Analysts of Commonwealth Bank of Australia expect Federal Reserve Chair Jerome Powell to note the FOMC has the tools to intervene. That is, the analysts wrote if the bond market becomes disorderly or constrains the economic recovery.
However, they expect Powell to oppose talk of policy tightening. That’s because of the large amount of labor market slack.
They wrote that U.S. bond yields and the USD could jump. If the FOMC’s post‑meeting statement and Powell’s statement are not deemed dovish enough.
On Wednesday, Asian stocks were down, tracking Wall Street. Investors were eager if the U.S. central bank will signal a faster path toward policy normalization than they expected.
Later in the day, the Federal Open Market Committee (FOMC) will end a two-day meeting.
In recent weeks, global markets have been swung by a rout in Treasuries. The benchmark yield soared to a more than one-year high.
Bond investors were betting that expediting COVID-19 vaccinations and massive fiscal stimulus would encourage faster growth and inflation in the U.S. The volatility created speculation the Federal Reserve may be forced into a technical adjustment to the levers controlling its policy rate.
However, few expect the Fed to act on the matter at this week’s meeting. That is even if it releases more optimistic growth forecasts.
Stocks on The Move
Both South Korea’s Kospi and Australia’s S&P/ASX 200 have declined. An index of regional equities excluding Japan lost 0.3%.
In China, the Shanghai Composite index slipped 0.4%. Meanwhile, in Hong Kong, the Hang Seng slid 0.2%.
In Japan, the Nikkei 225 added 0.1%, while the broader Topix index was unchanged to slightly lower.
In over a year, Benchmark Treasury yields were near their highest levels. Tuesday’s ten-year yield trading around 1.62% and a 20-year bond auction have also drawn strong demand. Besides, the dollar also rose on Wednesday.
Investors’ eyes are on the outcome of the FOMC, with the updated projections for rates and the economy of particular interest. However, rates could rise sooner than what the Fed’s current guidance suggests. Growing inflation expectations are boosting bond yields and driving a rotation from growth to value stocks.
They don’t want to fight the Fed. At least until wage pressures show up, New York Life Investments portfolio strategist Lauren Goodwin said in a note. He added in the note that growing uncertainty over the front end of the curve would contribute to market volatility in the coming months.