Hello traders
I hope you had a good week!
Despite the spread of Omicron gathering pace, investors’ attention has been firmly fixed on policy decisions from several of the key central banks. The Fed kicked things off on Wednesday, announcing a more aggressive tapering of the economic stimulus alongside faster interest rate hikes. Despite their more hawkish outlook, the bond market showed very little movement which seemed to confirm doubts that the US central bank will be able to maintain its course amidst slowing growth and disinflation which looks all the more likely in the wake of Omicron.
Equities rallied to reach a new intraday record high, taking their cues from the bond market’s outlook rather than the Fed. It is however worth noting that Jerome Powell in his speech said that he would be willing to act should any threat to the economy return (as I, as well as the bond market, see currently), thus reaffirming the presence of the decade-plus “Fed put”. It looks set to be an epic battle between the market and policy makers over the coming months, and my money is with the bond traders being vindicated when the Fed eventually realises that they are behind the curve on growth and inflation and reverses course on tapering and rate hikes.
In the meantime, here’s a chart of the S&P 500 showing how equities responded to the news.
Our Checklist highlighted the buying opportunity at the beginning of the month when the market was trading around 4500, given a score of +3.
Elsewhere on Thursday, the Bank of England surprised investors by hiking interest rates in the face of wider restrictions to control Omicron undoubtedly disrupting the economy during what is the peak season for many businesses in the retail and hospitality sectors. It seems that BoE governor Andrew Bailey is fixated on combating inflation just as disinflationary pressures are beginning to take a hold, and is thus responding too late to a situation which is diminishing of its own accord. You know what they say about policy makers and their unwavering belief that they can control inflation via the blunt tool of interest rates…
The pound understandably ripped higher on the surprise on this earlier-than-anticipated hike, although it had showed signs of bottoming over the days which preceded it. With a score of +1 on our Checklist following a substantial decline last month, sterling was set up well for the upside surprise provided by the BoE.
It remains to be seen who will win the current battle of wits between the bond market and the central banks, and whilst the saying is “don’t fight the Fed”, perhaps indeed “this time is different.”
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Have a great weekend,
James
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