Soaring interest rates reflect Fed policy that ‘overstayed its welcome’: Morning Brief
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Wednesday, January 19, 2021
The Fed is catching up and investors are spooked
Soaring inflation — and by extension interest rates and expectations of Federal Reserve rate hikes — have made their presence felt on Wall Street in a big way.
After spending most of last year downplaying the threat of tighter monetary policy and rising yields, the 10-year note (TNX) climbed nearly 2%, the yield at 2-year inflation-sensitive bond hitting 1%, both at their highest level in nearly 2 years.
The surge in yields, which we’ve been warning Morning Brief readers about for months, has spooked investors and sent blue-chip and tech stocks teetering.
Tuesday’s selloff is “about interest rates,” UBS Global Wealth Management Americas head of equities David Lefkowitz told Yahoo Finance Live. The rise in the 10-year yield “has big implications for the internals of the market.”
The decisive end to market placidity regarding the upcoming rate hike cycle largely reflects a few drivers, but with a general theme. Namely, investors are increasingly concerned that a lagging Fed will get its hand pushed by inflation – and as a result will have to be much more aggressive on rate hikes than current conditions suggest, even if growth rates come back down to Earth.
“At the end of last year, the market had less than a 2 in 3 chance of a rally in March,” noted Marc Chandler of Bannockburn Global Forex.
“Now he has a fully reduced hike and about a 1 in 3 chance of a 50 [basis point] movement. At the end of last year, the market had nearly three fully discounted bulls for this year. Now the market is about 107 basis points completed,” Chandler said — meaning fed funds could quickly end up a full percentage point above current near-zero levels.
Much of the blame lies with the Fed for “far overstaying its welcome with [quantitative easing] and zero rates and a misinterpretation of inflation that they are now forced to catch up with,” said Peter Boockvar, chief investment officer of the Bleakley Advisory Group, which is a relentless critic of Fed monetary policy.
“The other sin, so to speak, was that by waiting this long to tighten, they let asset prices inflate further, creating a higher peak that they inevitably fall to when the tightening intensifies,” a- he added.
Banks are probably approaching the era of higher interest rates with aplomb. Yahoo Finance’s Brian Cheung wrote last week that the banking industry is executing a “pivot away from capital markets firm profitability in favor of higher net interest income in loan portfolios. “.
Yet, judging by the Nasdaq’s dramatic fall, high-growth and tech stocks have a lot more to worry about and are bearing the brunt of market jitters amid this CNBC’s Patti Domm noted that interest rates could maintain a “stangle” in this market segment.
the The Wall Street Journal rightly pointed out “Money-burning tech companies, biotech companies without any approved drugs, and startups that quickly listed via mergers with blank check companies” as the most vulnerable to the current slump.
“I think it makes perfect sense that some of these names need to calm down a bit, and then when you think about the trajectory of interest rates over this year, you need to look for companies that can generate realistic profitability. JPMorgan Chase Asset Management global market strategist Jack Manley told Yahoo Finance Live on Tuesday.
“For any tech company that’s burning through cash without any sort of viable product, that’s a tough sell this year,” he added. “I understand the volatility, I understand the sell-off, I think that’s a bit of a stretch but I certainly don’t think that’s a long-term issue for the sector.”
Indeed, Northern Trust Wealth Management has reminded its clients that tighter monetary policy does not mean tighter policy in absolute terms.
CIO Katie Nixon wrote last week that despite rising rate expectations“, it is important to stress that monetary policy will remain very accommodative and Treasury yields will remain negative. Based on our forecast of slower growth and more subdued inflation as we head Mid-2022, we also believe this particular rate hike cycle will be short and incomplete relative to the Fed’s dot chart as well as market expectations.”
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