Thought Of The Week
When the Lights Come on At the End of the Night
The FOMC minutes released on Wednesday caused many investors to take flight as it was more hawkish than expected. The actual monetary policy meeting happened in mid-December, but minutes were released at 2pm (EST) three weeks after the day of the policy decision. Firstly, the Fed doubled the pace of taper, allowing it to end asset purchases earlier, March rather than June. Secondly, the dot plot in the December FOMC meeting featured three median hikes (from just a half a hike in the September FOMC projections), signalling a shift in the Fed’s views on risks around inflation. Lastly, the FOMC revised its statement to drop its previous intention to maintain an accommodative policy stance to keep inflation above 2 percent for some time. 10-year Treasury yields rose to as high as 1.71%, a level last seen in April while the S&P 500 extended declines following the release. This means that we could have lift-off (the first rate hike) as early as March 2022.
Same Same but Different
In Chair Powell’s press conference post FOMC, he said “ the inflation that we got was not at all the inflation we were looking for” in response to a question whether the Fed might let inflation run hotter than preferred for a while in order to reach maximum employment. He is making a distinction between demand pull inflation and cost push inflation; the former seems inevitable given pent-up demand and economic activity in 2021 as the country re-opened, coupled with quantitative easing along with unprecedented fiscal spending while the latter is now unavoidable with sustained supply chain disruptions. The Fed was hoping for the first sort of inflation, where 2% was seen as a signal that meant that things were in order.
The US added 199,000 jobs in December, a weaker showing than the consensus estimate of 425,000. Data is released every first Friday of the subsequent month and collected up until the middle of the previous month. This means that the new payroll print released on Friday was collected before the Omnicron variant caused the sharp increase in cases later in December.
Now, the Fed has a choice to make – take the disappointing December jobs print in stride, putting it in context along with the JOLTS (Jobs Opening and Labor Turnover Survey) data showing a record 4.5 million American quit their jobs in November and keep on the path of tapering and lift-off, or run the risk of having inflation figures increase further from 6-7% to high single digits.
China Tech Selloff Deepens
Unprecedented regulatory tightening targeting the private economy and lingering risks about forced delisting of Chinese ADRs from US exchanges have resulted in the worst ever correction (-50%) in China Internet/Tech stocks last year, with US1.5tn of market cap lost and raising concerns about the investability of Chinese assets. China’s tech stocks fell once again on Wednesday as firms backed by Tencent Holdings Ltd. came under pressure after it pared investment in the cohort for a second time in two weeks.
Chart Of The Week
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