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Friday, February 18, 2022
The Joseph Heller market may last all year
Over the last several days, the crisis in Eastern Europe has mostly displaced fears about what the Fed might do at its next policy meeting, even as labor and price data continue to beat expectations.
Yet one key idea remains crystal clear. Whether or not Moscow invades its neighbor over the coming days — or whether the central bank hikes four, five, or even seven times this year — the bar for growth and market gains in 2022 is getting lower and lower each day.
And it’s cornering investors, which have become overly reliant on cheap liquidity provided by the Fed, squarely in the center of a no-win scenario.
“Even if tensions between Russia and Ukraine abated, we wouldn’t expect risky assets to gain all that much over the rest of this year and next, mainly because we think ongoing monetary tightening would continue to keep a lid on any rally,” wrote Thomas Mathews, market economist at Capital Economics, in a research note this week.
“This view is supported by the fact that the assets that have struggled the most this year have tended to be those that are particularly vulnerable to rising discount rates, notably U.S. ‘tech’ stocks,” the economist noted.
In fact, some market watchers have suggested that market conditions haven’t pulled back enough to reflect the era of high inflation and rates. Goldman Sachs analysts recently found that financial conditions are currently far less tighter than prior cycles that preceded rate hike campaigns; meanwhile bond yields sensitivity to data “remains well below historical norms.”
Accordingly, the bank suggested that “we continue to believe more tightening in financial conditions will likely be required to generate the slowdown that the economy needs, and we expect increased data sensitivity to catalyze some of that tightening.”
With inflation surging, economists are now debating whether the Fed will commit a policy error of hiking too much, too fast, which runs the risk of sending the economy into a tailspin.
Minutes from the central bank’s last meeting momentarily tempered some of those concerns, but policymakers are seen well behind the inflationary curve, and have almost no room for leniency, particularly because both prices and wages are rising, and consumers keep spending — though why that is remains something of a mystery.
“Inflation expectations sometimes have a way of turning into a self-fulfilling prophecy,” WisdomTree strategists Kevin Flanagan and Jeff Weniger wrote this week.
“It is entirely plausible that consumers will accelerate buying to get ahead of future higher prices. This is the slippery slope [Fed policymakers] now find themselves on,” the analysts said.
“Prices and wages are rising in tandem — robustly, we may add — and still, we wait several more weeks for the Fed’s first move off the zero line,” they added.
Editor’s note: Morning Brief will be observing Presidents’ Day on Monday. We will be back on Tuesday, Feb. 22.
What to watch today
10:00 a.m. ET: Existing Home Sales, January (6.10 million expected, 6.18 million in December)
10:00 a.m. ET: Existing Home Sales, month-over-month, January (-1.3% expected, -4.6% in December)
10:00 a.m. ET: Leading Index, January (0.2% expected, 0.8% in December)
6:45 a.m. ET: Deere (DE) is expected to report adjusted earnings of $2.26 per share on revenue of $8.2 billion
7:00 a.m. ET: DraftKings (DKNG) is expected to report adjusted losses of 74 cents per share on revenue of $444.4 million
7:00 a.m. ET: Bloomin’ Brands (BLMN) is expected to report adjusted earnings of 53 cents per share on revenue of $1.04 billion
President Biden has a phone call scheduled with other trans-Atlantic leaders about the situation in Ukraine this afternoon. Also, officials including Vice President Kamala Harris and House Speaker Nancy Pelosi are in Germany for the Munich Security Conference which is set to be dominated by the latest developments from the region.
Monetary policymakers will gather in New York today for the 2022 US Monetary Policy forum. Speakers include Lael Brainard, who is nominated to be Federal Reserve vice chair, and Christopher Waller of the Federal Reserve Board of Governors.
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