It’s been something of a downbeat day in the markets, something we may see more of this morning as the January blues kick in.
The omicron relief trade appears to have played out now and attention has quickly shifted back to the interest rates dilemma, with the economy performing well but not firing on all cylinders, the labor market extremely tight and inflation at risk of getting out of control.
Central bank policymakers would ordinarily like to be more patient during this stage of the recovery cycle but the pandemic was no ordinary economic shock and this is certainly no ordinary recovery.
Based on how investors responded to the Fed minutes on Wednesday, you’d be forgiven for thinking they’re terrified at the prospect of tighter monetary policy and couldn’t have foreseen what the central bank was about to unleash upon us. But the reality is very different and the reaction is over the top. Something I tend to expect this time of year.
Aside from the references to balance sheet reduction, which at this point are merely an option up for discussion, there was nothing in the minutes that wasn’t clear after the meeting. Slightly higher yields are a normal response to the balance sheet discussion but the level of risk aversion seen across the markets is not.
Data from the US today appears to continue to point to the same thing for the US, as far as inflation is concerned. Labour markets are extremely tight which should lead to higher wages, higher inflation expectations, and more permanent pandemic price pressures. And an apparent easing of supply-side pressures that could see temporary inflation pressures abate. Cause for concern and optimism if you’re a central banker.
Oil shakes off sentiment hit
Oil is continuing to push higher as traders price in a modest economic impact from omicron. The OPEC+ meeting this week supported the view and the price of oil is now not far from its October peak, with WTI closing in on $80 for the first time in almost two months.
The knock to broader market sentiment from the Fed minutes is not reverberating around the crude market, with prices up more than 2% on the day and backed by momentum.
Gold hit hard by Fed minutes
Gold’s recovery in late December appeared to be built on rocky foundations and the Fed minutes delivered a hammer blow to hopes of sustaining a move above $1,800 in the near term. The yellow metal has slipped further today, off more than 1%, and we could see the pullback gather momentum.
Once again, resistance around $1,833 has got the better of gold. It appeared to have finally broken the barrier in November but it wasn’t long before it came crashing down once more and the last week has shown it remains as much a barrier now as it did before.
A nasty shock for bitcoin
Bitcoin has snoozed its way into 2022 and the Fed minutes on Wednesday gave it just the shock it needed to bring it back to life. Unfortunately for the hodler community, it wasn’t in their favour and the cryptocurrency crashed below $45,500 support, losing more than 5% on the day. It’s stabilised a little today but remains almost 2% lower and below $43,000. The next major support is $40,000, a break of which would be another big blow.