The 10-Year Yield
Last week, we mentioned that the Fed speaking on Wednesday would be a big market-moving event, and that ended up becoming a reality. The market sold off after the Fed’s meeting on Wednesday. While no action was taken, it was the verbiage that the Fed used around having to possibly raise rates sooner than they thought, that spooked the market. Today, we want to focus on the 10-year treasury yield. On Wednesday, the 10-year yield spiked up after the Fed news but then traded back down on Thursday and Friday. It is important to know that we watched how the 10-year yield reacted because it is a proxy for mortgage rates and investor confidence in the economy. In analyzing the 10-year treasury yield, we can get an idea of the level of volatility that the movements of 10-year yield can cause in the stock and the bond market. In this video, we show a chart that gives us an idea of what the danger zone could be. We think the high-risk region on the chart would come into play if the 10-year yield drifted up near the 1.83% range. Last week, it finished at around 1.4% but if the 10-year yield gets up to around 1.8%, we could see volatility increase in the stock and bond markets. Remember, in the bond market, bond prices decrease as rates increase so there is an inverse relationship. The 10-year yield is something to watch for going forward.
Inflation and The Fed
One of the big risks we think the market was concerned with, was that the Fed would be behind the curve and would raise rates too late because of inflation. What we agree with the Fed on and have talked about before, is that the Fed has been saying that the current inflation situation is transitory. Inflation is in specific pockets of the economy because of supply and demand, balances, and bottlenecks. Over the last week, we have seen a lot of data that supports that theory. The Fed said that the U.S. is still not at the “substantial further progress standard” that would allow policy normalization. This is their way of saying the economy is currently not strong enough to stand without the support of the Fed. This means the Federal Reserve plans to continue to support the market, which is very positive. The second point that Chairman Powell made was to basically say if you want to call the meeting they had last week anything, you can call it a meeting where they started talking about having a meeting, where they may raise rates. The thing the market was concerned about, is that several members of the Fed said that they may raise rates in 2023. So, we are getting worried about something that’s very, very far away. One of the reasons we think it’s still very far away is that we’re starting to see some cracks in that agenda and very conflicting data. For example, over the weekend, one of the largest U.S. airlines had to cancel 6% of their operations and flights. Half of that was due to unavailable flight crews which shows that there are not enough workers. That is partly because it takes time to hire and train new flight crews. We’re seeing prices of airline tickets spike due to the fact that they can’t fly booked planes. That situation is likely not going to be permanent. In addition, an area where clients have really been concerned about inflation is in lumber prices. Lumber prices have been spiking and have never been this high. However, since it’s peaking in May, lumber has dropped from $1,711 per thousand feet to $996. That’s a 42% drop in under a month, which is a huge decrease from an over extreme price. Copper is down over 12% while oil and gas have remained flat. We’re seeing a lot of conflicting data right now but there’s no driver that would push the Fed to aggressively raise rates or to even consider or talk about raising rates. The market may have overreacted to what was a really “ho-hum” meeting. This is why we likely saw interest rates drop. The initial thought was. “Oh, my goodness! The Fed is raising rates and that means inflation is here!” Interest rates spiked as a result but then as people read through the data, we saw a calmer market and interest rates drop. Hopefully, the market will correct itself and get back to normal areas. This is more of a reset rather than a recovery.
Last week, we talked about how the main market mover would be the Fed speaking on Wednesday. We saw evidence of this as the S&P 500 closed on Friday at a price of 4,166. That made the resistance level 4,200 and the support level 4,130. The Fed’s meeting was to talk about raising rates in the future and that disruption, even though we started the week at record highs, made the bears come out and cause a lot of volatility in the markets. Despite the markets falling on Friday, we still saw the year-to-date moving day average of the S&P 500 raise up to 4,010. One thing that we are watching the moving day average for, is to make sure that we are continuously trying to find the base of the market.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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