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OANDA – Inflation shock, Stocks pare losses as Wall Street eyes half point March Fed rate hike, Oil rallies, Gold steady, Bitcoin
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Q4 2021 hedge fund letters, conferences and more
This Value Fund Likes Trucking And Logistics Firms As Supply Chain Pressures Drive Prices Higher
Lyrical Asset Management International was up 16.1% for 2021, compared to the MSCI EAFE index's 11.3% return and the MSCI EAFE Value Index's 10.9% gain. Q4 2021 hedge fund letters, conferences and more Inflation Is Now The Specter Over The Markets In their 2021 review sent to investors, which they shared with ValueWalk, portfolio managers Read More
A hot inflation has Wall Street bracing for a half-point Fed rate hike in March, with a full percentage point of hikes by July. Everything got more expensive in January and fears remain that it will get worst. US stocks initially tumbled after surging prices made swap markets added another Fed rate hike, bringing the total to six Fed rate increases this year. Technology stocks suffered the biggest blow as underlying inflationary pressures remain strong and support expectations for hotter reports over the next month or two. The US consumer is clearly weakening here as rents, electricity, energy, and food prices continue to trend higher.
The Fed will be tested here as they were hoping to have a gradual tightening cycle and not a mad dash that looks like a policy mistake. With core inflation well above the Fed's target and real average hourly earnings declining, the political pressure will also grow on the Biden administration and democrats. November is still far away, but this inflation report is showing price increases are everywhere and resistance is growing for more fiscal packages that will fuel further pricing pressures.
US stocks recovered most of the inflation-driven losses as investors anticipate that pricing pressures could be peaking just before the Fed's March policy meeting. Two of the biggest inflationary pressures have been surging shelter prices and new vehicles, both of which seem poised to be improving next quarter. The housing market will undoubtedly peak now that mortgage rates have skyrocketed to 3.69%, the highest level since January 2020. New car pricing was unchanged in January and that could be a sign that manufacturers are finally getting their semiconductor chips. Table of Contents
US inflation jumped to a new four-decade high on robust demand and as supply chain issues persist. The consumer price index came in hotter-than-expected on both a monthly and annual rate. The 7.5% increase from a year earlier, was towards the upper boundaries of the 7.0% to 7.6% consensus range. On a monthly basis, inflation rose 0.6%, which was the same pace in December.
The one positive is that the cost for new vehicles was flat, snapping a streak of several 1% gains. The chip shortage problem may be improving a little faster than we have thought.
The dollar initially rallied as risk aversion ran wild after a hot inflation report have many on Wall Street worried about the strength of the US consumer. Currency traders expecting the dollar to continue to have gains as more Fed rate hikes get priced in might be disappointed as the other advanced economies are not too far behind. Commodity currencies and British pound turned positive after FX markets digested the inflation report.
Crude prices have been in a ping-pong session over the past couple days as energy traders monitor headlines regarding the Russia-Ukraine geopolitical conflict and Iran nuclear talks. The Biden administration reached out to the Saudis but was unable make any progress in getting oil prices down. The Saudis are sticking to their gradual output increase strategy for now, which means that energy traders will be buying on every oil price dip.
The hot inflation report sent the dollar higher which tentatively dragged down commodities, which include oil prices. The oil market fundamentals however remain very tight and with no immediate changes to that outlook, crude prices seem poised to go higher.
Gold prices went on a wild ride after a hot inflation report raised Wall Street expectations for a much aggressive Fed tightening cycle. Gold initially plunged as swap markets priced in 6 total rate hikes this year, with the March liftoff becoming a half point increase.
With inflation hitting more categories, gold could start behaving more like an inflation hedge as the flattener trade will likely limit the dollar's gains going forward. While the US consumer seems to be heading for some tougher times as real average hourly earnings are not keeping up with these surging widespread price increases, gold should see limited safe-haven flows as the overall economic outlook is still upbeat.
Gold will likely continue to trade between $1800 and $1855 until money markets become more convinced of the Fed's tightening path. If the 10-year Treasury breaks above the 2.00% level, gold could see some short-term weakness, but nothing that should signal the beginning of a bearish trend.
Bitcoin prices are holding up nicely given the surge in global bond yields. Bitcoin's best environment going forward is risk appetite and that might prove to be difficult until we get past the first couple of rate hikes by the Fed. Bitcoin's institutional investors are focused on Treasuries as that momentum trade appears to be rather straightforward. Bitcoin seems poised to consolidate between the $40,000 and $50,000 level over the short-term.
Article By Edward Moya, OANDA
Updated on Feb 10, 2022, 2:43 pm
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