Please see below this week’s market commentary from Brooks Macdonald – received late yesterday afternoon – 10/01/2022
Weekly Market Commentary | Treasury yields rise rapidly as Omicron concerns ease
By Edward Park
- Increased optimism around Omicron, mixed with Federal Reserve hawkishness, catalysed a rapid rise in mid and long term Treasury yields
- Friday’s payroll numbers came in lower than expected with supply issues still prevalent in the labour force
- This week’s US CPI numbers will be an important test of whether the inflationary pressures continue in the US economy
Increased optimism around Omicron, mixed with Federal Reserve hawkishness, catalysed a rapid rise in mid and long term Treasury yields
The last week saw increased optimism around the Omicron variant at the same time as the Federal Reserve (Fed) made it clear that they were ready to use all policy measures at their disposal to combat inflation should it prove to be enduring. In terms of specifics, reports on Tuesday hinted that the Fed may begin quantitative tightening earlier this cycle and the release of the December meeting minutes on Wednesday confirmed this was the view of the committee. This created the perfect storm for Treasuries where 10-year yields rose sharply, catalysing a selloff in interest rate sensitive equity sectors such as technology.
Friday’s payroll numbers came in lower than expected with supply issues still prevalent in the labour force
Friday’s non-farm payroll figures disappointed markets at a headline level with just 199,000 jobs created in December compared to expectations of around 400,0001. The unemployment rate came in at 3.9%2 which implies that a lack of supply may be behind the lacklustre headline number rather than a lack of demand for workers. The average hourly earnings figure, a key part of the future inflation narrative, beat expectations at 0.6% month on month3. The participation rate for the US workforce still remains below its pre-COVID-19 level. An important question is whether those that were in the workforce pre-COVID-19 return. The sharp rise in asset prices (homes and equity markets) could lead to an acceleration of retirement plans, reducing the participation rate, though this is hard to quantify at this point.
This week’s US CPI numbers will be an important test of whether the inflationary pressures continue in the US economy
There are two interpretations of the Fed’s hawkishness last week; one that they have their mind set on tightening policy, the other that they have been trying to buy increased optionality ahead of the uncertainty of inflation. This week’s US Consumer Price Index (CPI) release on Wednesday will be of critical importance and may determine whether the committee continues its shift towards a more hawkish stance or whether there is some pause for breath. Of course, one datapoint will not make a trend, however the early 2022 releases will start to paint a picture of how sticky the current pandemic-distorted inflation is.
The future of US monetary policy is the central question in markets at the moment. At the end of this week we enter the communications blackout window ahead of the next Fed meeting. In the interim, we have a number of Fed speakers but tomorrow sees the nomination hearing for Fed Chair Powell in front of the Senate Banking Committee. The language Powell uses will be closely watched for signs of further hawkishness even if the market is fairly confident that the vote on Powell’s second term itself will be a formality.
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Charlotte Clarke
11/01/2022