Bonds will be the Tell for Stocks Following the Fed Announcement
The focus Wednesday is on the FOMC meeting, which include the statement, the forecasts, and Yellen’s press conference. Since the April meeting, nearly every inflation measure has moved higher. The slightly stronger than expected CPI report for May that was released Tuesday suggests the next (May) core PCE reading likely rose, lifting the y/y rate to 1.6%.
The Fed’s statement and forecasts will likely recognise that its mandates are being approached. However, attempts to model Fed action based on past business cycles may be fundamentally flawed.
The Federal Reserve will likely indicate that additional accommodation is still necessary, even as its policy goals are approached. That it recognizes that its policy goals are being approached will be reflected in its forecasts, where unemployment is likely to be revised lower and inflation higher.
This will offer a stark contrast to the Bank of England. BOE Governor Carney had leaned against calls for an early rate hike in the forward guidance provided until last week and then says the market underestimates the chances of an earlier start in the rate hike cycle. We expect the FOMC to stick to the course, broadly outlined by Bernanke, under which the Fed continues its “measured” tapering of 10 billion per meeting and winding down QE), with the first rate hike likely in H2 15.
The bond markets will be “the tell” for stock investors post the Fed announcement. This will not come until after Janet Yellen completes her press conference. Yields have remained depressed during 2014, despite many calls for the 10-year to move above the 3% threshold as stock prices moved to all-time highs. A move above 2.65% will technically be bullish for yields (bearish for bonds), and could generate concerns for stock investors in the wake of recent inflation gauges.
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