SINGAPORE – After “talking about talking about” tapering for months, the United States Federal Reserve finally acknowledged the build-up of inflationary pressures, sending markets into a tizzy during the past week.
While suggesting a potential end to its quantitative easing in about two years, the Fed last Wednesday gave no indication as to when it would begin cutting back on its bond-buying programme.
“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Fed boss Jerome Powell said in a phrase that recalled a statement he made a year ago that the Fed was not “thinking about thinking about raising rates”.
Nevertheless, policymakers indicated at least two rounds of hikes in 2023, but done in a measured manner so as not to disrupt the financial markets.
But the news was enough to trigger a knee-jerk selldown of stocks, making it the worst week on Wall Street since October last year.
The Dow Jones fell sharply last Friday, the second consecutive weekly loss for the big board index, which ended at 33,290.08 for a
3.4 per cent loss. The broader S&P index lost 2 per cent to end at 4,166.45, while the tech-heavy Nasdaq ended flat for the week at 14,030.38 points.
In Singapore, the Straits Times Index held rather steady, although it lost 13.81 points, or 0.4 per cent, for the week to 3,144.16 points as interest moved away from bellwether stocks to situational second-liners.
Last Friday’s sharp pullbacks on Wall Street also coincided with what analysts call the “quadruple witching”, where options and futures on indexes and equities expire. This event traditionally injects more volatility into the market.
Going forward, market watchers will be keeping an eye on where key economic data is headed.
As a report last Thursday by Bank of America Global Research indicated, China’s economy is showing signs of slowing, US fiscal stimulus is fading and the Fed is getting more hawkish.
The easy money has already been made, and future gains on the market will have to come on the back of fundamentals. The focus will be on growth and economic recovery.
While inflationary pressures have built up, there is also a realisation that much of it is transitory and due to the base effect against the deflationary pressures a year earlier.
The bigger concern for the Fed is employment and labour participation rate, which is still low.
Meanwhile, market experts reckon that even with the expected double rate hike in 2023, the Fed rate will still be at 0.5 per cent.
Financial powerhouse BlackRock noted that hiking the Fed funds rates marginally is the “right move”, given that its inflation target is now set at above 2 per cent.
“As we have described elsewhere previously, we don’t think that tapering the QE (quantitative easing) programme will create tangible stress to the economy or markets, and in fact think that the biggest risk to the economy and markets today would be an overheating paradigm where it is hard to predict how high input, or wage costs, could get,” wrote Mr Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the global allocation investment team.
“We are quite confident that inventory levels will be rebuilt over the coming year or so, and that the drivers of the current elevated levels of inflation – semiconductor chip shortages, used cars, airfares, lodging and so on – will eventually be brought into balance after the reopening is longer in the tooth. The easy money has already been made on the market, and future gains will have to come on the back of fundamentals and news flows.”
But tapering is not necessarily on the cards for other central banks.
The Bank of Japan said last Friday that it would keep its policy rate at minus 0.1 per cent, and its 10-year bond yield target at zero.
Just as during the aftermath of the global financial crisis in 2009 and 2010, markets will adjust to the new emerging normal – moderate inflation, higher interest rates, pickup in economic activity, and recovery in the job market.
Stocks and companies that do well will be those plugged into this reality.