It has been a very interesting start to the new year. Omicron concerns have been replaced by tightening fears. Tech stocks are no longer racy. Everyone wants to own value stocks such as banks. Investors are realising that the era of zero interest rate policy is coming to an end, because of inflation and the fact the US and global economies have weathered the storm of Covid. There’s hope that this omicron wave might be the last hurrah of Covid before the pandemic turns into endemic. South African researchers have gone as far as to say Omicron may mark the end of the pandemic.
Investors are now looking ahead in trying to anticipate how the Fed and other central banks might respond if the economy evolves as expected. Every word the Fed says will be examined, like how investors observed the FOMC’s meeting minutes from the December meeting that were released on Wednesday. In a bid to keep the US economy from overheating amid high inflation and near-full employment, the FOMC indicated that the outlook “could warrant a potentially faster pace of policy rate normalization.”
Investors since been bidding up yields, and on Friday the US 5-year and 10-year yields broke above their 2021 highs despite a mixed US jobs report. This triggered further selling of tech stocks, while value pushed higher.
Although headline jobs disappointed yet again with a print just shy of 200K, it didn’t matter in the eyes of investors because hourly earnings beat expectations with a print of +0.6% m/m vs. 0.4% eyed, taking the y/y rate to 4.7%.
It is worth watching the 10-year yields closely as we look forward to the week ahead when more US data including CPI are released (see data highlights below). The dollar rally could accelerate, while value stocks could shine even brighter.
Source: ThinkMarkets and TradingView.com
Macroeconomic highlights
Monday: Eurozone Sentix Investor Confidence
Tuesday: Fed Chair Powell testifies and speeches by Fed’s Mester and George
Wednesday: Eurozone industrial production and US CPI m/m
Thursday: US PPI and Unemployment Claims
Friday
- UK construction output and manufacturing production
- German Prelim GDP
- US Core Retail Sales, Industrial Production, and Prelim UoM Consumer Sentiment and Inflation Expectations
