Not transitory

Inflation is ‘not transitory’ said the Federal Reserve (Fed) Chair Jerome Powell at his testimony before the Senate yesterday, and the stock markets took the ‘no transitory’ phrase as a slap in the face. Most equities dived yesterday, as many didn’t expect to hear a hawkish Powell at a time the new omicron wave threatens the economic recovery.   

We now know that Jerome Powell thinks ‘it’s appropriate to discuss whether it will be appropriate to wrap up the QE purchases a few months earlier’, at the next FOMC meeting which is a couple of weeks from now, and an earlier end of the QE program would also mean an earlier hike of interest rates, even though Powell wants investors to dissociate the link between the timing of the QE taper and the first-rate hike.  

The kneejerk reaction from the market was strong. The S&P500 and the Dow closed the session near 2% down, as Nasdaq dropped 1.50%. The US 2-year yield rebounded dramatically, and the US yield curve flattened to the levels last seen in March 2020, since the onset of the pandemic. But the US equity futures rebounded as fast as they dived in the overnight trading session. Nasdaq futures are up by 1.30% at the time of writing. 

And what about omicron? Well, Jerome Powell didn’t seem too concerned about omicron, or the near-term impact of the virus on the economy, meanwhile a day before his testimony, he had said that the virus adds up to the economic risks. It’s hard to drive clear conclusions. 

The problem is, Jerome Powell may not be concerned with the new omicron strain, but investors are, and watching the Fed support fade away is certainly not the best news and the news doesn’t come at the ideal time. This is what I think, and this is what reinforces the risk of a more persistent selloff in the equities space to the year end. So, the Santa rally may not be happening this December.  

And Bitcoin in all this? 

Now for the crypto market, it’s a bit tricky. The inflation hedging properties of Bitcoin are not granted, really, and the fact that the Fed would pull away the cheap liquidity could actually hit the appetite in cryptocurrencies. This is what Mike Novogratz, who is a billionaire crypto investor said following Jerome Powell’s comments yesterday. He said the hawkish shift in the Fed policy could lead to a crypto meltdown in 2022. The thing with the cryptocurrencies is that: we don’t know. As we don’t have enough data in hand, and as it is not fundamentally linked to anything we have, we can’t really predict what will be next. So your guess is as good as mine, or as Mike Novogratz’. For now Bitcoin is consolidating at about the $56K level, the downside potential is big, but the upside potential could be even bigger, inflation or not, a tighter Fed or not. But no one, at this point could establish a strong relationship between cryptocurrencies and economic fundamentals. There is simply none for now.  

Christine? 

Inflation in the Eurozone jumped from 4.1% to 4.9% in November, versus the expectation of 4.5% by analysts. That’s a big, big number for the eurozone. It doesn’t look transitory, and it seems to be accelerating as well. Therefore, I am increasingly convinced that we will soon see Christine Lagarde raising the white flag soon and announcing that, finally, inflation is not all that transitory.  

The EURUSD rebounded from the 1.12 mark last week. The significant rise in European inflation should encourage a certain bullish repositioning for the euro, but the upside could remain limited into the 1.15 mark, limited by the hawkish shift on the Fed front.  

Jerome Powell will speak at the second day of his testimony, but the major take is pretty much clear: inflation is not transitory, and even a weak ADP report at today’s release won’t change that take.