Risk sentiment is relatively strong this Monday on news that China will add fiscal stimulus in early 2022 to boost growth, and investor mood in the equities space is bullish after Friday’s inflation data revealed that consumer prices in the US advanced to 6.8% in November, just a tick higher than the consensus of 6.7% (although relatively faster compared to the 6.2% printed a month earlier).
Activity on European futures hint at a positive start. The FTSE should continue benefiting from firm energy prices and cheaper sterling.
Fast inflation, hawkish Fed priced in
If the investors didn’t react too strongly to the slightly worse-than-expected US inflation data, it is certainly because they were happy to see the actual number just a bit higher than consensus. And the latest acceleration was mostly priced in.
In summary, the fact that the US CPI figure didn’t exceed the 7% mark has been good news. Less encouraging was the rise in rents and healthcare costs, which came as a confirmation that inflation is no longer seen as ‘transitory’ in the US. But that’s something Jerome Powell already told us, so it’s priced in.
As such, the expectation for this week’s FOMC meeting is the announcement of a faster QE tapering, and perhaps a hint that the first-rate hike in the US could come earlier than previously thought. Investors will have their eyes set on the famous dot plot. Activity on fed funds futures point that the first hike should arrive in May, but some hawkish guesses point at March. As such, the chances of a massive hawkish surprise are limited, and the actual expectation doesn’t interfere with equity investors’ craving for a Santa rally to close a record-breaking year with one last record.
The S&P500, the Dow and Nasdaq are already a stone’s throw below their all-time-high levels, and one last record isn’t asking too much.
However, we may see some categories of stocks fall from grace, such as meme stocks which were greatly benefiting from cheap liquidity, and which may not fly as high with their own wings in the coming months.
The Fed tightening will be the first important test for cryptocurrencies. We have stronger evidence that cryptocurrencies are increasingly correlated positively to the risk assets. Therefore, we expect to see Bitcoin trading with a high beta, meaning with amplified gains and losses compared to major market indices. But this is just an assumption. We don’t rule out that the behaviour in cryptocurrencies could change fast as this is a new asset class. But the chances of Bitcoin acting like a hedge against inflation, or a hedge against a severe market rout are low.