Fed looks even more hawkish

Chart of the Day

The Fed Minutes yesterday showed that the FOMC discussed whether it should engage in quantitative tightening – i.e. selling the Treasuries and other assets it bought during QE – very soon after first raising interest rates. In other words, while the Fed is currently still buying assets, it could end up selling them again as soon as the middle of this year. That sent bond yields up again and sent a shockwave through equity markets, with the Nasdaq in particular falling by over 3%. Amid all the typical moves, though, there was one asset that stood out – the euro. Even though yield differentials have moved sharply against the euro so far this year (the white line in the chart above has fallen sharply), the euro has fallen only slightly against the USD. Yesterday, it even appreciated slightly. Nonetheless, yield differentials point to a downward bias to future moves in the euro, particularly if markets continue to price in a more hawkish Fed.


Ahead of the US non-farm payrolls report on Friday, the ADP employment report showed an increase of 807,000 – twice as large as expected and some justification for tightening policy sooner.


The weekly EIA report showed that US crude production continued to rise at the end of 2021, to its highest since the pandemic began. That could help to alleviate some inflationary pressure by keeping a lid on oil prices, though they rose yesterday.

The hawkish Fed minutes sent real interest rates up sharply.

That was bad news for the Nasdaq, which fell 3.1%. It looks at risk of dropping back below the previous key support levels it has found in the past couple of months.

The Russell 2000 performed even worse, down by 3.3%.

That relative move is unusual – usually, the Russell outperforms the Nasdaq when yields rise.

While the rise in yields so far this week has been bad news for tech stocks, financials have outperformed the market – even they fell yesterday though.

Gold hasn’t fared as badly as we might expect considering how far real yields have risen this past week. A positive sign for gold bugs, or just a delayed reaction?

VIX has risen in recent trading days, but not dramatically so in the context of the current level of realized volatility.

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