It was a pretty wild and crazy week a number of days this week with some of the high flyers in the markets taking quite the thrashing. Fortunately I own essentially no common stocks so for me it simply was something interesting to watch.
Most interesting to me was watching Jay Powell on Wednesday and observing how markets reacted to the Fed statement and then the Chair press conference. Honestly I thought the Chair did a great job of walking a fine line between being perceived as too dovish and being to hawkish. Of course in the end even though he did a good job of laying out the plans the bond and stocks markets heard something else–recession ahead.
So now we know we have significant tapering ahead and they will wrap up the taper by March–seems to me that may be a bit aggressive. I thought the Fed was very late to the taper party–and now that they have joined in they have immediately increased the taper amounts because of the ugly inflation stats that have been released recently. I understand the urgency, by about the time the taper ends inflation will be flattish to moving a bit lower (all my opinion of course which means nothing at all). Certainly we will have wage pressures all through 2022, but I suspect some of the supply chain issues will be letting up in the next few months. This assumes that the new Covid strain is controlled and a new variant doesn’t pop up.
Anyway the 10 year treasury yield ended the week at 1.40% which was down by 8 basis points on the week. Common sense says the bond is extremely over priced (price too high and yield too low). We are in the midst of pulling $120 billion in demand from this market yet the tremendous liquidity drives the yield down.
In the past we had global money moving into the U.S. debt markets and this is certainly still the case, but the Bank of England nudged rates higher this week and the European Central Bank is curtailing their QE bond buying. Other more minor countries such as Brazil, Chile and Mexico have begun raising interest rates. It is only a matter of time before U.S. debt funding becomes more difficult if other competing rates become more competitive.
I think that 2022 is going to be a very interesting–if not downright dangerous to financial markets. Do we have a recession? Will the Fed ever raise interest rates? No one really knows–most certainly not me.