| Fed and ECB moves, claims data due, and Treasury yields tumble. Minutes, moves Federal Reserve officials were not ready to communicate timing for the tapering of asset purchases as the outlook remains unclear, the minutes of the June meeting showed. However, there was a feeling that they needed to nail down a plan in case they had to move sooner. Across the Atlantic, it is a big day at the European Central Bank where the results of the institution's major strategic review which began in January last year will be announced. The release at 7:00 a.m. Eastern Time is expected to include a higher inflation goal, and allow room to overshoot that goal if needed. ECB President Christine Lagarde gives a press conference from 8:30 a.m. Claims Also at 8:30 a.m. this morning we get the latest check on the labor market, with a drop to 350,000 initial jobless claims expected. Yesterday's Fed minutes clearly showed that officials are very focused on the labor market, with questions over how worker shortages which contribute to inflation would resolve. JOLTS data for May showed that openings hit a record high in the month. The OECD has released a study which shows developed economies won't return to pre-pandemic levels of employment until the end of next year. Risk off Investors seem to be having a hard rethink about the prospects for the global economy. Easing inflation expectations in the U.S. are helping push Treasury yields lower, with the 10-year dropping below 1.27% this morning. Falling inflation expectations amid the rise of the delta variant of the coronavirus is the main driver for the risk-off move. The 20-day correlation between futures for the S&P 500 and Treasuries turned negative for the first time since February as bonds return to their traditional role as a hedge for falling stock portfolios. Markets fallThe rally in sovereign bonds is a global phenomenon and so is the selloff in equities. Overnight the MSCI Asia Pacific Index slid 1.2% while Japan's Topix index closed down 0.8%. In Europe the Stoxx 600 index had dropped 1.2% by 5:50 a.m. with every industry sector in the red as cyclical stocks led the losses. S&P 500 futures pointed to a more-than-1% fall at the open, oil fluctuated around $71 a barrel and gold rose. Coming up... Mexico, Brazil and Chile all report June CPI readings this morning. Latest U.S. crude oil inventories data is at 11:00 a.m. is expected to show a significant drop in stockpiles. President Joe Biden is scheduled to speak on the Afghanistan drawdown at 1:45 p.m. Levi Strauss & Co. and Duck Creek Technologies Inc. are among the companies reporting results. What we've been readingHere's what caught our eye over the last 24 hours. And finally, here's what Joe's interested in this morningEquity futures are selling off this morning, but for the most part, major stock indices in the US are very close to all-time highs. The real action lately has been in the bond market, where the recent moves have been extraordinary. Just two or three months ago, everyone was talking about reflation, and how maybe even the Great 40-Year Bond Bull Market might finally be coming to an end thanks to this era of loose monetary policy and fiscal expansion. There seemed to be this newfound unanimity that rates had nowhere to go but up. There was even talk about the Fed losing control of the long end in some way. And yet hear were are, this morning, with the 10-year yield below 1.3%.  There are probably multiple contributing factors to the reversal, but some of the best commentary on it comes from Jon Turek of JST Advisors, who wrote in a note to clients that the recent action is in large part attributable to the last Fed meeting in the middle of June, where Powell & Co attempted to cut off the right tail of inflation outcomes. Jon Writes: To me, this move has all been about the right tail of growth/inflation trades getting chopped. In USD terms, this move is about the left tail getting smaller post FOMC, not the right tail getting enlarged. I think 90-94 range in DXY will hold for a while. The selling point for the dollar to break the lower end of its 6y range was really predicated on the idea of this "reckless Fed". The idea that FAIT (Flexible Average Inflation Targeting) would engineer this new regime of pro-cyclical policy where the Fed would allow the economy to expand the rate of policy accommodation in self-reinforcing way.
(Emphasis mine) In other words, there had been this perception that the Fed was really going to let things rip. That it would let growth run fast, and let inflation run hot and not bat an eyelid, so long as we still had work to do to get back to full employment. And not just let things rip for awhile, but do so in a self-reinforcing way. See if you commit to keeping rates at zero until some economic destination is reached -- and then growth and inflation heat up on the journey to that destination -- then implicitly you've engaged in more easing, because you're keeping rates at zero and not reacting at all to the speeding up. This is the right tail of inflation outcomes that Turek is referring to. But the Fed is apparently not doing that. As I wrote on June 17th, it was clear from Powell's press conference that while he's optimistic about the recovery, it's clear that of the Fed's two main goals, employment and constraining inflation, he's more anxious about risks to the latter right now. This spring's hot CPI prints re-activated the central bank's inflation-fighting white blood cells. The Fed may be a long way from literally raising rates, but they're watching the speed and heat of the economy and letting people know they're paying attention. This helps cut off that right tail and it breaks the perception of self-reinforcing easing by non-action. And this explains some of the rather extreme movements we've seen of late at the long end of the yield curve. Joe Weisenthal is an editor at Bloomberg
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