Three Things Moving the Markets

February 7, 2022

Last Week in Review: Three Things Moving the Markets

The financial markets began February exactly where January left off – trading in a volatile fashion. After all the bouncing around, interest rates ticked higher week over week. Let’s discuss what happened and what to watch for next week.

1.) Omicron’s Economic Impact Being Felt

“The path of the economy will depend significantly on the course of the virus” – FOMC Monetary Policy Statement, Dec 2021.

As Omicron ripped through the United States over the past month or so, we are just starting to see the economic impact. The labor readings for January showed negative to no growth in job creation … why? Omicron was responsible for several million people being out of work at any given time and delayed hiring plans.

We should also expect February jobs data, due out in early March, to be weak. These back-to-back poor readings come right before the next Fed meeting on March 16th.

Remember, the Fed has a dual mandate, which is to maintain price stability and promote maximum employment. With labor market weakness and the associated decline in consumer sentiment that comes with it, can the Fed still hike rates in March, as widely expected?

We are reminded of this quote from Fed Chair Jerome Powell’s recent press conference.

“The committee is of a mind to raise the federal funds rate at the March meeting ‘ASSUMING’ that the conditions are appropriate for doing so.”

The large uncertainty surrounding the economic data being reported and how the Federal Reserve will respond, which could be rate hikes and balance sheet reduction is the major cause for high volatility in bonds, rates, and stocks.

2.) Mixed Europe Central Bank Activity

“We have not raised rates today because the economy is roaring away, we face the risk that some of the higher imported inflation could become entrained within the domestic economy, leading to a longer period of high inflation.” Bank of England Governor Andrew Bailey.

Another uncertainty causing volatility in the financial markets is the messaging and actions being taken by Central Banks around the globe. The Bank of England just hiked rates at two consecutive meetings, while China just cut rates and injected more liquidity to help with their economic slowdown.

Meanwhile, in the European Union and European Central Bank President Christine Lagarde maintains the ECB will not hike rates in 2022 – despite record-high inflation. This dovish stance on inflation and monetary policy helped the German 10-year Bund yield spike to .12% the highest level in three years. As interest rates move higher around the globe, it pulls our interest rates higher as well. On Thursday, the 10-yr yield started the day near 1.75% and quickly shot to 1.85% in response to the central bank activity around the globe.

3.) Tech Wreck

Disappointing earnings from Meta/Facebook put into question the ability for these once high-fliers to continue growing. On top of the bad earnings, growth stocks detest higher rates, so when the 10-year yield reached 1.85% last Thursday, it added to the selling pressure in stocks.

This trading action is a reminder that if stocks go down, rates don’t always follow suit. In this current environment, it is quite the contrary; stocks are worried the Fed may overcook rate hikes and create an economic slowdown. Any small uptick in rates has seen NASDAQ tech shares move lower. Expect this trend to continue amidst the uncertainty surrounding what the economy is doing and how the Fed will respond.

Bottom line: The current environment remains like 2018, where rates creep higher over time in response to a hawkish Fed and the threat of multiple rate hikes. If you are considering a mortgage, rates are still suppressed thanks to the Fed bond-buying program which will end in March. Don’t delay.

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