By Ven Ram, Bloomberg markets live commentator and analyst
The Fed’s persistent messaging about the prospect of taper ensured that the bond markets didn’t lose their keel this year ahead of the actual news, in contrast to what happened during Ben Bernanke’s time. However, stocks are starting to feel the heat, hoping policy makers may pay heed. It may be in vain.
Front-end Treasury yields have about doubled so far this quarter, and until a couple of days ago U.S. stocks had barely scarcely paid any attention. In such a jocund company - with apologies to Wordsworth - valuations had been all but forgotten.
But with Fed Chair Powell expressing a sense of urgency to quell inflation by raising the possibility of fast-forwarding the taper song and getting to the main part of raising rates, the score sheet has changed. After all, stocks and their attendant valuations need to keep pace with the changing tempo: if the prelude took too long, the interlude promises to be faster, and that means it’s time for a change in valuations across the board. Last month, MLIV wrote about how two-year yields face a stern denouement, and I have written about how expensive stocks are.
So if stocks continue to grind lower against that backdrop, the market soap opera may not quite get the same attention from policy makers, for they will likely take their cue from what is happening on Main Street rather than Wall Street. The Fed has itself warned that “prices of risky assets are high compared with expected cash flows and remain vulnerable,” suggesting it won’t be rattled by a decline in some of those lofty valuations.
And with yesterday’s ADP print confirming that the labor market is expanding as expected, the Fed may not be in a mood to pay heed to any stock-market tantrum. That doesn’t mean stocks won’t try, but like Wordsworth, they may wander, lonely as a cloud.