Dovish Fed Minutes Provides Market Boost

Bonds rally while Wall Street’s fear gauge falls to its lowest level in over 3 months. Treasury yields fell across a flattening curve today, the 2-year yield falling ~4bps to 4.47% and the 10-year yield declining ~7bps to 3.69%. The move came after Fed minutes revealed a dovish sentiment in the central bank, which contributed to the continued reduction in the VIX, a useful proxy to measure investors’ confidence in the market. The VIX fell to 20.35 today, which has not been seen since mid-August. Equities had a great day as a result, with the S&P rising by ~0.59% and NASDAQ realizing gains of ~0.99%.

November FOMC minutes indicate participant support for slower pace of interest-rate hikes and elevated recession probability. According to the closely-watched November FOMC minutes released today, “a substantial majority” of FOMC members believe that slowing the pace of rate hikes will “likely soon be appropriate,” explaining that a slower hiking pace would help the committee assess the impact of rate hikes and could reduce the risk of instability in the financial system. In addition, the committee sees the risk of a recession over the next year as “almost as likely as the baseline,” the first such warning from the central bank since March. FOMC members noted softer consumer and business spending growth and a slowing in rate-sensitive sectors such as housing in response to tighter economic conditions. Continued labor market strength and still “unacceptably high” inflation represented areas that have yet to feel the impact of the rapid hiking pace. Currently, markets are pricing in a 50bp hike in December and will be closely watching Chair Powell’s speech scheduled for November 30th for further clues on future hikes.

Day ahead. Markets will be closed tomorrow for Thanksgiving, and Friday will follow with a 2pm EST early close. Derivative Path wishes a happy and healthy Thanksgiving to you and your loved ones!