Tapering and the Growth/Value Tension

The Fed is currently injecting $120bn into the economy every month via its quantitative easing programme. It is doing this by buying $80bn of Treasuries and $40bn of agency mortgage-backed securities and is committed to this until it has achieved "substantial further progress" on meeting its mandates of price stability and full employment.

However, substantial progress does seem to have been made in this regard. The payrolls number for July (released Friday, 6 August) beat the forecast of 870,000, coming in at 943,000. Moreover, the previous month's number was revised upwards to 938,000. Inflation data has also made substantial progress and core CPI reflected at 4.3% for July.

Tapering Seems Likely

It is likely that the Fed wants to wait for another one (possibly two) readings of inflation and payroll data before announcing its tapering timeline. The Fed is concerned that inflation is transitory, and the latest NFP did not fully reflect the spread of the delta variant currently underway in the US.

Nevertheless, there seems to be a growing consensus amongst market participants that the Fed will start tapering towards the end of 2021 or at the beginning of 2022. To this end, the US 10-yr note has started to respond:

It seems as if the orange moving average is converging on the red moving average and will cross over it soon (blue rectangle). This will put the moving averages into bullish formation, with the green shorter-term average above the intermediate orange average, and the intermediate orange average above the red longer-term average. If angle and separation develop and the moving averages move in a north-easterly direction, the 10-yr will be gaining a momentum upwards as the market heads towards the anticipated tapering.

Higher Yields Affect the Growth/Value Dynamic

In the above weekly chart, we have the US 10-Yr note (top) and the relative strength chart of the Vanguard Growth ETF to the Vanguard Value ETF (bottom). As yields came down during 2019 to July 2020, the Growth ETF was outperforming the Value ETF (first green lines). Then, when yields became more resilient and rose into April 2021, the Growth ETF underperformed the Value ETF (red lines). This correlation continued in the next leg as well (second green lines). If this correlation continues, and if yield increases, we may see growth underperforming value again (red dashed lines).

Conclusion

It's no longer a matter of "if" but rather "when" the Fed will begin its tapering timetable. The market seems to be of the opinion that this will begin towards the end of this year or early next year. As such, the US10-Yr notes' moving average have started converging towards bullishness. If this continues and yield moves upwards with the moving averages in bullish formation, it is likely to affect the growth/value dynamic. As per our second chart, higher yields are likely to result in an underperformance by the growth side of the market and an outperformance by the value side.