This is a short week for trading with the focus primarily on the rising cases of Omicron Covid and second will rising inflation. It seems more difficult because there are still very little data about the Omicron variant. In addition, we are getting conflicting reports.
Cutting through the noise we think Omicron is unlikely to destabilize the markets because it is substantially less severe and treatments are becoming more available.
Front Line Doctors has been using their “Prevention and Treatment Protocols for Covid-19” with success using Ivermectin and vitamins. This is the same protocol that Joe Rogan used and I personally used them to successfully recover from Covid.
Dr. Francis Collins, Director of the National Institutes of Health, stated that vaccination and booster shots have proven effective in preventing severe diseases and death. N95 masks can also be used to avoid the spread of the virus. GlaxoSmithKline and Vir Biotechnology have recently demonstrated an effective antibody therapy.
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All of this led Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, to state that he doesn’t anticipate social-distancing restrictions like we saw when the coronavirus was onset. Both businesses and households have options, and they can make a difference.
These statements should ease concerns about the outlook for domestic growth. It will increase domestic investment and support a steady S&P 500 index rise.
This dynamic indicates that the dollar is heading higher. The Federal Reserve could do its job with the coming rally. Increasing buying power for the greenback will ease inflation pressures and reduce the need to raise interest rates.
Investors panicked late last week and early this week. We believe there is a strong bearish sentiment for investors. A dip in the markets could trigger a major drop.
They were concerned about the Federal Reserve’s tightening of monetary policy. The central bank had already announced three interest rate hikes in its monetary policy announcement. Wall Street was concerned about the possibility of rising rates as it could slow down economic growth.
Lower Oil Demand?
Over the weekend, headlines were filled with stories about rising coronavirus infection. Managers of institutional money are concerned about social-distancing restrictions and lockdowns being reimposed. It could also cause a slowdown in growth if the change is made.
Combined, these two factors could lead to rising rates and a slowdown in economic activity, which could lead to a double whammy in reducing gross domestic product (“GDP”) growth. Money managers made the sale first and then asked questions later.
The problem is, big-money investors got caught up in the “here and now” emotions instead of seeing the larger picture.
The European Central Bank (“ECB”) provided another update on the Fed’s last week policy announcement. Although the press release seemed hawkish, it indicated that they were inclined to raise rates. However, looking again at the press release and listening to Christine Lagarde’s comments, monetary policy is still pretty dovish (inclined lower rates).
This is because the tone of these two central banks differs from one another, indicating that the U.S. economy has a better outlook than Europe’s.
The most hawkish aspect of the ECB’s policy announcement was its statement that it would end the pandemic emergency purchasing program (“PEPP”) by quarter’s end. The Governing Council stated that this would not happen immediately. This admission is not surprising and should not be considered a surprise.
Many investors were wrong at first glance. The dynamic will change in the future.
The ECB will increase its bond purchases by doubling its current level starting in the second quarter next year. This will be after PEPP is over, and Wall Street expected the opposite. The central bank will increase its monthly bond purchases in the Asset Purchase Program (“APP”) by 20 billion to 40 million euros.
It is planned to bring that down to 30 billion euros during the third quarter and 20 billion for the fourth quarter. This program will be maintained until 2022 before being terminated by the ECB. This doesn’t replace what we have seen in bond purchases via PEPP over the past months, roughly 68 billion euro per month, and it does cushion the blow when the program ends.
Lagarde was more reserved during the press conference. Lagarde stated that interest rates would not rise until the APP ends, and the statement suggests that rates will not rise before 2023 if the central bank plans to maintain the program through 2022.
This is in sharp contrast to the Fed’s recent statements.
It intends to stop asset purchases by April. The regional presidents and board members expect to raise interest rates three times in 2022, 2023. The federal-funds rates target range will be lowered to 1.50% to 1.755% if the change occurs. This number is significant as it represents the range before the pandemic.
This momentum should drive the greenback’s purchasing power higher. As the price of goods falls, a rising currency will reduce inflation. This would solve the Fed’s problem without the need to raise interest rates.
A central bank’s primary purpose for raising rates is to fight inflation. If the problem is resolved with a stronger dollar, the need for higher rates will be diminished.
Following a split between the Biden administration and Senator Joe Manchin (D-WV), Build Back Better legislation is sitting idle. Media reports this week said that Manchin and Biden would ultimately find a solution, but so far Manchin said that he can’t vote for a bill that would increase inflation and the national debt.
In response, Goldman Sachs continued their downward revisions to 2022 GDP growth, from 4.2% to 3.8%. Morgan Stanley lowered their expectations from 4.9% to 4.6%.
Gold & Inflation
Will inflation cause Gold to climb? Maybe.
We are seeing a slight bump but nothing major to report on Gold price movement.
Larry Summers, former Treasury Secretary, warned that the US’s inflationary environment could cause a recession in 2022. He demanded that the Fed make “significant changes in their tone” or they risk making serious errors in policy decisions which could lead to a financial crisis.
Summers stated that he is not certain what will happen after the current episode, but that “secular stagnations” are a risk for many Americans. This is regardless of how the economy is doing.
Summers was the first to warn about inflation last summer, despite the obvious trend towards disinflation. According to the Fed, inflation will be 2.6% by next year. This is unlikely unless the Fed changes how inflation calculation is done. Since at least 2017, “Smart money” has warned of secular stagnation and stagflation, high inflation, and low economic development. JPMorgan has also warned clients that there is a danger of a boom-bust recession in their latest note.
This change means that the S&P 50 should experience a normalized 8% rate next year that will likely be eaten up by rising inflation.