January 21 2022
This has certainly been a week for headlines. There does not seem to be a week where we don’t mention inflation and this week will prove no exception. UK CPI increased to 5.4% in December, above consensus forecasts of 5.2%. This was the highest reading since March 1992. RPI meanwhile rose to 7.5%, the highest figure since March 1991. UK December retail sales excluding fuel however surprised to the downside, down 3% year on year, missing the consensus forecast of 1.1% growth. It would appear that Santa wasn’t as generous this year, perhaps as higher costs and the prospects for higher interest rates started to hit home.
It’s not just here in the UK where the prospect of higher inflation and interest rates is hitting home. In the US we this week saw the US 2 year yield breach the 1% level to the upside. Two year Treasury yields have historically acted as a good barometer for the US Federal Funds Target Rate. If we were to continue to believe that this was going to be the case we should therefore expect the latter to attain the same level in the not too distant future. In the table below we show the latest probability for an interest rate move. Whilst one is not expected at the meeting in January they are expected to come swiftly afterwards, with a 93% probability of 3 interest rate hikes by the end of the year, and a distinct chance that we will see a fourth.
Whilst we have seen an upward move in the US 10 year Treasury yield, to 1.79%, the pickup in yield at the shorter end has been greater, therefore leading to a flattening in the yield curve. Yield curve inversions have historically been a good indicator of a pending recession. This time referring to the 10 year yield less the 3 month yield, when the difference between the two turns negative, a recession has typically followed. With a current spread of +1.63%, it is hopefully some time before we have to worry about this one, but one to watch all the same with interest rate hikes potentially pending.We have also seen moves in Europe. Whilst it is unlikely we are to see the ECB move on interest rates this year, bond yields are on the rise. In Germany for example we have seen the 10 year Bund yield rise above 0% this week for the first time 2019.
Higher bond yields and the prospect of more to come continues to impact equity markets, in particular those sectors which are considered longer duration. This week continues to be a rough one for technology stocks, with the Nasdaq moving into correction territory, a move of 10% or more from a previous high. More pain could yet be to come, with Netflix being down significantly in afterhours trading following a warning that subscriber growth would slow substantially in early 2022. In pre-market trading the stock price was down as much as 20%. The peddles meanwhile stopped going round at Peloton. We have previously reported of the fall seen in the share price and it took another tumble yesterday after the company announced that it was temporarily halting production of its connected fitness products. There were concerns that they were halting the production of all bikes and treadmills. Whilst this is not the case they have conceded that they are “right sizing” their production.
For those chartists out there another index to keep an eye on is the Russell 2000. At its close on the 20th January of 2,024.04, the index was trading below its 50 days moving average of 2,239.33. More importantly however the 50 day average of 2,239.33 now trades below the 200 day moving average of 2,251.26. Known as the death cross, this historically signals the potential for further weakness moving forward. Whilst fundamental investors may give this little credence, those technical chartists I am sure are very much aware.
As always in markets there is plenty to keep your eyes on, but often it is those things which aren’t being given attention which can creep up on investors. To quote an African proverb, “The sheep will spend its entire life fearing the wolf, only to be eaten by the shepherd.”
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