It was an interesting day in the markets.
It was a stereotypically “risk-on” day (stocks up, dollar down, etc.) until the Fed minutes came out.
The minutes revealed (apparently to the market’s surprise) that several members of the FOMC were reluctant to keep Quantitative Easing far beyond the middle of the year.
It’s debatable whether this counts as a “tightening” or not. After all, this doesn’t change the Fed’s ‘Evans Rule’ guidance, which indicates that easy money will be guaranteed at least until the economy hits a certain economic threshold, but any sign that the easing appetite is nearing its end is noteworthy, given the abnormality of the last few years.
So the risk-on-move reversed itself and became a very un-QE day. Stocks fell. The dollar shot up. Gold fell. Yields at the long end of the curve started to rise.
In light of this move, Citi’s Steven Englander warns of a ‘1994’-like scenario.
Before the Minutes were released, there was little anticipation or discussion on payrolls. Now that the Minutes are out and have raised market fears that the fed will pull back from ease earlier than anticipated, investors are worried about a repeat of 1994, when a surprise Fed tightening after a long period of easy money (by standards of those days) devastated fixed income markets. Then 10yr Treasury yields rose 170bps over a two month period.