“At first blush the December FOMC minutes read hawkish, and the market reaction supports this,” said Cliff Hodge, chief investment officer for Cornerstone Wealth. “The fact that FOMC participants are discussing faster and more aggressive rate hikes, alongside a faster pace of balance sheet normalization than the last hiking, indicate that the Fed put for the stock market has been repriced lower.”
*Markets have largely turned their attention to tightening monetary policy, however, concerns persist about the omicron variant’s threat to global growth. Hong Kong reimposed social curbs and halted flights from eight countries. Meanwhile, U.S. school closings are accelerating as case counts soar.*
*Keep in mind the timing of the [FOMC] meeting -- even a few weeks ago we were in a very different place than we are now when it comes to omicron spreading. And while most predict a somewhat limited effect on the economy, it remains to be seen if the virus will overshadow the drive to curb inflation*
So far, data suggest the U.S. economy is maintaining its resiliency in the face of the variant.
*But Carey also expects the Fed to remain cautious about tightening monetary policy too much during its battle with inflation, particularly if the surge in COVID-19 infections hampers the economy, with some school districts hitting pause on in-person classes and difficulties emerging for planned industry conferences and other events major events, including the Grammy Awards, nearly two years into the pandemic.*
*“The problem could be resolved if the economy slows with omicron,” Carey said of inflation pressures.*
“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.
That runoff is “the key risk for the year”. If the Fed starts shrinking the balance sheet that’s going to be disastrous. “I assume that they’re going to keep the balance sheet flat, but it is possible if inflation stays really hot that they start letting the balance sheet run off.”
If that happens, “it’s not just that they’re not injecting liquidity, they’re taking liquidity out. You don’t want to be in the stock market when the Fed is taking liquidity out of it — it’s like being in Coke when Warren Buffett is selling his position.
Meanwhile, the minutes of the Fed meeting hastened a wreck in technology-related sectors, already gathering momentum on Wednesday. Shares of* Google parent Alphabet Inc. closed down 4.6%, off more than 7.6% from its Nov. 18 closing high of $2,996.77.*
*Rising interest rates increase borrowing costs for businesses and consumers. Higher rates can depress stock multiples, especially for technology and other growth stocks.*
*Policymakers had agreed to hasten the end of their pandemic-era program of bond purchases, and issued forecasts anticipating three quarter-percentage-point rate increases during 2022.*
A rise in government bond yields also contributed to pressure on tech plays, as investors factored in the prospect of the higher borrowing costs if the Fed lifts interest rates as many as the three times as anticipated this year.
On the other hand, financials, which benefit from a rising rate environment, still were headed solidly higher for the week.
*The 10-year Treasury yield has surged nearly 20 basis points in the first three trading days of 2021.*
*U.S. 2-year and 5-year yields, which mirror rate hike expectations, climbed to their highest since March and February 2020, respectively. The benchmark U.S. 10-year yield rose to its strongest level since April 2021, at around 1.7%, while 30-year yields climbed to more than two-month peaks.*
I think many investors are coming to the realization that this is not the time to stick your neck out,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, in a phone interview.
By: via @AlliesFin Serve Stock Market
