Daily Analysis 12 January 2022 (10-Minute Read)

Hello there, A wistful Wednesday to you as stocks wind their way higher on U.S. Federal Reserve Chairman Jerome Powell's comments that the central bank will return to a normal monetary policy while attempting to do no harm. In brief (TL:DR)

  • U.S. stocks rebounded Tuesday with the Dow Jones Industrial Average (+0.51%), the S&P 500 (+0.92%) and the Nasdaq Composite (+1.41%) all up.

  • Asian stocks followed a rebound in the U.S. after Federal Reserve Chair Jerome Powell reassured investors the central bank will tackle inflation to extend the economic expansion.

  • Benchmark U.S. 10-year Treasury yields were flat at 1.74% (yields rise when bond prices fall).

  • The dollar was steady after declining.

  • Oil edged up with February 2022 contracts for WTI Crude Oil (Nymex) (+0.42%) at US$81.56, their highest in a week.

  • Gold rose with February 2022 contracts for Gold (Comex) (+0.05%) at US$1,819.40.

  • Bitcoin (+1.78%) rose to US$42,637 after its roughest start to a year and ominous technical indicators failed to dampen bullish sentiment on the Fed pledging to tackle inflation but with economic expansion in mind.


In today's issue...

  1. The Last-Minute Debt Binge

  2. How strong is the economic recovery really?

  3. Digital Dollar Could Coexist with Privately-Issued Stablecoins

Market Overview

U.S. Federal Reserve Chairman Jerome Powell told the Senate Banking Committee that officials won’t hesitate to act if needed to contain price pressures.

He also said the Fed will probably start shrinking its balance sheet this year, but importantly, he noted that the economy was still a "long" way away from normal, opening the door for somewhat accommodative policy and pushing back fears that the Fed would tighten suddenly and dramatically.

The next focus for traders is Wednesday’s U.S. Consumer Price Index report that is widely expected to show unrelenting price pressure, but could provide some surprises and may see markets push higher if the rate of price growth starts to flatten out.

Markets have been buffeted by volatility at the start of the year on the prospect of faster interest rate increases to deal with the surge in inflation.

In Asia, markets rose Wednesday morning with Sydney’s ASX 200 (+0.62%), Seoul's Kospi Index (+1.32%), Tokyo's Nikkei 225 (+1.86%) and Hong Kong's Hang Seng (+1.81%) all up at the start.




1. The Last-Minute Debt Binge

  • In the first week of January, global corporate bond issuances soared to US$101 billion second only to 2021’s start, which saw US$118 billion raised, according to records from Refinitiv.

  • Both equity and debt markets have been choppy ever since the release of the U.S. Federal Reserve’s December meeting minutes and the perception that the Fed has taken a hawkish turn.

Companies are making hay while the sun shines, raising more than US$100 billion on the bond market ahead of what many expect to be increased borrowing costs in the coming days. In the first week of January, global corporate bond issuances soared to US$101 billion second only to 2021’s start, which saw US$118 billion raised, according to records from Refinitiv. Although the corporate bond market sees seasonally higher activity in the period after the holidays, the rush of new deals also reflects companies looking to tap debt markets before major central banks hike short-term interest rates. Both equity and debt markets have been choppy ever since the release of the U.S. Federal Reserve’s December meeting minutes and the perception that the Fed has taken a hawkish turn. And while not all investors were chomping at the bit to soak up opportunistic debt that is looking to lock in lower rates, with some orders for new bond deals pulled last Wednesday as investors reassess the macro environment, the environment has still been favorable. Pandemic-sensitive stocks like cruise operator Royal Caribbean launched one of the first deals last week in the lower-rated junk bond market, with a US$1 billion issue last Tuesday and the meme stock of champions AMC Entertainment (+0.044%), has declared its intent to raise debt as well. This week should see more new debt issuances as well, as companies gear up for the unofficial earnings season that should start next week and will likely see a slowdown for borrowing. Companies may nonetheless want to lock in debt as soon as possible because the amount of government bonds set to hit the private sector is set to swell this year, adding pressure on already elevated yields to rise even further.




2. How strong is the economic recovery really?

  • While indicators from major economies seem to reveal a world that is on the mend, recessionary pressures are building.

  • The threat of the Omicron variant derailing economic gains and ushering in a period of economic uncertainty may leave central bankers caught in a dilemma of removing support too soon, or face the wrath of rising price pressures.

