Deflation? Not So Fast...

Sebastien Callebaut -

The Economy Doesn't Need Much Support Anymore

Powell indicated during his confirmation hearing before the Senate Committee on Banking, Housing, and Urban Affairs that he anticipated a series of interest rate hikes this year, as well as other cuts to the Fed's exceptional assistance introduced during the pandemic.

“As we move through this year … if things develop as expected, we’ll be normalizing policy, meaning we’re going to end our asset purchases in March, meaning we’ll be raising rates over the course of the year, [...] At some point perhaps later this year we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.” Federal Reserve Chairman Jerome Powell

Powell delivered the statements following a 2-hour hearing that included praise for the Fed's handling of the economy as well as criticism of central bank members' perceived ethical shortcomings. Some Republican senators were also concerned that the Fed was straying too far from its goals of price stability, full employment, and banking supervision.

Clarida To Step Down Earlier Than Planned

With only a few weeks left on his tenure and amid allegations about his trading in funds, Federal Reserve Vice Chairman Richard Clarida announced on Monday that he will be stepping down.

  • Clarida's departure comes after increased scrutiny over what he termed as a "pre-planned portfolio rebalancing" scheduled for February 27, 2020
  • According to filings originally reported by the New York Times, Clarida sold shares in three funds on February 24 and then repurchased them three days later
  • This was around the same time that the Fed was preparing to implement what would become its most aggressive support program ever in order to fight the economic downturn brought by the pandemic

Supply Chains Issues Continue

The potential of continued disruptions in the world's second-largest economy, which has adopted a zero-tolerance approach to tackling the virus, is raising fears that the disruptions will spread throughout the world. Already, companies such as Samsung, Volkswagen, and a textiles company that supplies Nike and Adidas are experiencing production delays.

  • Because of the very contagious nature of Omicron,  economists warn that the possible implications are more severe this time
  • The strain is spreading across China as Beijing tries to prevent outbreaks ahead of the Winter Olympics, which begin on February 4th

Several analysts believe China would intensify its containment policy, with some speculating on the likelihood of a nationwide lockdown. In light of the latest Covid-19 developments, Goldman Sachs decreased China's growth prediction for 2022 to 4.3 percent from 4.8 percent on Tuesday.

Ark Invest's Cathie Wood Bets On Deflation

In a webinar on Tuesday, ARK Invest's Cathie Wood doubled down on her prediction that deflation, not inflation, will be the most important driver in the US economy in the coming year.

  • According to her, inflation will decrease this year as supply chain bottlenecks are alleviated and businesses no longer feel compelled to place multiple orders for items
  • Simultaneously, technology would continue to drive down the cost of goods and services, she said

"Companies are learning how powerful technology can be on holding the line on costs," Cathie Wood, Ark Invest

BENCHMARK'S TAKE

  • The surge of a new Covid-19 variant isn't slowing down the economy as the labour market remains stretched and consumer spending relatively sustained
  • Supply chain issues are set to continue throughout 2022 as China is now trying to deal with the Omicron variant in the light of its Winter Olympics
  • Long duration stocks (the ones with earnings tomorrow rather than today) will most likely continue to endure a weak environment as the Fed starts to take money off the table

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Toomas Tartes on Unsplash.