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Equity markets stall as investors await rate commentary from Federal Reserve

March 17, 2021


  • Equity markets have stalled following a breakout to record highs on Monday, as investors await commentary from the Federal Reserve with respect to rates. There is notable weakness in areas of recent leadership, including small caps, energy and financials, with relative strength in technology and communication services.
  • Rates continue to be a focus of investors as the 10-year Treasury yield topped 1.67% for the first time in more than a year. Credit spreads remain tight, but the TED spread and commercial paper spreads are modestly widening. The FOMC meeting concludes today, with the updated “dot plot” being released at 2:00 and Chair Powell’s press conference at 2:30, with debate around if the dots will now reflect a hike in 2023 or 2024. The Fed futures curve currently embeds three hikes by the end of 2023. Powell has given no indication of a shift in their stance in recent commentary, so a change is unlikely. In direct reaction to rising rates, the demand for mortgage refinancing falling 4% for the week and 39% from a year ago.


  • As the debate surrounding infrastructure spending begins, the partisan divide continues to widen. Republicans have stressed opposition to raising taxes during the pandemic, likely shifting the Democrat strategy from bipartisanship to another filibuster-proof reconciliation bill. President Biden hopes to go beyond physical infrastructure to include many “social” infrastructure programs, such as expanding access to child and elder care, making the refundable child tax credit permanent and dealing with climate change. Other progressive ideas include the Obamacare public option, lowering the Medicare age to 55 and comprehensive immigration reform. It would be paid for by some combination of hiking the corporate rate to 28% from 21%, hiking income taxes on those making more than $400,000, broader estate taxes and higher capital gains taxes. Furthering the partisan divide, Biden is now discussing changes to the filibuster in the Senate.
  • Covid-19 cases continue to plummet in the United States, with cases down nearly 80% since early January and deaths at the lowest level since January. The falling case count and accelerating vaccinations have driven many high-frequency data points to the best levels since last March, including restaurant reservations and return to the office. The data is less encouraging in Europe, where cases have jumped 35% from mid-February, though it remains 45% below November’s peak. Complicating the rise in cases is the suspension of vaccine distribution with reports of blood clots resulting from the AstraZeneca vaccine. This is causing discussion of adding further lockdown measures.
  • A potentially contentious meeting between the U.S. and China awaits, addressing human rights in addition to economic and technology issues. The expectations for a breakthrough are low, as the talks are being termed as a “high-level strategic dialogue.”

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