Analysis: After extreme market movements, investors concentrate on spokespersons for the central bank

NEW YORK, June 22 (Reuters) – Some investors have all eyes on the Federal Reserve this week, hoping for a parade of Federal Reserve speakers to calm market volatility and say the response to the June meeting the Fed was too extreme.

The Fed signaled a potentially tougher stance on inflation last week and postponed projections for its first two rate hikes to 2023, triggering a sell-off in US stocks, boosting the dollar and the government bond yield curve in its fastest reshape since March 2020 flattened at Citi analysts.

However, those moves were partially reversed on Monday as stocks rallied and the dollar fell.

Investors now await what message will come from Fed Chairman Jerome Powell, who will address Congress on Tuesday at 2 p.m. ET (1800 GMT), as well as several other key Fed officials who appear later this week . Data is also expected on the real estate sector and the Fed’s preferred inflation meter.

“I expect Powell will try to undo some of the damage that the Fed meeting last week did,” said Tom Graff, head of fixed income at Brown Advisory. “I don’t think they were trying to convey such a Hawkish message.”

Graff pointed out on Monday that the yield curve is “getting a little steeper, which could indicate that the market is expecting a small reversal”.

In prepared statements by Powell, which the Fed released late Monday afternoon prior to its congressional hearing, the Fed chairman said that he actually believes the current rise in inflation is likely. Continue reading

“I think this is just a continuation of what you said last week that things are getting better, things are getting better, but we’re not there yet and I think that speaks for it,” said Robert Pavlik, senior Portfolio Manager at Dakota Wealth in Fairfield, Connecticut.

REFLATION TRADE IN DANGER?

At stake is the market’s assessment of whether the Fed has become restrictive enough to jeopardize so-called reflation trading, a bet on strong US growth that has helped boost prices for stocks of economically sensitive companies in recent months, while they weigh on the dollar and increase returns. Some of these trades were completed last week.

“There has been a lot of drama going on in some of the reflation deals,” said Thanos Bardas, co-head of global investment grade bond business at Neuberger Berman.

“The market overreaction has been pretty evident,” he said, adding that he expects cooler heads this week.

Others also saw a reversal of some of these positions likely. TD Securities analysts said the yield curve flattening is “extreme”.

The yield curve flattens out when shorter rates, which are more vulnerable to interest rate policy, move faster than longer-term ones, suggesting that investors believe monetary policy could tighten before the economy has fully recovered from the coronavirus recession.

“Last week has shown that overcrowded investor positioning for a steeper turn can cause the boat to tip over as disinflationary developments can flatten out quickly,” said Matt Miskin, co-chief investment strategist, John Hancock Investment Management.

The Cboe Volatility Index (.VIX), an options-based measure of expectations for volatility in stock markets, fell Monday after hitting a 4-week high at the start of the session. Meanwhile, the Deutsche Bank Currency Volatility Index (.DBCVIX) hit a two-week high, while the MOVE Index (.MOVE), a bond volatility indicator, hit a two-month high.

The Fed spokesman’s parade began Monday morning when two regional officials said a quicker exit from the central bank’s bond-buying program could give them more leeway in deciding whether to hike rates. Continue reading

Other speakers this week include the President of the Federal Reserve Bank of Cleveland, Loretta Mester, who is hawkish.

Some investors saw the week as an opportunity.

“We tell people if you have a 12 month outlook that we would view this retreat as an opportunity to get into the value trade,” said Keith Lerner, chief market strategist at Truist Advisory Services in Atlanta, adding : “It’s a great week.”

Editing by Megan Davies, Ira Iosebashvili and Richard Pullin

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