The Fed is meeting again, will the "stocks and bonds soaring together" show be staged again?
Federal Reserve officials have started a two-day policy meeting, with stocks and bond markets expected to rise again. In the past eight Federal Reserve meetings, the stock and bond markets have recorded weekly gains in six instances. This week, both long-term US bonds and the S&P 500 index closed higher. It is expected that the US bond market will record gains for the third consecutive month, and the stock market is expected to maintain its upward trend after the FOMC decision day. Investors should closely monitor the bond market and Friday's US employment report
As Federal Reserve officials begin their two-day policy meeting, history is on the side of both stock and bond bulls.
An analysis report from Citigroup shows that in the past eight Federal Reserve meetings over the past year, the stock market and bond market have recorded weekly gains in six of them.
This trend seems to have manifested this week, with long-term U.S. Treasuries and the S&P 500 index both closing higher on Monday. In fact, with expectations of a rate cut signal from the Federal Reserve, the U.S. bond market is expected to record a monthly gain for the third consecutive month this month, marking the longest uptrend in three years.
Citigroup strategists Jabaz Mathai and Alejandra Vazquez wrote in a report, "We believe that **the U.S. bond market is likely to continue to rebound at least until the close of trading on Wednesday, the day the Federal Open Market Committee (FOMC) meeting ends in Eastern Time. Due to Powell's overall more moderate than expected remarks, financial conditions in the U.S. have eased this week at the FOMC meeting."
Nevertheless, historical records are encouraging for the bulls. According to data compiled by Citigroup and Bloomberg, over the past eight Federal Reserve policy meeting weeks, the 10-year U.S. Treasury yield has fallen by an average of about 12 basis points, while the S&P 500 index has risen by an average of 1.5%.
Stocks and bonds tend to rebound before and after the Federal Reserve meeting
For a long time, the trend of stocks and bonds rebounding before and after the Federal Reserve meeting has puzzled investors. This pattern has remained largely unchanged since Powell launched the most aggressive monetary tightening policy in decades at the beginning of 2022.
Although the Federal Reserve is expected to keep its benchmark interest rate at the highest level in over 20 years this week, traders will closely watch for any signs of an imminent easing policy. Swap traders have fully priced in expectations of a 25 basis point rate cut by the Federal Reserve in September and expect a total cut of about 64 basis points by the end of the year.
Citigroup strategists point out that stocks often maintain an upward trend after rebounding, but they suggest that exiting bond bullish positions before the U.S. employment report is released on Friday would be a "prudent" move, as the employment report often triggers significant market volatility.
These strategists said, "On FOMC decision day, bond yields often decline, the yield curve steepens, and stocks rise and continue to rise the next day. However, looking beyond Wednesday this week, the bond market will need weaker than expected employment data to sustain further gains."