By Han Tan, Chief Market Analyst at Exinity Group
The risk-on start to 2022 is taking a breather, with Asian stocks seeing mixed performance while US and European equity futures are in the red. Typical safe havens are faring better so far on Wednesday with the US dollar holding steady, gold rising, while the Japanese Yen is the best performing G10 currency.
This year, market participants are primarily framing their outlook around how inflation informs the Fed on when to raise rates, as the world continues to battle against Covid-19 and record infections.
US rate hike clues from FOMC minutes, NFP
The December FOMC minutes due Wednesday may offer fresh clues about the timeline pertaining to the Federal Reserve’s tapering and rate hikes.
As things stand, markets are forecasting a better-than-even chance of a US rate hike as soon as March, the same month that the Fed’s unwinding of its asset-purchases is set to be completed. The latest FOMC dot plot signaled a total of three rate hikes for 2022.
The consensus headline figure for this Friday’s US non-farm payrolls report is estimated at 424,000, with the unemployment rate falling to 4.1% in December. The jobs report will be used to determine how far the labour market must improve before meeting the Fed’s “maximum employment” criteria for a hike.
Faster-than-expected US wage growth, beyond the estimated 4.2% for December that feeds into demand-pull and cost-push inflation, may also prompt the Fed to hasten its policy tightening.
If this week’s FOMC minutes and the NFP print suggest that a March rate hike is probable, that could prompt further gains in Treasury yields and the US dollar, while triggering declines in growth stocks and gold.
Gold: Rising Treasury yields
Gold prices are seeing some relief, unwinding more of Monday’s losses after bullion was pummelled by surging US Treasury yields. Rising interest rates could be the scourge of gold bugs in the first half of 2022, as ramped-up expectations for Fed rate hikes could dampen demand for the non-interest-paying precious metal.
Still, lingering concerns over a possible turn for the worse in the worldwide battle against Covid-19 should offer some measure of support for gold prices.
Oil: Easing Omicron concerns
Oil prices have been swept up with the risk-taking activities that kicked off the new year, with Brent futures now resurfacing above the psychologically important $80/bbl level.
OPEC+ delivered on the widely expected decision to stick to its plans to raise output gradually, suggesting that recovery in demand is resilient enough to weather Omicron’s threat, at least for the time being.
Oil benchmarks could see more near-term upside if concerns over an oversupplied market in the first quarter are further diminished, as long as demand remains steadfast. However, recent gains could be swiftly unwound if we see more reports of significantly tighter restrictions in major economies to curb Omicron’s spread.
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