Hard Court

By Wouter van Eijkelenburg, economist/strategist at Rabobank

Hard Court

Yesterday, it was Europe’s turn to take losses in equity markets following the release of Fed minutes on Wednesday with the DAX losing -1.35%, CAC in France losing -1.72% and the FTSE -0.88%. At the other side of the Atlantic most damage was already done in the US on Wednesday when tech-heavy Nasdaq had its worst session since February last year, losing more than 3%. Tech stocks didn’t rebound on Thursday, as investors rotated out of high valuation names. The 10-year Treasury stabilized yesterday and currently yields 1.73%, up 20 bps since the start of the year. Today started off well in the Hong Kong, with Hang Seng index up 1.6% boosted by higher prices of tech stocks and erasing the losses of earlier this week.

Equity markets might not be the only victim of the accelerating hawkish pivot of the Fed. Emerging markets (EM) are also confronted with the 2022 reality. It’s hard not to remember the “Taper Tantrum” back in the summer of 2013. EM assets and currencies collapsed as a result of the Fed’s announcement that they would be unwinding unconventional monetary policy after a prolonged period of monetary easing.

Sounds familiar? Yes it does, but we don’t expect a similar 2022 taper tantrum to occur. This time around the Fed was more careful in their messaging, providing the market with an advanced notice. This partially proved successful since markets anticipated further tightening by decreasing capital inflows towards EMs over the last months. Furthermore, EMs have fortified their FX reserves over the past years and many are experiencing records in exports, fueled by the global economic recovery. Both factors could help mitigate potential negative currency shocks caused by foreign capital outflows from EMs as a result of tighter US monetary policy. Nonetheless, the potential for rising inequality between developed and emerging markets remains. EMs might be forced to counter the Fed’s tighter monetary policy at a sub-optimal moment in their economic cycle since the economic recovery in many EMs is still fragile. Higher interest rate costs also pressure domestic governments who already squeezed their balance sheets in order to counter the consequences of Covid-19. This is certainly something to monitor over the course of 2022.

Meanwhile, “down under” the Djokovic saga continues as the federal government denied his entry. The tennis star received a medical exemption from the state of Victoria in order to be able to participate in the Australian Open which will start on the 17th of January. However, (No-vax) Djokovic was detained shortly after arrival (failing to provide evidence justifying his medical exemption) and will be deported from Australia and unable to defend his title, unless he wins his first game in “court” (of justice) to “qualify” (medically). It symbolizes the difficulties that countries face in providing transparent and equal rules while exploring “how to live with Covid-19”. Different rules in different countries for different sectors, professions and sports (stars) makes government guidelines less comprehensive and harder to logically justify. This adds to frustration and polarisation of societies. 

Which links to the 1-year anniversary of the insurrection of the Capitol. So much has happened in 2021, but it was only at the beginning of last year that a crowd of fired up “political” Trump enthusiast took over the Capitol with the aim to halt the certification of Biden’s election victory. A very confronting sight, illustrative of increased polarization in the US. However, it’s questionable if yesterday’s speech by Biden’s brought the American people closer by undeniably blaming Trump for the capitol riots. Moreover, does his tough stand benefit or hurt the electoral sentiment leading up to the 2022 mid-terms? The mid-terms will be very important in setting the tone for the 2024 elections. In this regard, president Biden may have asked a key question for coming year(s):” Are we going to be a nation that accepts political violence as a norm?”

Day ahead

Today, Eurostat will publish its flash estimate for Eurozone inflation. Data from several member states suggest that today’s figures for the Eurozone as a whole may finally show a stabilization in inflation following the sharp rise in recent months. The consensus is for a slight decline to 4.8% y/y from 4.9% last month. In Germany, the harmonized figure for December fell slightly, data showed yesterday. However, it rose further in Italy and Spain. More worrying is that the easing of inflation pressures appears to be coming mainly from energy but that other components, such as food and core-items, are gradually taking over. Although there are hopes that the figure for December (or perhaps even November) would mark the cyclical high in the y/y inflation rate, the underlying signals from recent data are far from reassuring. Whilst the headline inflation rate will almost certainly drop in January thanks to the German VAT hike falling out of the comparison base, the steady rise in non-energy inflation in recent months is clearly a matter of concern. Food price inflation could see a significant acceleration in coming months. Moreover, January is traditionally the month in which many companies set their new list prices for 2022. With shortages all around, we could be in for some surprises next month. So, a saying that not only applies to farmers, but also to central banks nowadays: do not count your chickens before they are hatched!

Furthermore, today’s US Employment Report is not likely to show much of an impact from the Omicron variant as it reflects the labor market situation around mid-December. The Bloomberg consensus expectation for nonfarm payroll growth in December is 440K, which would mean a pickup from the disappointing 210K in November and a return to the pace we saw in August through October. Earlier this week, ADP’s employment change for December surprised with 807K. However, ADP has been more optimistic about employment growth than the Bureau of Labor Statistics since September. The unemployment rate is expected to fall to 4.1% from 4.2%. In combination with increased participation this would be a sign of further labor market progress. The participation rate is expected to rise slightly, to 61.9% from 61.8%. Participation has remained below pre-pandemic levels as labor supply continues to be restrained by COVID-19. Average hourly earnings are expected to slow down in year-on-year terms, to 4.2% from 4.8%. This is largely a base effect from the 1.0% jump in average hourly earnings (month-on-month) in December 2020. In month-on-month terms, an acceleration is expected to 0.4% in December 2021 from 0.3% November 2021. Due to composition effects, average hourly earnings are not a good measure of wage pressures anyway. In fact, it was the high Employment Cost Index on the eve of the November meeting of the FOMC that helped Powell make his pivot to an inflation fighting stance. While strong employment growth and a decline in unemployment would strengthen the case for an earlier rate hike by the Fed, the key test will be whether this momentum can be sustained when the impact of Omicron is incorporated in the data in the coming months.