Markets with Megan

Megan Horneman looks into the key takeaways from the Federal Reserve's January meeting minutes in today's episode. Megan highlights the Fed's hawkish tilt, expressing concerns about potential stalls in inflation progress and emphasizing the risks of cutting rates too quickly. She examines the precursors to the meeting's release, including concerns about Nvidia earnings and a challenging 20-year bond auction. The effects include a rise in yields, disrupting equities, and particularly impacting the infotech sector. Megan discusses the bond auction, citing specific metrics like the sizable tail and the lowest bid-to-cover ratio since August 2022. If you have any questions or comments please reach out to podcast at Verdence dot com.  

Watch today's episode here: 

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today, on Wednesday, February the 21st, and we want to discuss some of the highlights that came out of the Federal Reserve's January meeting minutes. Remember that at each meeting they released a brief statement and then we have to wait several weeks to get the full context of their meeting, and in the January meeting they did kind of take a little bit more of a hawkish tilt, meaning that they tried to pull back some expectations for rate cuts this year, and the minutes and the further details really reinforced that view. So just a couple things to highlight. Many of the officials were worried that the progress on inflation would stall. They were highly attentive to the inflation risks and they're worried about cutting rates too quickly. They found that there were more risks to cutting too soon than there are risks to keeping them elevated. The only other thing that they did mention was a bit about the balance sheet, and we probably will get some more information in March about that and their plans on the continued reduction of their balance sheet.

Let's talk about the market reaction. So there was some movement in the market even before these minutes came out, and it was due to two things. From the equity side, there's a lot of concern around the Nvidia earnings after the bell today, and then on the bond side, we did have a 20-year auction, which was really, really poor. If you can remember, a couple months ago we went through several weeks where we had poor auction results. Just to let you give you an idea of some of the things that happened with that auction, the yield that actually came out of the auction was three basis points higher than what was expected. That's called a tail. That was the biggest tail we've seen since May of 2020. The bid to cover ratio, which measures demand that was the worst we've seen since August of 2022. And then, lastly, the indirect bidders so this is things like foreign governments or foreign banks. That was the lowest we've seen since May of 2021. So, because of that, the primary dealers are those that are required to pick up the slack when the bills or notes are not picked up by indirect bidders or direct bidders. They had to pick up the most as well since May of 2021.

So what we're seeing here today is a backup in yields, meaning that yields are rising, they're pricing out Fed expectations and then the equities are taking a hit. We're down triple digits on the Dow when we came in to talk about this. But the biggest declines that we've seen in the market has been in the infotech sector and we've warned multiple times before that these high PE, high growth names were at risk if we saw interest rates back up and especially if we saw the Fed try and pull back on these unrealistic rate cut expectations for this year. That's all we have today. Tomorrow we'll be back with some housing information. Because of the backup in yields, we're seeing mortgage rates spike up again, so this isn't good news for the housing market, but we'll be back tomorrow with the existing home sales. That's all we have. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you,