S&P 500, Federal Reserve, FOMC, Treasury Yields – Talking Points
- S&P 500 falls nearly 2% as Fed offers hints of faster tightening
- 10-year US Treasury soars to 1.71%, highest level since April
- US Dollar relatively mixed, Bitcoin and gold tumble with major indices
The S&P 500 fell sharply on Wednesday as market participants digested the latest FOMC meeting minutes, which hinted that tighter policy may be closer than previously expected. The hawkish release sparked a major rout across risk assets, with the tech-heavy Nasdaq 100 Index falling more than 3%. The 10-year Treasury yield surged to 1.71%, its highest level since April. Gold and silver both declined, coming under pressure from rising Treasury yields. Bitcoin also fell victim to the rout, slicing through a key support level at $45,666.
Following December’s FOMC meeting, markets moved to price in a more hawkish Fed in 2022 and beyond. Wednesday’s release of the meeting minutes highlights that the “Fed put” should be repriced lower, as the Committee discussed faster rate hikes and more aggressive balance sheet normalization than the previous cycle.
The FOMC minutes also discussed the Omicron variant, but recent US economic data suggests that the recovery remains resilient in the face of rising cases. Private sector jobs data for December showed the largest increase in 7 months, highlighting the growing strength of the domestic labor market.
S&P 500 Futures (ES) 1 Hour Chart
Chart created with TradingView
Following the release of the FOMC meeting minutes, futures traders moved quickly to price in an 80% probability of a first Fed rate hike in March. Perhaps the most notable part of the FOMC release was the following:
“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated…”
Open acknowledgement of more aggressive tightening could pave the way for additional jitters in the near-term for equity markets. Continued pressure from higher rates could see weakness in frothy names, as well as the large megacap tech firms that have propelled markets higher over the last 18 months. While it may take some time for the market to reprice the road ahead in 2022, market participants should be wary of the Federal Reserve’s intent to remove liquidity from the markets.
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— Written by Brendan Fagan, Intern
To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter