Morning Roundup

By Mark Masterson on January 6, 2022

Good morning,

Below are the news items moving markets today

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Executive Summary:

Quick Roundup after a rough day across capital markets yesterday.

Why the downside volatility yesterday?  The Fed minutes.

There were numerous opinions expressed in the minutes – many of which we knew – such as an accelerated taper is on tap.  However – we also saw a concern and willingness to hike rates (possibly) earlier than expected.  That spooked markets as investors are trying to guess the path forward for the record liquidity and easy money conditions.  I cover this in my video commentary coming out later today – so keep an eye out for it.

• Markets brace for Fed QT as minutes send hawkish message (Reuters, Bloomberg)
• Heaviest tech selling in ten years fuels US market rout, spooking hedge funds (Bloomberg)

Minutes summary: December FOMC minutes show officials had diffuse opinions on timing of balance sheet decline

• The December FOMC meeting minutes noted that almost all participants said it would likely be appropriate to start the balance sheet runoff at some point after the first fed funds rate increase, though the expectations for the timing of the first decline were diffuse.
• The minutes also said that given members’ individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.
• Staff flagged the possibility of more severe and persistent supply issues as an additional downside risk to activity and as an upside risk to inflation.
• Because the weighted average maturity of the Fed’s Treasury holdings was shorter than previous normalization episodes, the balance sheet could shrink faster than the last time. However, some participants noted concerns about vulnerabilities in the Treasury market and how hose vulnerabilities could affect the appropriate pace of balance sheet normalization.
• Participants said that current conditions could help push the timing of the balance sheet runoff closer to the policy rate liftoff, including a stronger economic outlook, higher inflation, and a larger balance sheet that could warrant a faster pace of policy rate normalization. However, the decision to initiate a runoff would be data dependent.
• On inflation, a few participants warned that elevated levels of inflation could increase the public’s longer-term expectations to a level above the Fed’s longer term objective, though a few participants say long-term inflation expectations remain well anchored.
• On the labor market, many saw the economy making rapid progress toward the Committee’s maximum-employment goal, though several viewed labor market conditions as already largely consistent with maximum employment.

The market is now pricing in a >67% probability of the 1st Fed rate hike occurring in March. A month ago that probability was at 27%.

This is a big change.  I think it would be a big mistake to raise rates before completing the taper.  It may be a big mistake to raise rates at all – but time will tell.

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Articles of Interest:

• Markets:
  • Q4 earnings season could provide a tailwind for stocks (Barron’s)
  • Cryptocurrencies sink with Bitcoin at lowest level since December’s flash crash (Bloomberg)
• Coronavirus:
  • Fauci warns against complacency as Omicron puts US health care systems under pressure (Reuters)
  • CDC advisers recommend Pfizer-BioNTech booster for 12-17 year-olds (WashingtonPost)
  • CDC’s stumbling communications cloud White House’s Covid policies (NYTimes)
• Washington:
  • Slimmer BBB still possible after Manchin torpedoed Biden’s social plan (Barron’s)

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Charts of the day:

Below shows how volatility tends to be the norm in mid-term election years.

The first quarter is typically positive – but gives way to a challenging Q2 and Q3 until the elections.

Post election – we typically get a strong rally.

Strategas

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Quote of the day

The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic. – Peter Drucker