“If there’s logic, it’s of the elusive variety,” BMO’s Ian Lyngen and Ben Jeffery dryly remarked, on Thursday afternoon in the US.
They were referring to the somewhat counterintuitive action in rates, where five-year yields dropped sharply just a day after the Fed checked every box on the hawkish pivot list.
Toss in a spate of constructive data including a decline in the four-week average of initial claims to just 203,750 and a much better than expected read on housing starts (figures below), and the rally in Treasurys (out to the 10-year) looked even more perplexing.
But such is life in the pandemic era — perplexing.
For what it’s worth, the drop in five-year yields was probably attributable at least in part to a reassessment of Fed hikes down the road, the assumption being that more now means less later. After jumping near 1.30% following the release of the dot plot on Wednesday, five-year yields ended Thursday around 1.18%. As Bloomberg’s Elizabeth Stanton wrote, “price action in short-term rate futures subsequently signaled that the Fed’s rate outlook beyond the next six months is too ambitious.”
Goldman on Thursday brought forward their liftoff call to March and predicted balance sheet runoff will begin in Q4 of next year. “The Chairman did not give a clear answer when he was asked if quantitative tightening could start at a lower funds rate in the upcoming cycle than in the last cycle [but] if anything, his answer encouraged us to think QT will start at a somewhat lower funds rate level this time,” TD’s Jim O’Sullivan and Priya Misra said. They see QT beginning in March of 2023. They also changed their forecasts for rate hikes. They expect hikes commencing in June of next year, followed by additional hikes in September and December.
Lost in the deluge of central bank news Thursday were flash reads on IHS Markit’s services and manufacturing PMIs for December. Both missed estimates for the US, printing 57.5 and 57.8, respectively. The latter was a 12-month low (figure below), albeit still signaling a strong expansion.
“The survey data paint a picture of an economy showing encouraging resilience to rising virus infection rates and worries over the Omicron variant,” IHS Markit’s Chris Williamson said, before striking a cautious tone. “The worry is that rising wage growth, greater transport costs and higher energy prices have pushed service sector cost inflation to a new high, and that any renewed disruption to global supply lines resulting from the Omicron wave could lead to renewed upward pressure on goods prices.”
That’s a reminder that the assessment from BMO’s US rates team — that it’s difficult to grasp a logical thread or otherwise find the one tie that binds it all together — extends to the macro as well.
It also applied to equities Thursday. Following the Fed meeting, media outlets were quick to conjure a laundry list of explanations for the rally in big-cap tech. A day later, the futility of that endeavor was readily apparent (figure below).
The Nasdaq 100 dropped the most in months, erasing the entirety of the post-FOMC rally — and then some.
In his weekly, SocGen’s Albert Edwards delivered a characteristically amusing take. “It’s the time of year when strategists publish huge tomes to give their year-ahead views,” he wrote, before promising to summarize his own 2022 outlook “in a few lines.”
“My key predictions are that equity markets will surprise and fall sharply as US tech unravels in the first half,” Edwards said.
“My second surprise for next year is that if an equity bear market unfolds, investors may find that while the Powell Put still exists, the strike price may be a lot lower for equities than it was at end 2018,” Albert went on to muse, on the way to suggesting that “policymakers globally now understand that QE creates as many problems as it solves.”
On that latter point, at least, he’s certainly correct.
