Stocks Decline as Powell Warns of Higher Inflation and Accelerated QE Tapering

Stock Selloff Resumes

Wall Street's main indexes extended declines in choppy trading on Tuesday after Federal Reserve Chair Jerome Powell said the risk of higher inflation has increased and that it was appropriate to consider wrapping up tapering a few months sooner.

Snip Reuters, Image WSJ.

11.06 AM Central Indexes

• DOW: -667, -1.89%
• S&P 500: -88, -1.88%
• Nasdaq: -320. -2.03%

Bond Market Reaction

The stock market reaction is what I would have expected on the above news. 

The bond market reaction is far more interesting. Yields at the long end tumbled and rose in the middle. 

Huge Yield Curve Flattening

I will post new charts later tonight after the bond market closes. But huge flattening is underway now.

• The yield on the 30-year long bond is down 8 basis points, the 10-year note yield is down 10 basis points. 
• Meanwhile, the yield on the 5 year note yield was positive but just fell by 2 basis points as I am typing.
• The yield on the three year note is up 2 basis points and the 2-year note is up 3 basis points.

Other Measures

The VIX S&P volatility index is up 4.86 points to 21.47.

Gold is down a modest $7.50 as I type. One might have expected a bigger selloff on this news.

Of all the reactions, the bond market was the most interesting because it was arguably the least expected. 

Recession Watch 

This continual flattening is a recession warning.

I still do not believe the Fed gets in all the expected hikes and the bond market reaction supports that belief.