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Conflicting signals from US treasuries and technology stocks ahead of Fed FOMC

A typical profit-taking modus operandi has taken shape again in the flows of US stocks ahead of the US Federal Reserve meeting, as well as the release of its latest economic projections and “dot plot” out later today.

The S&P 500 has failed to make any meaningful positive follow through after it printed another fresh all-time intraday high of 4,257 at the open, and traded lower to close at 4,246, with a minor loss of -0.20%. The best performer of the past three weeks, the technology-heavy Nasdaq 100, was the worst underperformer with a loss of -0.69% to close at 14,030, its previous range resistance formed bteween 16 and 29 April.

Even the cyclical/value related stocks are not seeing much flows in general to hold the fort despite a strong performance put up by energy stocks; the S&P Energy sector recorded a stellar gain of +2.06% supported by a rally of +1.75% seen in the WTI crude oil futures to US$72.12 per barrel, close to a two and a half year high. The Dow Jones Industrial Average declined by -0.27% to 34,299 where gains in energy stocks were offset by losses seen in consumer discretionary.

Given the recent uptick in inflationary data, especially from manufacturers’ input costs have raised the expectation of a more hawkish Fed guidance in today’s FOMC outcome as consensus has indicated that the “dot plot” projection is likely to bring forward the first 25 basis points interest rate hike to 2023 from 2024 and a tapering signal to scale back its monthly bond purchase programme is expected to be announced in either August or September.

As technology and growth-related stocks are expected to perform more poorly in relation to the broader market in a less accommodative monetary policy environment, hence the intraday sell-off seen in the Nasdaq 100 yesterday seems to be humming along this line of narrative. But interestingly, if we take a closer look at the performance of the US Treasuries market which is more sensitive to the shift of expectations towards Fed’s monetary policy is not showing the start of a major change in its existing dovish stance.

The longer dated US Treasury 10-year yield settled unchanged at the close of yesterday’s US session at 1.50% after it erased its intraday gain from a high of 1.52% while the 2-year yield just increased by 1 basis point to 0.16%. Overall, the spread between the 10-year and 2-year Treasury yields was unchanged at 1.35% and still below its 20 and 50-day moving averages of 1.41% and 1.44% respectively.  So which asset class is pricing in a more “correct” narrative in the upcoming Fed FOMC, the US Treasuries or US technology stocks? The verdict will be out later between 7pm and 7.30pm (UK time).  

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