OANDA - Inflation Forces Powell To Lean Towards Hawkish Side, Retires 'Transitory' Word

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OANDA – Inflation forces Powell to lean towards hawkish side, retires 'transitory' word, Moderna Inc (NASDAQ:MRNA) reversal, Cyber Slump, Regeneron Cocktail less effective against Omicron, US Data, Oil falls, Gold drops, Bitcoin and Ether diverge

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The negative headlines dominated today's earlier news flow as Omicron variant uncertainty triggers risk aversion again. It is too early to speculate on whether it causes more severe illnesses than other variants and how well do our current vaccines protect against it. The early signs are optimistic as South Africa has reported that most Omicron cases have shown mild symptoms.

Today will go down as the day Fed Chair Powell shed his dovish wings and showed signs of becoming a hawk. An abrupt shift is conveniently timed as less than a week ago he was nominated by President Biden to serve a second term as Fed chair. Powell's comments about finishing tapering a few months sooner helped the dollar pare earlier Omicron-driven losses and sent stocks back to their earlier lows.

Earlier stocks were in retreat mode after Moderna 's CEO warne+d of potentially materially lower efficacy of existing vaccines against the Omicron variant. Early results from Regeneron tests indicate that antibody cocktails lose effectiveness against the Omicron variant. It is too early to assess if we will need to update all of the COVID vaccines and treatments, but some of the early reports across Europe are that the Omicron cases are mostly mild or asymptomatic. Financial markets appear to be mostly optimistic that the growth outlook across the US will not be terribly disrupted by the Omicron variant.

Risk appetite did not get any favors after the CBO reminded investors that the US Treasury could run out of money before the end of the year.

• 1. Cyber Monday
• 2. US data
• 3. Powell/Yellen
• 4. Oil
• 5. Gold
• 6. Cryptos

Cyber Monday online sales slumped according to Adobe Analytics. US consumer spending dropped 1.4% from a year ago to $10.7 billion, towards the middle of the $10.2-11.3B consensus range. Some retailers are extending Cyber Monday sales as concerns grow that many shoppers have already finished the bulk load of their purchases.

The Chicago Purchase Manager Index dropped more-than-expected to 61.8, while the Conference Board consumer confidence reading hit the lowest level since February. The housing market remains hot as both the FHFA and S&P Corelogic housing price index show prices are not easing.

With inflation running well above 2% for long enough, the Fed has met their inflation mandate. Fed Chair Powell is worried about a policy mistake as inflation risks have increased in recent months. The proof of broad-based price increases easily confirms the economy is battling generalized price inflation that won't go away when we are beyond COVID.

Powell wants to retire the word“transitory” for inflation. Powell defined transitory as not leaving a permanent mark on prices. Powell sees inflation subsiding in the second half of next year, but clearly he wants tapering done sooner in case inflationary pressures continue to see upward pressure from future COVID variants.

The Treasury curve flattened following Powell's transparency over his fears of higher inflation. Faster tapering sent the short-end US yields rose, while long-dated Treasuries tumbled. The 2-year Treasury yield rose 6.1 basis points to 0.547%, while the 30-year Treasury yield dropped 6.3 basis points to 1.791%, the lowest levels since January. The dollar embraced the faster taper headlines and recovered a good part of its earlier losses.

Crude prices got hit with a one-two punch from Moderna CEO's concern over the current MRNA vaccines effectiveness with Omicron and after the Fed sent the dollar higher and brought forward rate hike expectations. Energy traders will be stuck in wait-and-see mode over the next couple weeks until a clearer picture emerges over how bad lockdowns and travel restrictions get with this new COVID variant. The short-term crude demand outlook is a giant question mark and that has many traders turning bearish with crude prices. All eyes will be on OPEC+ for the rest of the week. OPEC+ will likely pause production increases in response to the globally coordinated strategic petroleum releases and as the crude demand outlook took a big hit from the latest COVID jitters.

Gold prices got punished after both Fed Chair Powell turned hawk and signaled a faster taper and on optimism after reports that many of the Omicron cases across Europe have been mild or asymptomatic. Rate hike expectations are once again increasing but the real yields are not. The inflation risk is still the biggest risk on the table and that is why the Treasury curve is flattening.

Gold will eventually stabilize once it gets through this tough period of stimulus withdrawal. The risks of a Fed policy mistake are growing and given what the long-end of the curve is doing, gold might start seeing support fairly soon.

Treasury Secretary Yellen got hit with a bunch of crypto questions, but she did not deliver much clarity on how stablecoins should be regulated. Yellen simply pointed out that stablecoins could be regulated the same way since they can be used as a means of payment. Tether, XRP, and USD Coin all remained at the $1 level.

Bitcoin and Ethereum went in separate ways today. A faster Fed taper and increased rate hike expectations was bad news for Bitcoin. Bitcoin is trading more like a risky asset than an inflation hedge. Ethereum is still the favorite crypto bet for most traders and seems like it will make another run towards $5000 once risk appetite returns.

Article By Edward Moya, OANDA

Updated on Nov 30, 2021, 3:31 pm

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