Investors are dumping their sovereign bond holdings yet again on rising inflation fears that hit the highest levels since 2008. And the Federal Reserve (Fed) Chair Jerome Powell will unlikely stop the bleeding at his speech at a Wall Street Journal Event today. Saying that the aggressive bond sell-off is due to a growing optimism, or the recent chip shortage didn’t work at his testimony before the Senate, it won’t work today either.
On the other hand, the jobs market is, as he says, not in a position that would allow the Fed to tighten its monetary policy. As such, the Fed is faced with a difficult problem. It will either act to improve employment and let the inflation run hot. Or it will act on inflation and leave 10 million jobless Americans hopeless along with a more restrictive government check policy. The answer is simple: we will need to learn how to live with rising inflation fears, and perhaps with higher inflation for some time.
In this respect, the ADP report released in the US yesterday came in at 117000. the US added 117000 new private jobs during the course of last month, the lowest since last summer and almost halfway below last month’s figure. Investors didn’t like the weak figure. The S&P500 retreated for a second day and Nasdaq dropped to the lowest in two months.
But in reality, they would’ve hated a strong read even more, as a solid recovery in the US labour market would’ve further boost inflation expectations and mean the end of the cheap liquidity party for risk investors. And risk investors hate seeing their punch bowl pulled away from their hands. So, under these circumstances, the weak ADP read was just the best of the worse-case scenarios for equities. Given the inconsolable sovereign bond holders, a strong jobs figures would’ve only added an extra layer of discomfort in the market.
Now all eyes are on Friday’s jobs figures. I believe, investors would be happy with just the right dose of recovery in the US jobs market, not too soft not too strong, just enough to keep the Fed loose enough.
The US dollar is stronger across the board and gold is testing the $1700 per oz support. Another race in sovereign yields could throw the yellow metal under this level, and encourage investors to look for better inflation-hedge alternatives, such as commodities or value stocks. And Bitcoin is not an inflation-hedge of choice. The past days price action shows that it tends to move in tandem with tech stocks, rather than safe-haven assets.
In this respect, the migration to value stocks remains the main topic. Bank and energy stocks continue attracting the reflation flows, although the sell-off in value stocks, led by big tech outweigh gains in better performing sectors. And it’s normal we don’t see a panic purchases in equities. The value stock recovery will of course be slower than the growth stock sell-off. This is especially true for the time of financial distress.
With the better appetite in bank and energy stocks, the FTSE 100 which lagged its major peers during last year’s super-skewed V-shaped correction is in a good position to catch up with post-pandemic recovery, although we shall see the stronger pound tempering the upside potential in British blue-chips. But, gains are probably not on today’s menu due to a global lack of risk appetite and uncertainty in oil markets ahead of the OPEC+ decision.
WTI crude is surprisingly holding on to its gains despite a sizeable 21.6-million-barrel jump in US oil inventories last week, compared to the expectation of nearly 1-million-barrel decline. The resilience in oil’s advance is a sign that investors are mostly focused on today’s OPEC decision, and more importantly, they expect Russia to sound reasonable and don’t ruin the lower-production-alliance just yet. The alliance is expected to start unwinding its production cuts with baby steps, 500k barrel per day. The only risk is the pace of the unwind not living up to Russia’s expectations.
