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Market Reaction Reflects Higher Inflation and Accelerated QE Tapering

stock market reaction
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EDITOR'S NOTE: Reuters reports that “Wall Street's main indexes extended declines in choppy trading on Tuesday after Federal Reserve Chair Jerome Powell said the risk of higher inflation has increased and that it was appropriate to consider wrapping up tapering a few months sooner.” Mish Talk adds to this by analyzing other market reaction such as “yields at the long end tumbled and rose in the middle” of the bond market and the high yield curve flattening. Also, Mish Talk reports that “Gold is down a modest $7.50 as I type. One might have expected a bigger selloff on this news,” which sounds like good news for the near-term prospects for the precious metal. The big takeaway here, the author notes, is that “This continual flattening is a recession warning. I still do not believe the Fed gets in all the expected hikes and the bond market reaction supports that belief.”

The stock market selloff resumes following Fed Chair Jerome Powell's remarks to Congress on Inflation and tapering.

Stock Selloff Resumes

Wall Street's main indexes extended declines in choppy trading on Tuesday after Federal Reserve Chair Jerome Powell said the risk of higher inflation has increased and that it was appropriate to consider wrapping up tapering a few months sooner.

Snip Reuters, Image WSJ.

11.06 AM Central Indexes

  • DOW: -667, -1.89%
  • S&P 500: -88, -1.88%
  • Nasdaq: -320. -2.03%

Bond Market Reaction

The stock market reaction is what I would have expected on the above news. 

The bond market reaction is far more interesting. Yields at the long end tumbled and rose in the middle. 

Huge Yield Curve Flattening

I will post new charts later tonight after the bond market closes. But huge flattening is underway now.

  • The yield on the 30-year long bond is down 8 basis points, the 10-year note yield is down 10 basis points. 
  • Meanwhile, the yield on the 5 year note yield was positive but just fell by 2 basis points as I am typing.
  • The yield on the three year note is up 2 basis points and the 2-year note is up 3 basis points.

Other Measures

The VIX S&P volatility index is up 4.86 points to 21.47.

Gold is down a modest $7.50 as I type. One might have expected a bigger selloff on this news.

Of all the reactions, the bond market was the most interesting because it was arguably the least expected. 

Recession Watch 

This continual flattening is a recession warning.

I still do not believe the Fed gets in all the expected hikes and the bond market reaction supports that belief.

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Mish

Originally posted on Mish Talk.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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