Rate hike frenzy continues

It was another choppy session overnight in equity and currency markets, followed today, by another cautious Asian session on equity markets, with forex markets marching on the spot. In other words, business as usual for the past few days.

Rate hike fever rises after US job reports

Federal Reserve rate hike nerves continue to grow tauter after Friday’s fall in unemployment and rise in employment cost indexes. From three hikes, I am now hearing four hikes could be possible this year. I would have been laughed out of the room for saying as much a month ago. Actually, I was – it’s funny how quickly sentiment shifts.

Given how cautious the FOMC has been over the past two years, to the point of appearing snail-like, I am struggling to see them hitting the panic button right now. As such I am struggling to pencil in a March hike just as the Fed taper finishes, although I don’t disagree with three hikes across all of 2022. I am definitely disagreeing with four hikes. As such, I do believe we may be approaching “peak Fed-fear” for now. That could see a sharp jump for equities, a retreat by US yields and the US dollar. The first move the market throws the kitchen sink at is usually the wrong one, always fade January.

Wall Street spent much of the evening on the back foot, especially the interest rate-sensitive Nasdaq. It’s sudden rally into positive territory towards the end of the session. The sudden reversal was put down to “bottom-fishing” and I’ll not disagree with that. But I believe the volatility is being spurred by the US monetary policy outlook. Until just how hawkish, or not, the FOMC will be, becomes clearer, we can expect more days with a lot of intra-day noise, but not change by the close, to be ahead.

Data wise, Asia’s calendar today is fairly quiet. Indonesia and Australian Retail Sales for November outperformed, reflecting the recovery in consumer sentiment in both post-delta. The arrival of omicron, particularly in Australia, will likely mean a new year’s hit to consumer demand once again. Apart from that, markets will be awaiting China CPI tomorrow morning and US CPI tomorrow evening as the week’s highlights.

Readers should watch the situation in China as well. Evergrande dodged another bullet yesterday by engineering a domestic bond extension with creditors. But Evergrande, Shimao and other private property developers remain in deep trouble and a slow-moving credit trainwreck. It has the potential to further cut into China’s growth prospects this year. Likewise, the omicron variant keeps popping up in small numbers across China, even as it and Hong Kong tighten restrictions. The only way for Covid-zero policy countries in 2022 is down, whether by wider outbreaks or social restrictions.

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