong at +4.1% next year. In any normal business cycle, the FOMC would have already implemented several rate hikes by now. If it weren’t for the fact that there are currently 7.6 million missing jobs, the FOMC would have probably started raising interest rates based on the current inflation and GDP surge.
The fact that the 10-year breakeven inflation expectations rate fell yesterday by -7 bp to 1.50% supports the thesis that Wednesday’s more hawkish FOMC stance caused the markets to become less concerned about inflation.
Despite yesterday’s decline in yields, however, the long end of the yield curve remains vulnerable to a possible taper-tantrum spike once the Fed comes closer to QE tapering. The general market view is that the FOMC is likely to provide an early-warning about QE tapering at either the August Jackson Hole conference or the September FOMC meeting.
The consensus is that the FOMC will then make a formal announcement of QE tapering sometime between September and December, taking effect a month or two after the announcement. While the timing of an announcement remains uncertain, there seems to be a strong likelihood that QE tapering will be in effect by December or January.
Bipartisan infrastructure proposal picks up some Republican support — The bipartisan infrastructure proposal has picked up some support in the past two days, with more than 10 Republican Senators now saying that they support the proposal. However, the details of the proposal remain fluid and the strength of Republican support remains questionable.
Moreover, some of the more progressive Democratic Senators are now saying they will not support the bipartisan infrastructure proposal because it includes only $579 billion of new money and doesn’t come close to containing all the infrastructure measures they believe are necessary, including clean energy measures. If the bipartisan proposal loses the support of even a few Democratic Senators, it is likely doomed.
Some Democrats also suspect that Republicans are only saying they support the bipartisan bill to slow down what was formerly a Democratic freight train towards passing President Biden’s $2.25 trillion infrastructure proposal. In addition, if the bipartisan infrastructure bill were to pass, some Democrats fear there might not be enough support left to pass the remainder of President Biden’s infrastructure proposals with budget reconciliation.
Developments on the infrastructure proposal should pick up next week when President Biden is back from his European trip. The White House has said that next week will be pivotal for seeing whether there is any hope for the bipartisan infrastructure bill.
House Speaker Pelosi has been aiming to pass an infrastructure bill by the Fourth of July, but that target now seems in doubt. Senate Majority Leader Schumer has said that he is following a two-track process in the Senate, allowing the bipartisan talks to continue while he pushes the budget reconciliation process forward that could be used to pass a Democrat-only infrastructure bill in the Senate without obstruction from a Republican filibuster.
U.S. Covid infections fall to new 14-3/4 month low — The U.S. Covid infection rate continues to drop, which is particularly good news since infections are falling even though restrictions are quickly being dropped. That suggests that vaccinations are doing their job in preventing new infections.
The 7-day average of new daily Covid infections on Wednesday fell to a new 14-3/4 month low of 12,323. Covid infections are at the lowest level since March 2020 and have plunged by -95% from the peak seen this past January.
Meanwhile, vaccination levels continue to steadily climb, although at a slower pace. The CDC says that 44.5% of the total U.S. population has now been fully vaccinated and that 53% of the U.S. population has received at least one dose. Bloomberg reports that daily vaccinations in the U.S. are running at an average of 1.33 million per day.
