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  • richard evans

Use of the term 'transitory' proves to be transitory

Good morning

Feds Powell brought some excitement to the market yesterday afternoon when he surprised the markets with a comment in his testimony Q&A about possibly accelerating tapering this month. He added that it was time to retire the word transitory as a descriptor for inflation. US 10 year yields bounced from low 1.40s to 1.50%, and the US dollar strengthened across the board with EURUSD moving from 1.1380 to 1.1240 and GBPUSD from 1.3360 to 1.3195. It has since given up a lot of its gains, EURUSD now 1.1355, GBPUSD 1.33220 which leaves EURGBP at 0.8525 (GBPEUR 1.1730).

As you would expect, equities took a tumble with major US indices down almost 2% at the close although Asian equities are positive and futures prices this morning suggest those US markets will regain part of yesterdays losses.

It was quite an interesting move and one which may give Fed second thoughts about increasing the pace of tapering this month. We have seen before that the Fed comments on something and then gives a few months for the markets to digest it. Powell is certainly not the first Fed official to talk of a faster taper, we have seen several over the past week or two, although it is fair to say none have gone so far as to actually say transitory is a term that just doesn’t describe inflation any more. An earlier end to tapering will of course lead markets to look for earlier rate rises. Fridays employment numbers are very important to say the least. Unless we hear a real push back in the coming days from Fed officials then faster tapering and earlier rate rises looks very likely. Whether Omicron has an impact on that remains to be seen.

For now the market looks for tapering to end in March with a 25bps rate rise in June and possibly another in September 2022. Powell speaks again today which of course will be very closely watched.

Worth mentioning that AUD and NZD were less affected by Powell than other majors. They did drop in the initial knee-jerk move but got back to pre-Powell levels overnight. Perhaps it is thought that a hawkish Fed will make those central banks think again about their own inflation issues and make rate rises more likely. In a way I am surprised GBP hasn’t moved a little higher on this basis.

Meanwhile the obvious Covid talk continues. UKs restrictions including compulsory mask wearing and isolations came into effect yesterday, while the vaccine program is being beefed up to try to get every adult ‘boosted’ by end Jan. The Telegraph suggests these restrictions will be in place well into Q1 2022. What happens to Christmas remains to be seen, but I’d imagine Christmas parties could well be at risk despite Boris’s insistence that they should go ahead. Whatever he tells us, travel and meeting restrictions, perhaps even lockdowns, must surely be likely.

The isolation of 10 days if you’re in contact with someone with an Omicron variant opens the door for what is referred to as a ‘pingdemic’, ie businesses closing because staff are unable to attend and in my mind makes the chance of sitting full GCSEs and A levels next year considerably lower.

Anyway, with a combination of Omicron and now this potential game-changer from the Fed, whatever chance we had of a relaxing time while opening advent calendar doors seems to have gone altogether. December to remain volatile…..

- 09.00 EU markit manufacturing PMI

- 09.30 UK markit manufacturing PMI

- 13.15 US ADP employment

- 13.30 CAD building permits

- 14.30 CAD markit manufacturing PMI

- 14.45 US markit manufacturing PMI

- 15.00 Feds Powell speaks

- 15.00 US manufacturing ISM

- 19.00 Feds Beige book

- 00.30 AUS trade balance

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