How will the markets respond to the proverbial one-two punch of interest rate hikes and balance sheet reduction? The effects on the markets and the economy of combining the two aspects of monetary tightening in quick succession has not been attempted before therefore the outcome is unknown.

To write it differently the scale of what the Fed is contemplating now is completely unprecedented. New York Fed President stated the obvious and what all thought should be occurring…”long rates are expected to move up over time as the central bank downsizes its balance sheet.”

The Fed President also acknowledged he is “pretty uncertain how big the impact of such quantitative tightening would be. We will have to remain humble.”

Markets are telegraphing their concern as the NASDAQ is down about 8.4% over the past ten trading sessions and Treasuries are off about 2.3% in the same span.

As noted several times Treasuries have not had back to back down years since 1974.  As widely noted, Treasuries were down in 2021, the first negative year since 2013 and have had only four declining years since 1982.

Most market participants have not experienced an inflationary environment. Complacency is great as evidenced by bond yields, the inverse of 1982 when all were hypersensitive.

Commenting on yesterday’s market activity, the NASDAQ declined another 1.15% and is now decisively below the pivotal 200 day moving average. The Dow and the S & P 500 fell about 0.90% and both have violated their 100 day moving average.

At the close NFLX posts results. Some view their results of a harbinger of things to come, thus suggesting can either validate or nullify current sentiment. Shares year to date are down about 14.5%.

Last night the foreign markets were mixed. London was down 0.10%, Paris down 0.12% and Frankfurt up 0.15%. China was down 0.09%, Japan up 1.11% and Hang Seng up 3.42%.

The Dow should open nominally higher on earnings optimism. NASDAQ futures are up about 0.70%, perhaps on the proverbial “buy on dip” philosophy. The 10-year is up 9/32 to yield 1.84%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.