Tag: FED

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U.S. stock market volatility continues

Yields

The stock market has been experiencing some volatility and uncertainty in September and October 2023, as investors fret about inflation, interest rates, and the possibility of a U.S. recession.

Main facts affecting the current stock market

The month of October has produced some severe stock market crashes over the past century, such as the Bank Panic of 1907, the Wall Street Crash of 1929, and Black Monday 1987.

October has also marked the start of several major long-term stock market rallies, such as Black Monday itself and the 2002 nadir of the Nasdaq-100 after the bursting of the dot-com bubble.

The S&P 500 dropped 4.5% in September 2023 and finished the third quarter in the red.

The U.S. Treasury yield curve has been inverted for months – which is a historically strong recession indicator.

The Fed maintained interest rates at the current target range of between 5.25% and 5.5% in September 2023, but signalled that it may need to raise rates again to combat inflation.

The consumer price index gained 3.7% year-over-year in August 2023, down from peak inflation levels of 9.1% in June 2022 but still well above the Fed’s 2% long-term target.

The bond market is currently pricing in an 81.7% chance the Fed will choose not to raise rates again on 1st November 2023.

Wall Street closed down on 3rd October 2023 as the yield on the U.S. 10-year treasury rose to 4.80%, reaching its highest level since 2007.

The Dow Jones Industrial Average was down at 33002, Tuesday 3rd October 2023.

Stocks fell as investors pulled money from equities and moved it to the hot bond market.

International markets also faced significant turmoil, sending mini shockwaves through global financial centres, which reverberated in equities.

The dollar rose to the highest since December and is heading towards the twelfth positive week in a row.

Uncertainty

Uncertainty in the U.S. political system is having a major affect too. Especially with the ousting of the speaker and the real fear of a government shutdown looming large.

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U.S. Treasury yields chase 5% at 16 year high!

U.S. yields up

Highest yields since 2007

The U.S. Treasury yields are the interest rates that the U.S. government pays to borrow money. The 10-year and 30-year Treasury yields are the most widely followed indicators of the long-term health of the U.S. economy and the expectations of inflation and growth.

10 year yield at 4.80%

According to the latest data, the 10-year Treasury yield surged to 4.80% on Tuesday, 3rd October 2023, which is the highest level since 12th October 2007. 

30 year yield at 4.79

The 30-year Treasury yield rose to 4.79% on Monday, 2nd October 2023, which is the highest since 6th April 2010.

The main reasons for the rise in the Treasury yields

The strong U.S. economic data that showed that the labour market remains hot and the manufacturing sector rebounded in September 2023.

The Federal Reserve’s ‘higher for longer’ mantra signalled that the central bank would keep raising rates until inflation is under control.

The reduced demand for safe-haven assets as the U.S. government averted a shutdown over the weekend by passing a short-term stopgap funding measure.

Uncertainty at the heart of the U.S. political system.

The implications of higher Treasury yields

The higher borrowing costs could weigh on the economic growth and consumer spending in the future.

Higher inflation expectations could erode the purchasing power of the fixed-income investors and increase the risk of a bond market sell-off.

The higher interest rate differential could attract more foreign capital inflows into the U.S. dollar and strengthen its value against other currencies.

The Fed makes and ‘unmakes’ the economy!

Remember… the Fed said inflation was transitory.

Why?

How could they get it so wrong?

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U.S. holds interest rates at 5.25% – 5.5%, but expect higher rates for longer

Central banker

Fed holds steady

The Federal Reserve held interest rates steady in a decision released Wednesday 20th September 2023, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.

That final increase, if realised, would be it for now according to data released at the end of the Fed two-day meeting. If the Fed goes ahead with the move, it would be the twelfth rate hike since policy tightening began in March 2022.

No change priced in

Markets had fully priced in no move at this meeting, which kept the fed funds rate targeted in a range between 5.25%-5.5%, the highest in some 22 years. The rate fixes what banks charge each other for overnight lending but also affects many other forms of consumer debt too.

While the no-hike was expected, there was plenty of uncertainty over where the rate-setting Federal Open Market Committee (FOMC), would go from here.

Judging from reports released Wednesday 20th September 2023, the bias appears towards more restrictive policy and a higher-for-longer approach to interest rates.

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Why buy U.S. stocks when yields are high?

Cash

At 4.33%, the 10-year Treasury yield in the U.S. is at its highest in 16 years. That represents a risk-free, long-duration asset with relatively high returns and this is challenging the stock market.

Why should traders invest in stocks that may not return as much, or just slightly more and take unecessary risks, when there is an asset class that guarantees around 4% return or slighlty more?

Cash is king?

Cash is now yielding 5% in the U.S., short term bonds are yielding 5% plus, so equities for the first time in a long time, have actually got some competition.

Typically stocks if they do well, are likely to return more than a risk-free asset, precisely because it isn’t certain stocks will rise. That’s called the equity risk premium, a return that’s supposed to compensate stock investors for the chance that they might lose money. But, as  the premium is below 1% now. Historically, it’s been between 2% and 4% – meaning stocks are looking much less attractive than Treasuries.

Harder job for the Fed?

Another potential issue that could crop up with high Treasury yields is that it could make the Federal Reserve’s job tougher. During the recent Jackson Hole gathering, the Fed head has indicated that more interest rate hikes are still high possibility.

But don’t panic just yet… this is likely a pullback phase of a bull market analysts suggest. That is, it’s still too early to be bearish on stocks.

Yardeni Research president Ed Yardeni is reported to have said that the market is ‘going to hang in there’ and ‘a year-end rally will bring the S&P 500 back to something like 4,600‘.

That implied an increase of almost 5% in stocks – while not certain – would give Treasuries a run for their money again.

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FedNow: A New Instant Payment System for US Banks

Digital Dollar

New FED Payment System

The FEDNOW payment system is a new instant payment infrastructure developed by the Federal Reserve that allows financial institutions of every size across the U.S. to provide safe and efficient instant payment services. 

Live system

It went live on July 20, 2023 and enables individuals and businesses to send and receive money in near real-time, 24/7/365, through their depository institution accounts. 

The service is a flexible, neutral platform that supports a broad variety of instant payments and offers optional features such as fraud prevention tools, request for payment capability, and tools to support payment inquiries. 

FedNow is the first new payment rail in the United States since the introduction of the Automated Clearing House (ACH) in the early 1970s.

Digital Dollar?

Is this a possibly a pre-emptive strike to get ahead of international digital currency deployment and set the scene to adopt a digital payment structure of a new ‘crypto coin system’ for the future – the digital dollar?