The Weekly Wire: Omicron & The Fed Upend The Markets
The recent market volatility and decline in risk assets have been driven by concerns over the Omicron COVID variant and the Federal Reserve's shift to a more hawkish stance on persistent inflation, with Chairman Powell retiring the term "transitory" for inflation, though a simultaneous drop in commodity prices suggests peak inflation may be near, potentially allowing the Fed to transition to a neutral policy that could support markets.
After a week away for the Thanksgiving holiday, we are happy to be taking pen to paper to share our thoughts on the economy and markets. While our Thanksgiving was great–and we hope yours was too–the post-Thanksgiving period has been anything but for investors. The Omicron variant of the coronavirus and talk of sped-up tapering and sooner than expected rate hikes by the Federal Reserve have conspired to push volatility higher and risk assets lower.
As always, our first concern is for everyone’s health and safety, and we hope the Omicron variant will not drive a spike in Covid hospitalizations or deaths (and considering the Delta variant proved more manageable than expected, that could prove to be the case).
Then there is the Federal Reserve and the hawkish tone emanating from our central bank, as Chairman Powell and his colleagues contend with inflation that has proven more persistent than they expected. In fact, while testifying before Congress last week, Mr. Powell said it was time to retire the word “transitory” when it came to describing inflation, and that meaningful shift in tone was a catalyst for recent market weakness as investors worried how risk assets would fare under a less accommodative Fed.
We think the Fed is right to assume a more hawkish stance, but we also find it interesting that, as the institution most associated with the concept of transitory inflation abandons the concept, the Bloomberg Commodity Index, which is comprised of any number of cyclically sensitive commodities, has dropped about 10% from its all-time high. Maybe, just maybe, we are near peak inflation. If so, the Fed should be able to gradually shift from an accommodative to neutral monetary policy stance, a dynamic that would be welcomed on Wall Street and should be supportive of risk assets for some time to come.