Hello everyone, I hope you are enjoying the weekend and relaxing from a very wild week in the financial markets. Get my take on the current price action in this week’s Round-Up.
WEEKLY SOUND BITES:
Rising interest rate fears and growth worries pushed US Indexes to their biggest declines in more than 14 months over this holiday-shortened week with NASDAQ falling over 7.5% making it the biggest weekly drop since the start of the pandemic. The declines left the Nasdaq in correction territory, or down more than 10% from its mid-November highs. In addition, there is increasing speculation on Wall Street that the Fed will announce a 50-basis-point (0.50%) increase in the federal funds target rate at its March meeting, instead of the incremental 25-basis-point increases that have characterized Fed action in recent years. For the year, the futures markets are currently pricing in a nearly two-thirds chance of official short-term rates increasing by at least 100 basis points in 2022. The NASDAQ has finished down the remainder of the year 50% of the time when starting off January with a loss while the S&P and the DOW have fallen over 60% of the time with a January loss.
The trading week began on Tuesday with a report showing a surprise drop in factory activity in the New York region, the first since early 2020; a related gauge of activity in the mid-Atlantic region, released the following day, surprised on the upside, and indicated solid expansion, however. The latest housing market data were mixed. Housing starts and permits in December surprised to the upside, while existing home sales slumped over the month. An unexpected jump in weekly jobless claims seemed to have the biggest impact on markets. Claims rose to 286,000, the most since mid-October.
The yield on the benchmark 10-year U.S. Treasury note hit 1.90% on Wednesday—its highest level since late 2019—but fell back sharply in the wake of Thursday morning’s weaker-than-expected jobless claims report. With the upcoming Federal Reserve meeting and Press Conference this coming Wednesday, we have several factors and approaches the Feds can take, each of which can dramatically alter the course of near-term price action for US Indexes. From Rate Hike trajectory, speed of trajectory, to balance sheet run-off, each of these can move markets up or down depending upon how the Feds react and their anticipated plans on a go forward basis.
Like the US markets, shares in Europe ended lower, as expectations grew that the European Central Bank (ECB) would raise interest rates this year and that the Bank of England (BoE) would also need to tighten its monetary policy. Data showed that surging energy and food costs drove eurozone inflation to a record 5% in December—well above the ECB’s 2% target.
The Bank of Japan (BoJ) maintained its dovish stance at its January monetary policy meeting, keeping short- and long-term interest rates unchanged. The central bank said that it will continue with quantitative and qualitative monetary easing with yield curve control, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner, and it will not hesitate to take additional easing measures if necessary. They also upgraded its forecasts for economic growth in fiscal year (FY) 2022, expecting GDP to expand year on year in real terms by 3.8% (compared with the 2.9% expansion it projected in October 2021).
Chinese markets posted a weekly gain as the government stepped up monetary easing measures and signaled additional support for the beleaguered property sector. The People’s Bank of China (PBOC) unexpectedly reduced the interest rate on loans to some financial institutions by 10 basis points to 2.85% as monetary stimulus for their economy. Following the rate cut, PBOC said China will roll out additional policy measures to stabilize the economy and preempt downward pressures. And of course equity markets always love to hear more stimulus coming into the markets and reacted with upside price movement.
Enjoy this Week’s Video Update on the Financial Markets;
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