We learned yesterday that almost all participants thought it would probably be the appropriate time to start the balance sheet reduction sometime after the first interest rate hike. Federal Reserve Governor Christopher Waller had already hinted at this earlier, and it certainly appears that he wants to shrink the balance quickly, if not actively sell bonds. This will undoubtedly keep the bond market at the limit for a while, which could feed expectations that the Federal Reserve can anticipate the end of the tapering forecast for March if the employment and inflation data keep this upward trend.
All participants noted that inflation exceeded Fed's 2% target, and they expected problems in the supply chain at least 'well into' 2022. They also said that numerous signs suggested that the US labor market was very tight.
The impact on financial markets
Faced with the Fed's unexpected shift of tone that pointed towards a more restrictive monetary policy in the near future, the US bond market experienced a sharp price drop. For example, the 10-year benchmark Tnote bond yield fell to 1.70%, the lowest since April 2021.
The US currency moved upwards, strengthening against its main competitors due to expectations that interest rate differentials between the dollar and other currencies will continue to widen in favor of the first.
Gold, which had previously experienced notable rallies close to 1830, fell below 1810. Normally, a stronger dollar and higher interest rates put downward pressure on gold.
The American stock indices finally experienced a significant correction. Nasdaq was affected the most, suffering one of the largest daily falls in recent times, of more than 3%. Since the end of the year, the index has lost around 5%.
Technically, the index is dangerously close to the support zone of 15,700 through which the 100-day moving average passes. Below this level, the downward pressure could accelerate.
Sources: Bloomberg, Reuters.