So Much For Calmer Markets

So much for calmer markets. Despite a likely ease in monetary policy from the Federal Reserve in the coming weeks and months, early August has seen plenty of tumult. After the volatile rally of Aug. 5, Treasury yields started the following day 4 to 6 basis points lower. In a 24-hour period, the 2-year yield has traded in a 35-basis-point range — but that’s small potatoes relative to Japanese equities. After experiencing a 12% loss on Aug. 5, the Nikkei rallied more than 10% just a day later. U.S. equity futures were up 50-75 basis points just over an hour before opening after a volatile day.

In addition to correcting overbought conditions in recent days, Treasuries are prepping for $125 billion in new supply of 3-year, 10-year, and 30-year Treasuries, beginning with a 3-year auction valued at $58 billion. The Institute for Supply Management’s July service report — released Aug. 5 — surprised to the upside, including a much better than expected employment reading. But it received roughly half the reaction as previous week’s disappointing ISM manufacturing report, despite the U.S. economy being more toward service than manufacturing.

Additionally, typically dovish Federal Reserve leaders pushed back against overreacting to market volatility. Chicago Fed President Austan Goolsbee avoided any mention of an intra-meeting rate cut, saying they “can wait for more data before the September meeting.” In a separate appearance, San Francisco Fed President Mary Daly said the body “will make policy adjustments as the economy delivers more data.”

Prior to all this chaos, August kicked off with the bond market once again priced on the more dovish end of the spectrum relative to Fed guidance. More economic reports released in July suggest further moderation in labor market and inflation metrics, and Fed funds futures are now pricing for 75 basis points of rate cuts during the final three FOMC meetings of 2024. Treasury yields in the 2- to 5-year part of the curve fell approximately 50 basis points in the month of July, which corresponded with short-term rates markets pricing for a similar amount of additional rate cuts by April of next year, or roughly 125 basis points in total.

There was much anticipation ahead of the July 31 FOMC meeting. Although there was some fringe speculation the Fed might announce a rate cut at that meeting, the general expectation was the Fed would open the door for an initial cut in September. Powell & Co. did indeed open the door, but it was certainly not a commitment to a particular action. Instead, the official statement shifted to a more balanced assessment of upside/downside risks to its dual mandate (price stability and full employment), and Powell remained adamant that any such decision will be dependent upon the totality of new economic data in the coming weeks. If we were to characterize the tone, perhaps “cautiously dovish” would be appropriate.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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