With Fed Assets And US Stocks In Lockstep, Yellen Suggests Fed Behind The Curve

Treasury Secretary Janet Yellen pretty much implied on Tuesday that the Fed is behind the curve, although she tried to walk back her comments later. The economy may be “overheating”, but the Fed is not ready to dial back its ultra-accommodative policy.

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”

The above statement from Treasury Secretary Janet Yellen created a stir on Tuesday. The knee-jerk reaction in the markets was to shoot first and ask questions later. Stocks sold off in that session. The S&P 500 large cap index closed down 0.7 percent and was down 1.5 percent at the session lows. The Nasdaq 100 took it on the chin, down 1.8 percent and was down as much as 2.9 percent.

The prevailing perception is that tech will suffer in a rising rate environment.

The Nasdaq 100 already breached its rising trend line from the low of March last year, with the underside of that trend line resisting rally attempts. On Tuesday, it gapped lower, with the session low of 13396.11 finding support at a confluence of four-month horizontal support and two-month rising trend line (Chart 1). Plus, the 50-day moving average is at 13348. A decisive breach of this level can expose the index (13613.73) to a drop to 12200s-12400s.

Stocks already struggled to rally on good news last week. Earnings results from five of the top six US companies – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), alphabet owner Google (GOOG) and Facebook (FB) were very good, with some hitting it out of the park; Tesla (TSLA) slightly missed (more on this here). The FOMC also met last week, and Chair Jerome Powell promised continuation of the firehose of liquidity. And the first print of 1Q21 GDP showed the economy shot up at an annual rate of 6.4 percent.

Later that day, Yellen, speaking at a different event, tried to walk back her comments, saying any price increases would be transitory. But the genie was out of the bottle.

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