Expect more selling in the stock market and the bonds and mortgage markets. The recent increase in interest rates has now increased the rate on the bellwether 10-year note, up 100 basis points from 1.63% to 2.60%; and mortgage rates are up 75 basis points since early May. For over a month prior to last week, talk circulated regularly that the stock market may retreat 10% on a long overdue correction; it is occurring now. Bernanke set it off after the FOMC meeting last week, saying the Fed was ready to begin cutting back on the stimulus by the end of the year, and completely done by the middle of 2014. Markets had been expecting the Fed would begin tapering; what the market didn’t expect was Bernanke’s clear comments. It wasn’t thought to be as soon as what he indicated. What Bernanke added was that it will be dependent on the economic outlook as to when the Fed would pull the trigger.
The Fed obviously believes the economy is on a path of growth, albeit slowly. The overall consensus from the private sector is also forecasting better economic growth. We wouldn’t want to argue with the forecasts, they are out there and markets are taking it all seriously. However, the employment sector shows very little increased strength and without increased job growth all other measurements must be considered marginal at best. Any slowdown based on the data points over the next two weeks, including the June employment report on July 5th, will be closely monitored. A soft June employment report will change the outlook for the Fed tapering. Expect continued market volatility this week and next.