Exposure rates of the Dorval Asset Management Range – 14th January 2022
Recent comments from members of the Fed seem to point to a scenario of three rate hikes in 2022 for now – and slightly more if required. The latest inflation figures point to a dip in monthly changes (cf. chart 1), although this drop is not yet sufficiently significant. Meanwhile it is worth bearing in mind that December’s stats may have been hit by the Omicron variant’s effects on the economy.
Slight dip in US inflation at the end of 2021
Monthly % changes
Consumer prices / Average of four core inflation measures
Yet is the Fed’s new scenario compatible with its now openly anti-inflation stance? With unemployment below 4% and wages on a quickening uptrend, a truly orthodox Fed would suggest considerably greater rate hikes. Its current policy is therefore not seen as seeking to considerably slow growth – at least at this stage. It is as if the Fed were endeavoring to stabilize medium-term inflation projections by its comments alone, and simply attempting to put an end to the “whatever it takes” approach of 2020/21 merely by its actions. The Fed is probably also counting on the fact that rising prices will automatically stabilize demand, which will end up quashing inflationary tensions without the central bank having to trigger a recession. Lastly, it is still banking on the easing in bottlenecks and a decrease in the pace of commodities price rises. The bond markets seem to be proving the Fed right for now (cf. chart 2).
US inflation projections have stabilized since mid-November
_2-year breakeven for inflation-linked bonds
10-year breakeven for inflation-linked bonds
5-year breakeven for inflation-linked bonds_
As has been the case since Jerome Powell changed tone in June 2021, the adjustment in both the Fed’s stance and policy has not had a major impact on the main share indices (cf. chart 3), which have admittedly very slightly slowed their gains since summer 2021, while volatility has edged up. However, we could also contend that this deterioration in market behavior was a result of the Delta and subsequently Omicron variants – or of investors’ (unpredictable) behavior as they rush into and out of large quality stocks. It is difficult to draw a clear conclusion.
Impact of the shift in the Fed’s tone on equity market indices is difficult to ascertain
_MSCI World / 200-day moving average
The Fed in “whatever it takes” mode / The Fed increasingly firms its stance_
As everyone will have noted, considerable rotation moves have marked the start of 2022, with investors reassured on the timeframe for the current wave in the pandemic, which buoys cyclical stocks. However, they are also forsaking more safe stocks that had made strong gains in the second half of 2021. We do not know whether this rotation will continue or grind to a halt some time soon, but this is not absolutely critical for our allocation, which remains highly diversified.