Wednesday's Market Minute: Investors Brace For The FOMC Meeting Minutes

Crude Inflation sentiment has stabilized as the long end of the yield curve fell yesterday to 1.36%, its lowest since February. Equity markets took a defensive stance for most of the day. Particularly, shares of cyclical industrial goods companies, oil majors, and large banks slid in value while technology stocks continue to thrive in a low-yield environment.

Consumer sentiment on prices and the yield on the long bonds are headed in opposite directions. Investors await today’s minutes from the Federal Reserve’s last meeting, which is expected to underline a hawkish tilt in monetary policy. As the yield on longer-dated debt has fallen since late March, the curve is flattening, which suggests the market could be betting on a Fed that might tighten policy preemptively to head off inflation expectations that may not be transitory in nature. Months of data are needed to determine the likelihood of persistent supply bottlenecks, permanent abrupt changes in supply chains, and lasting inventory management challenges. Despite the possibility of a preemptive move on rates, consecutive downward moves in long-dated U.S. bond yields began on Friday after the monthly jobs print. Data showed U.S. hiring had accelerated, but not at a pace sufficient to prompt a policy shift by the central bank.

Based on recent market activity, it is becoming clear that institutional investors are looking to trim their equity exposures to reduce overall portfolio risk. Perhaps due to lofty valuations as earnings season is ramping up as Fed policy becomes more visible in terms of the timeline and pace of a well-telegraphed slowdown in purchases of long-duration assets.

Without knowing exactly what will come out of the FOMC meeting minutes, the equity markets have expressed weakness in yields as there has been a steady multi-week rotation into companies that had prospered during the pandemic. As the bull market continues to broaden out, stocks positioned for an economic recovery, such as procyclical value have recently taken a back seat position to those less sensitive to economic fluctuations, such as technology.