The negative headlines dominated today’s earlier news flow as Omicron variant uncertainty triggers risk aversion again. It is too early to speculate on whether it causes more severe illnesses than other variants and how well do our current vaccines protect against it. The early signs are optimistic as South Africa has reported that most Omicron cases have shown mild symptoms.
Powell finally ditches ‘transient label
Today will go down as the day Fed Chair Powell shed his dovish wings and showed signs of becoming a hawk. An abrupt shift is conveniently timed as less than a week ago he was nominated by President Biden to serve a second term as Fed chair. Powell’s comments about finishing tapering a few months sooner helped the dollar pare earlier Omicron-driven losses and sent stocks back to their earlier lows.
Earlier stocks were in retreat mode after Moderna’s CEO warned of potentially materially lower efficacy of existing vaccines against the Omicron variant. Early results from Regeneron tests indicate that antibody cocktails lose effectiveness against the Omicron variant. It is too early to assess if we will need to update all of the COVID vaccines and treatments, but some of the early reports across Europe are that the Omicron cases are mostly mild or asymptomatic. Financial markets appear to be mostly optimistic that the growth outlook across the US will not be terribly disrupted by the Omicron variant.
Risk appetite did not get any favors after the CBO reminded investors that the US Treasury could run out of money before the end of the year.
Cyber Monday online sales slumped according to Adobe Analytics. US consumer spending dropped 1.4% from a year ago to USD 10.7 billion, towards the middle of the USD 10.2-11.3B consensus range. Some retailers are extending Cyber Monday sales as concerns grow that many shoppers have already finished the bulk load of their purchases.
The Chicago Purchase Manager Index dropped more-than-expected to 61.8, while the Conference Board consumer confidence reading hit the lowest level since February. The housing market remains hot as both the FHFA and S&P Corelogic housing price index show prices are not easing.
With inflation running well above 2% for long enough, the Fed has met its inflation mandate. Fed Chair Powell is worried about a policy mistake as inflation risks have increased in recent months. The proof of broad-based price increases easily confirms the economy is battling generalized price inflation that won’t go away when we are beyond COVID.
Powell wants to retire the word “transitory” for inflation. Powell defined transitory as not leaving a permanent mark on prices. Powell sees inflation subsiding in the second half of next year, but clearly he wants tapering done sooner in case inflationary pressures continue to see upward pressure from future COVID variants.
The Treasury curve flattened following Powell’s transparency over his fears of higher inflation. Faster tapering sent the short-end US yields rose, while long-dated Treasuries tumbled. The 2-year Treasury yield rose 6.1 basis points to 0.547%, while the 30-year Treasury yield dropped 6.3 basis points to 1.791%, the lowest levels since January. The dollar embraced the faster taper headlines and recovered a good part of its earlier losses.
Treasury Secretary Yellen got hit with a bunch of crypto questions, but she did not deliver much clarity on how stablecoins should be regulated. Yellen simply pointed out that stablecoins could be regulated the same way since they can be used as a means of payment. Tether, XRP, and USD Coin all remained at the 1 dollar level.
Bitcoin and Ethereum went in separate ways today. A faster Fed taper and increased rate hike expectations were bad news for bitcoin. Bitcoin is trading more like a risky asset than an inflation hedge. Ethereum is still the favorite crypto bet for most traders and seems like it will make another run towards USD 5000 once risk appetite returns.
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