Bassanese Bites: Old News – December 13 2021

Global markets

The theme of the past week is ‘old news’, in the sense that global equities managed to lift in the face of rising Omicron cases and the highest U.S. inflation numbers since 1982. But as the saying goes, markets are forward-looking: equities saw fit to take relief from the fact that global Omicron deaths and hospitalisations still seem contained and, while shockingly high, U.S. CPI inflation was at least no worse than the market had expected. For the record, U.S. headline annual CPI hit 6.8%, with core inflation (i.e. excluding food and energy) up 4.9%.

Continuing with the theme of old news, it now seems almost consensus that the U.S. Federal Reserve will accelerate bond tapering at this week’s critical policy meeting, as well as likely pencil in two rate hikes next year within the ‘dot plot’ of Fed member policy rate expectations. Although U.S. 10-year bond yields did rebound a chunky 14 basis points to 1.49% last week, yields still remain remarkably contained despite the clear lift in Fed tightening expectations in recent weeks. To some extent this reflects lingering Omicron concerns and the fact fixed-income markets (although not most economists) had already priced in several 2022 U.S. rate hikes a few months ago.

Given this backdrop, it’s hard to see what what the Fed could say or do this week that could rile equity markets – with earnings still strong, it’s the risk of higher bond yields (and associated downward pressure on PE valuations) that remains the main threat to equity markets. If bond yields don’t push a lot higher, it’s hard to see equity markets pushing a lot lower any time soon.

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