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LGT Navigator: Fed signals faster pace

January 6, 2022

In the minutes of its latest interest rate meeting, the Federal Reserve (Fed) emphasizes the need for an early exit from loose monetary policy in light of the finding that the threat of inflation is proving to be higher and more persistent than anticipated. While US government bond yields and the Greenback benefited from rising interest rate expectations, interest rate expectations put pressure on stock markets.

Fed signals faster pace

On the New York Stock Exchange, the Federal Open Market Committee's (FOMC) Minutes put pressure on stock indexes on Tuesday. The Dow Jones Industrial lost about one percent and the S&P 500 fell by almost two percent. The technology exchange Nasdaq was hit the hardest, where the indices fell by a good three percent. At the same time, US government bond yields rose, and the US dollar strengthened. Two-year US Treasury yields, which reflect short-term interest rate expectations, rose nearly 3 basis points to a 22-month high of 0.8580%, and at the long end, 30-year yields climbed a similar amount to a ten-week high of 2.1220%. The yield on ten-year US government bonds rose by 1.4 basis points to 1.7140% and is thus trading at its highest level since April 2021. On Asia's stock exchanges, too, rising interest rate expectations caused losses, some of them heavy. Thus, the Tokyo Stock Exchange loses almost three percent today.

FOMC minutes: Faster interest rate hike seems justified

According to the Federal Reserve, the development of the economy and inflation justifies a faster exit from the expansionary monetary policy. The inflation trend is more persistent than expected, which is why a faster increase in key interest rates than previously expected may be justified, according to the minutes (Minutes) of the December 15 meeting of the Federal Reserve's Monetary Policy Council released last night. The Fed decided at its last meeting to scale back the multi-billion-dollar bond-buying program more quickly and likely to end in March, and already held out the prospect of earlier and faster rate hikes in light of high inflation. Currently, three rate hikes are expected this year.

Strong job growth in US private sector

In the United States, private sector employment grew much faster than expected at the end of last year. According to labor market services firm Automatic Data Processing (ADP), 807'000 new jobs were created in December. The consensus expectation was 375'000 jobs, and November's gain was 505'000 jobs. ADP's monthly report is considered an indicator for the official labor market report due Friday and is based on a survey of 460'000 companies with about 26 million workers.

Business sentiment in eurozone suffers

Business sentiment in euro-area countries deteriorated again in December 2021. According to London-based research firm IHS Markit, the Purchasing Managers' Index (PMI Composite), which covers the services and industrial sectors combined, slipped from 55.4 to 53.3 points at the end of last year. Particularly in the service sector, customer restraint was noticeable against the background of the rapid spread of the omicron variant, it said. In Germany, the services PMI even fell back below the growth threshold of 50 points. Regarding the development of prices at companies, according to IHS Markit, the second strongest increase in purchase and sales prices to date was measured.

ECB to respond to rising inflation expectations

Martins Kazaks, ECB Governing Council member and central bank president of Latvia, stressed that the European Central Bank will act in case of rising inflation expectations. One possible scenario could be that all ECB bond purchases are stopped by the end of this year, followed by a first hike in key interest rates in early 2023.

Italy's inflation rate reaches highest level in a good 13 years

In Italy, the annual rate of consumer price inflation climbed to +4.2% in December from +3.2% in November, marking the fifth consecutive increase and the highest level since August 2008.

Economic Indicators January 6

MEZ Country Indicator Last period
08:00 GE Industrial Orders (November, m/m) -6.9%
10:30 UK PMI Composite (December) 53.2
11:00 EZ Producer Prices (December, y/y) +21.9%
14:00 GE Consumer Prices (December, y/y) +6.0%
14:30 US Trade Balance (November) USD -67.1bn
14:30 US Initial Jobless Claims (weekly) 198,000
16:00 US Durable Goods Orders (November, m/m) +1.0%
16:00 US ISM Non-Manufacturing PMI (December)  69.1


Earnings Calender January 6

Country Company Period
FR Sodexo Q1 Sales
UK Next Q4 Sales
US Walgreens Boot Alliance Q1


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Source: LGT Bank (Switzerland) Ltd.

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