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Fed Discusses 10-Year Rates, Market Rescinds Some Gains

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Stock trading in Tuesday’s regular session represents something of a mirror-image of how markets performed yesterday, the strongest single-day of equities growth so far this year: while the Dow fell 0.46% and the S&P 500 was -0.81% on the day, the Nasdaq underperformed, down 1.69%, while the small-cap Russell 2000 closed down 1.92%. None of these levels were enough to erase yesterday’s gains; a sluggish couple weeks prior is keeping markets off their all-time highs.

There wasn’t a lot we learned today that we didn’t know yesterday, suggesting any up or down days in the markets under these conditions is searching for a comfortable plateau. About the only intra-day newsworthy item had to do with Fed Governor Lael Brainard’s address yesterday and finishing up today, in which she became the first Fed officer to directly acknowledge higher 10-year rates appearing on economists’ radar screens.

Brainard was clear to emphasize the Fed was “far from its goals” in terms of targeted inflation and employment. Though a recent “surge” above 1.5% on the 10-year last week brought about a host of new hypotheticals for market participants, it’s still a ways off the 2% the Fed has been grooming conditions to reach. She told her audience it will take “some time” for the economy to match the progress the Fed is looking for.

That said, a “burst of transitory inflation,” ostensibly from a sudden surge toward herd immunity from the coronavirus in the U.S. brings about a host of economic growth, job gains and increased pricing may prod the Fed into active mode. Brainard finds this a more likely scenario that a persistent hotter-than-expected longer term 10-year rate notably above 2%. Beyond this initial burst as Americans put the pandemic in their rear-view mirror, it is implied the future is less certain.

Thus, the Fed’s ongoing plan to buy back $120 billion in t-bills and mortgage-backed securities — and projected out through all of this year and next — is currently undisturbed. This is not so much an explanation of why we may be seeing today’s market sell-off as perhaps a reason not to worry too much about it; just because somebody at the Fed utters the word “inflation” doesn’t mean any magic spell has been cast.

Tomorrow we get our first look at job gains for the month of February, with the Automatic Data Processing (ADP - Free Report) private-sector payroll numbers out ahead of the opening bell. Expectations are for 225K new private-sector (non-government) jobs having been created last month, following 174K reported in January. For Friday’s non-farm payroll numbers from the U.S. federal government, 210K new jobs are projected for the headline, up from just 49K reported for the prior month.

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