Caution is once again evident in equity markets on Wednesday as we await the final Fed rate decision of the year.
Once again we find ourselves in an environment in which investors have perhaps got carried away with some early promising reports on the severity of the omicron variant and have not fully appreciated the downside economic risks facing the global economy.
Central banks have little choice but to start tightening monetary policy in the majority of cases, as inflation continues to rise to uncomfortable levels, become more widespread, and show signs of becoming more permanent. Omicron posing a greater threat and forcing restrictions may delay the inevitable but not for long as policymakers can’t afford to be complacent.
The Fed is not likely to hesitate following its meeting today and is widely expected to accelerate the tapering of its asset purchases, allowing for rate hikes to start in the second quarter. It could be argued that it’s taken longer than it should have but policymakers are finally coming around to the markets way of thinking and rate hikes are not far away.
The retail sales data for November won’t deter the Fed, with consumer spending more broadly remaining strong and the data perhaps signalling that purchases were brought forward as a result of supply concerns. The consumer remains in a strong position going into the new year and today’s report won’t be a cause for concern.
UK inflation hits decade high ahead of BoE meeting
The UK data this week highlights exactly why policymakers are being forced to withdraw stimulus earlier than they’d like and at a time of significant uncertainty around the variant. Not only are inflationary pressures accelerating faster than they anticipated and becoming more widespread, but an ever-tightening labour market is chipping away at the argument that it’s only temporary.
Odds on the Bank of England to raise rates tomorrow have increased following the data this week, although the consensus view remains that it will refrain due to the significant amount of uncertainty that omicron is creating as restrictions are reimposed. By February, the MPC will have much more data to hand and the booster program will have had time to improve the nation’s resistance to the virus. It certainly won’t be easy, but it may be sensible for policymakers to turn a blind eye to decade-high inflation this week.
Oil eases but OPEC+ could strike at any point
Oil prices are continuing to pare post-OPEC+ gains ahead of the Fed meeting. Ongoing reports of omicron-driven restrictions, combined with disappointing data from China which casts doubt over its growth potential are weighing on crude prices as we head into a highly uncertain period for the global economy.
The IEA also reported that the oil market has returned to surplus and that inventories will swell early next year, with first-quarter demand seen dropping by 600,000 barrels per day. It’s hard not to see this as a political victory for Joe Biden and the Democrats ahead of the midterms, given the timing of their coordinated SPR release. He’ll end up getting a lot of credit, despite the bulk of the price decline being omicron-related.
That said, it just takes OPEC+ to follow through on the immediate adjustment threat for prices to rise once again which will keep oil sellers on edge. This may limit the downside for now, although markets do like to eventually test the resolve of these warnings eventually.
Gold vulnerable to hawkish Fed
Gold is relatively flat on the day ahead of the all-important Fed decision. The yellow metal has been range-bound for weeks as every other asset class has whipsawed all over the place, while traders get to grips with the new variant. The Fed will have a huge role to play in how gold trades into year-end, starting today.
The central bank can’t afford to be complacent and isn’t expected to be. A policy mistake on that front could be bullish for gold as investors will be forced to factor in higher inflation which certainly improves to appeal of the yellow metal. If policymakers accelerate tapering, as expected, and price in two or three hikes for next year, we could see gold really test the lows of the last couple of months.
Santa rally for bitcoin?
Bitcoin has also been relatively steady recently, albeit with a slight bearish bias as it struggles to generate any momentum above $50,000. It slipped below $47,000 earlier this week but quickly found its feet again and, despite being above here once more, is off a little today. Perhaps there is an eye on the Fed meeting here as well, with the crypto-crowd hoping for a continuation of inflationary loose policy, which they’ve long believed is bullish for the cryptocurrency. I guess we’ll soon see if bitcoin can look forward to a Santa rally of its own.