Preparing for an inflection in monetary policies looking ahead

UBP
By January 4, 2022 11:26

Preparing for an inflection in monetary policies looking ahead

MONTHLY INVESTMENT OUTLOOK

  • Volatility returned to both equity and bond markets in November and December as equities exited earnings season and markets began to prepare for a change in Fed policies looking ahead.
  • These pivots come amidst a renewed acceleration in new case counts around the world as the latest variant, dubbed Omicron has begun to overtake the Delta variant as the dominant strain in countries around the world.
  • While the humanitarian burden remains high, the economic effect appears more modest as mobility in South Africa, where Omicron was first identified, and in the US, UK and through many EMs remains near pandemic era highs suggesting limited impact on activity.
  • At the same time, historically high inflation matched with unemployment nearing historical lows in the US suggests a pivot in the Fed policy lies ahead.
  • While the slowing of its bond buying programme has been well telegraphed, a consensus is growing that a rate hiking cycle will begin in 2022. We expect two rate hikes in 2022. Historically, these cycles have lasted one – two years and since 1980, seen Fed Funds rate increases of 200-400 bps.
  • For bond investors, Fed rate hiking cycles have proved challenging with 2-year yields rising in each of the nine rate hiking cycles while 10-year yields rose in eight of the nine rate hiking cycles since the 1970s. With credit spreads widening in three of the four rate hiking cycles since 2000, credit may offer little respite for bond investors.

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UBP
By January 4, 2022 11:26

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