The global economy may be in for a dose of strong medicine – reality – as unprecedented pandemic-era fiscal and monetary stimulus starts being bled (or in some cases yanked) out of the system to combat persistently high inflation. While indicators from major economies seem to reveal a world that is on the mend, recessionary pressures are building, especially in the U.S., with persistent inflation forcing the Federal Reserve’s hand to turn off the spigot of easy money. The pace of wage growth has accelerated in the U.S. and coupled with supply chain issues, conspired to put tremendous upward pressure on prices, with headline inflation rising at the fastest pace in four decades. Consumer Price Index data due out today from the U.S. Department of Labor Statistics is widely expected to confirm the trend of persistently higher prices and a Fed that will be forced to act by March at the very latest. But there may be a limit to how much the Fed can boost policy rates before pushing the U.S. economy into recession, with some estimates putting that number at just 1.5%. Significantly, consumer sentiment in the U.S. has worsened and bond yields are no longer reflecting a sanguine outlook for the economy. Omicron variant infections in the U.S. have also now crossed the 1 million mark, putting incredible pressure on an already stretched healthcare system. Against this backdrop, comments made by U.S. Federal Reserve Chairman Jerome Powell at his confirmation hearing before the Senate Banking Committee suggest that although the central bank is concerned about inflation, it will pursue a more normal monetary policy while causing the least amount of harm. “We’re really just going to be moving over the course of this year to a policy that is closer to normal, but it’s a long road to normal from where we are now. It really should not have negative effects on the employment rate.” Embattled tech stocks and even bitcoin saw a rebound on comments by Powell that it was a “long road to normal,” words which echoed his sentiments in July of 2020, where in the press conference following a policy meeting he said, “We’re not even thinking about thinking about raising rates.” “This is going to take a whole lot of time. There are just a lot of people that are unemployed and it seems quite likely there will be a significant group, even after a lot of strong jobs growth, that will still be struggling to find jobs.” Last Friday’s U.S. jobs numbers provided mixed signals for the Fed to consume – on the one hand, the unemployment rate has dipped to 3.9%, within a hair’s breadth of the pre-pandemic level of 3.5%, but job growth has all but stalled. In December, just 199,000 new jobs were created in the U.S. less than half economist estimates of 441,000 and well below the monthly average of 534,000. As the full impact of the Omicron variant ripples across the U.S. in January, job numbers available in the first week of February will be more reflective of the state of the U.S. employment landscape. Making matters worse, the number of African Americans and Latinos who are unemployed and unable to get jobs has increased in December, at a time when inflationary pressures are expected to start ebbing as supply chains smooth out. And while corporate earnings have been robust for last year, much of that reflects a pent-up surge in demand as pandemic restrictions were lifted and vaccination rates went up. The threat of the Omicron variant derailing economic gains and ushering in a period of economic uncertainty may leave central bankers caught in a dilemma of removing support too soon, or face the wrath of rising price pressures.




3. Digital Dollar Could Coexist with Privately-Issued Stablecoins

  • While the Fed has been coy on whether or not it intends to launch its own digital dollar, akin to China’s digital yuan, the central bank and other U.S. financial regulators have previously said that stablecoins require more regulation and ought to be issued by banks.

  • Stablecoins have been indispensable to cryptocurrency traders, providing a way to trade in and out of other digital tokens quickly and easily, but a Fed-issued digital dollar may provide a significant challenge to their ubiquity.

“Why can’t we be friends, why can’t we be friends, why can’t we be friends, why can’t we be friends?” – Why Can’t We Be Friends by Smash Mouth, off the album of the same name, Copyright Interscope Records 1997 Perhaps we can, at least according to U.S. Federal Reserve Chairman Jerome Powell who revealed that there is room for privately-issued stablecoins to exist alongside a possible central bank digital currency. While the Fed has been coy on whether or not it intends to launch its own digital dollar, akin to China’s digital yuan, the central bank and other U.S. financial regulators have previously said that stablecoins require more regulation and ought to be issued by banks. To be sure, there is well-established precedent and practice when it comes to commercial banks issuing their own currency. Hong Kong for instance has long used commercial banks that issue promissory notes to function as local currency given the special status of the territory. And in the U.S., wildcat money issued by wildcat banks during the 19th century helped to fill a gap when the country had no national banking system. At Powell’s confirmation hearing before the Senate Banking Committee, top Republican Senator Pat Toomey asked whether anything would preclude a “well regulated, privately issued stablecoin” from coexisting with a potential digital dollar, Powell said, “No, not at all.” Stablecoins have long served as a halfway house for cryptocurrency traders, with the largest and most liquid being Tether or USDT. And while most cryptocurrencies have suffered the slings and arrows of outrageous volatility in since bitcoin hit an all-time-high of close to US$69,000 last November, the fortune of stablecoins has only continued to grow, with inflows advancing. Tether has seen its market cap of USDT steadily rise to US$78 billion, while Circle’s USDC is now the fifth largest cryptocurrency by market cap, pushing out smart-contract blockchain Solana to round off the top five, according to data from CoinMarketCap.com Stablecoins have been indispensable to cryptocurrency traders, providing a way to trade in and out of other digital tokens quickly and easily, but a Fed-issued digital dollar may provide a significant challenge to their ubiquity. A recent report from the U.S. President’s Working Group on Financial Markets argued that Congress should give financial regulators greater authority and oversight mandates that would subject stablecoin issuers to bank-like rules.

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