That’s a big jump
US household net worth rose nearly 20% in the prior year through Q2, according to the latest Fed data. Easy money policies at the fiscal and monetary level have led to enormous booms in home prices and financial assets.
In Q2 alone, wealth rose to $141.7T from $135.8T with stock market gains adding about $3.5 trillion of that and real estate $1.2 trillion.
Of all that wealth, about $3.6 trillion is held in checking accounts and $10.6 trillion in savings accounts.
Heavy selling in bonds
US 10 year yields are surging.
They’re now up 7.7 bps on the day to 1.4078%. It’s the first trip above 1.40% since mid-July and breaks a quadruple top ahead of the level.
Initially, the bond market was trading like the Fed taper was a policy mistake as long end rates fell yesterday. However it’s all turning around today as less Fed buying plus the fear of inflation plus great risk sentiment life bonds.
The risk now is that a negative feedback loop starts for stocks. Tech in particular has been sensitive to higher rates.
In FX, the US dollar is beginning to fight back in the last 10 minutes on rate differentials. Note though that global bonds are generally moving in tandem with US rates.
Fitch ratings citing the property slowdown
- “deleveraging dynamics” weighing on recovery
- government policy is being recalibrated
- housing to take a toll on domestic demand, global commodities
Fitch says more broadly that challenges to EM growth in 2022 are rising.
So the world’s second-largest economy is only going to grow at 8.1%?
We are all doomed (sarcasm).
Fed to start tapering by year-end
I didn’t expect Powell to be so explicit about it but he even outlined the timeline for the entire thing, which now the market may likely expect something of an average pace of around $20 billion at each meeting starting from December.
They may likely start slow before gradually stepping things up and looking for a conclusion around the middle of next year.
As things stand, a November announcement is very likely before tapering begins at the December meeting – fitting with expectations coming into yesterday’s meeting.
So, what happens next?
The focus in the market will start to shift towards interpreting how fast does the end of tapering translate to higher rates by the Fed.
Equities are not too concerned but they have been living in their own world for so long that it might take a while to get their head out of the sand. That said, perhaps we’ve already moved past that and the supposed “taper tantrum” isn’t quite as bad as feared.
In other words, the period of easy money has even helped to soothe market fears on this, just like everything else during the pandemic.
The more interesting spots to watch are perhaps the dollar and the bond market.
The mixed dollar reaction yesterday was peculiar (though there has been a lot of head fakes in the reaction to prior FOMC meetings) but I reckon the bulls were certainly hoping to have had some backing from Treasury yields, which did not take flight:
Key line from Powell
The reversal in the dollar came after Powell said no decisions on the taper had been taken but added this:
“A gradual tapering process that concludes around the middle of next year is likely to be appropriate”
That would imply a $20B taper beginning around December. It’s the strongest guidance received so far and it’s a hawkish surprise that he would offer somewhat clear guidance on that before it was necessary.
Treasury yields have moved up on that comment and pulled the dollar upwards.