The FOMC meets on Tuesday and Wednesday, and will issue its post-meeting statement at 2:00 PM ET on Wednesday. June’s year-over-year inflation rate hit a 9-handle and jumped 1.32% for the month, stoking market expectations the Fed would enact another 75 basis-point rate hike. That would increase the fed funds rate to 2.5%, about where the U.S. 10-year Treasury yield is today at 2.75%. All eyes are on the fed funds rate, but don’t forget that the Fed also is withdrawing liquidity at the rate of $47 billion per month, which will increase to $95 billion per month starting in September. So why is the yield for the 10-year Treasury going down? The Fed is trying to achieve a “soft landing” but the markets expect that the Fed’s “too-aggressive” one-two punches will produce a “hard-landing,” aka recession; hence, the lower 10-year yield. Despite those expectations, last week the markets surged globally; notably, the S&P 500 consumer discretionary sector gained 6.8%! Wow, I would call that a game-changer. I feel investors are forgetting the profound resilience of the markets, to get hit hard in “Rocky” fashion, but still hang in there for the win.
For more detailed insight, please see the Global Perspectives mid-year outlook.