Yesterday, Federal Reserve Chair Powell put the kibosh on high school cafeteria talk. Nervous teenagers put out feelers to avoid disappointment in case their date to the dance rejects them, and apparently so did central bankers when they discussed “thinking about talking about tapering”.Mr. Powell banished the use of the phrase during yesterday’s press conference, and the Fed appeared to make a tentative step towards making a move. The dot plot added the likelihood of an additional interest rate hike – not until at least 18 months from now, mind you – which was enough to convince markets that the Fed was committed to preventing an outbreak of future inflation.

Bond investors took the Fed’s message to heart. The yield curve flattened, with rates rising in the 2 to 5-year range while sinking in the longer term. This reflects concerns that short-term rates are likely to rise in about 2 years, but that those higher rates would be sufficient to quell long-term inflationary expectations. The graphs below illustrate this:

On The Run US Treasury Yield Curve in Top Section: June 17^th (green dots), June 10^th (orange asterisks), May 17^th (green dashed line) with Comparisons in Bottom Section: Today vs 1 week (orange), vs 1 month (green)

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Source: Bloomberg

On The Run US Treasury Yield Curve in Top Section: June 17^th (green dots), June 15^th (orange asterisks), with Comparison in Bottom Section: Today vs 2 days ago

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To be fair, it is difficult to see the flattening effect from the curves above. The effects are subtle. The key portions are the bottom sections of the graph, which display comparisons between today's and prior yield curve readings. The biggest moves are in the 30-year bond, which is not surprising because longer yields are more sensitive to changes in price than shorter bonds, and the 5-year note, which would appear to bear the brunt of a rising rate cycle that begins in 2 years or more.

Yesterday, we warned about the potential for volatility after the meeting, and that appears to have been correct. 

2 Day Charts, S&P 500 Index (SPX, white) and NASDAQ 100 Index (NDX, blue)

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We saw major indices drop about 1% in the afternoon before recovering somewhat, and we now see NDX rising over 1%. Traders have decided that there is a solid link between 10-year yields and NDX. Remember, most stock valuation methods involve estimating the present value of a company’s future cash flows and/or earnings. The lower the interest rate, the higher the present value, and hence the justification for higher stock values. It may be that these traders’ relationship with valuation is one of convenience, since they don’t mind the sky-high valuations overall, but are glad to have an excuse to take refuge in lower rates when it suits the narrative. The leading stocks of NDX have been relatively impervious to both regulatory and valuation concerns.

The Fed meeting was tough for gold bulls who had been using the yellow metal as a hedge against inflation. Chair Powell’s ability to convince the market that inflation would not pose a significant threat despite continued short-term monetary accommodation was an anathema to inflation hedges. We saw gold fall after the meeting and continue to move lower today:

2 Day Chart, Spot Gold in USD

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As of now, it appears that Chair Powell continues his remarkable tightrope walk. He has managed to convince markets that monetary accommodation can continue without providing undue inflation risk to the economy. He has to display quiet confidence to succeed at that task. There is no room for nervous teenager angst in that messaging.