While the Olmikron strain is spreading rapidly around the world, initial research on its severe illness rate and vaccine efficacy has partly eased concerns, with the Dow ending its correction for four consecutive weeks and the S&P 500 hitting a record closing record high. Meanwhile, the VIX, a fear index that measures U.S. stock volatility, fell nearly 31 percent in a single week, its biggest drop since late January, and individual investors are warming up. The market is digesting the Fed's expectations of accelerating the de-coding and waiting for the boots to land to open the year-end market.
How inflation is hot how the Fed cooled down
For the U.S. government, last week's breakthrough in the debt ceiling problem lifted a major hidden danger for the economy, after U.S. Treasury Secretary Yellen warned that a debt default would cause the United States to fall into recession. The Democratic and Republican parties quickly agreed on operational procedures after congress resumed, and if the debt ceiling is raised by $2 trillion according to previous us media disclosures, it will meet the government's funding needs until next November's midterm elections.
Inflation is becoming the most intractable challenge facing US President Joe Biden and the Federal Reserve. The latest data show that the US consumer price index CPI in November increased by 6.8% year-on-year, the highest since 1982. Price issues are weighing on biden and Democratic prospects for power, and a CNBC survey released last week showed that support for the current U.S. president has fallen to 41 percent, with nearly 56 percent of respondents dissatisfied with the state of the economy. Inflation could also threaten a key part of Biden's economic agenda, the "Rebuild a Better Future" bill. Barron's weekly magazine said the nearly $2 trillion social spending program target would be hampered by prices as many senators expressed concerns about excessive fiscal stimulus.
Price factors can plague consumer spending plans. The University of Michigan's consumer confidence index rebounded slightly in December, but remains at a near 10-year low. The 1-year inflation forecast is 4.9 percent, the highest level since the summer of 2008. Richard Curtin, chief economist in charge of the survey, noted that optimism among low-income earners has risen, while sentiment among middle-income earners and top earners has declined. It is important to note that optimism for low-income households is based on expectations of rising wages, suggesting that the emerging wage-price spiral is likely to continue to push inflation higher in the coming years.
Bob Schwartz, senior economist at Oxford Economics, said in an interview with First Financial Reporter that inflation has become the number one problem facing American families, with rents, energy, food and almost all goods and services rising in price. Despite tight labor supply and strong personal wage growth, it is still faster than inflation, and purchasing power is being corroded, potentially threatening future consumer demand.
The Fed may then take a key step in the fight against inflation. The market generally expects that this week the FOMC will announce that the scale of asset purchases will be reduced to $30 billion per month starting next year, and the current round of asset purchases will end in mid-March. Federal interest rate funds futures show that investors expect the node of the Fed's first rate hike to point to May.
Schwartz told the first financial reporter that combined with the statements of Fed Chairman Powell and a number of Fed officials, the outside world has digested the news that the Fed will announce accelerated code reduction. The biggest highlights of the week are the dot plot and the quarterly economic outlook report, which will provide clearer clues for the Fed's next policy path. Compared to September, it is worth watching whether the position of the Fed's internal dovish commissioners on the issue of interest rate hikes has wavered.
Schwartz believes that given the uncertainty of the epidemic and inflation, the Fed may not make a clear statement on interest rate hikes at this meeting, and the FOMC needs to avoid policy mistakes affecting the economic recovery while ensuring full employment. He believes that combined with recent studies from various parties, the impact of the Olmikron strain on the economy is limited, and it is optimistic that the first quarter of next year is expected to see the high point of this round of inflation, and then the recovery of the labor market will drive consumer demand to provide more impetus for the economy.
New highs in the former retail investors eager to try
U.S. stocks have been on a strong trajectory over the past week, with Pfizer's preliminary clinical results for three doses of the vaccine partially allaying previous concerns about the economic outlook. Goldman Sachs believes that the spread of the Olmikeron strain will be a "mild drag" on U.S. economic growth. The report notes that while many questions remain unanswered, most likely the virus will spread faster, immunity to severe illness will only weaken slightly, creating a mild downward scenario.
The whole market sector showed a general upward pattern, cruise, aviation, technology and other sectors took turns to perform, the S&P 500 index took the lead in hitting a record high, the previously sluggish long-term US Treasury stabilized, and the yield curve re-steepened reflecting the positive change in recovery expectations. The CMECO Fear Index, a measure of market volatility, closed at 18.69% on the 10th, falling 30.6% cumulatively over the past week.
It is worth mentioning that the inflation factors that triggered market turmoil at the beginning of this month did not cause panic this time. Jack Janasiewicz, chief portfolio strategist at NatixisInvestmentManagerSolutions, said: "If you look at the numbers on the surface, it definitely looks hot. But in fact, the level of inflation that the market had originally speculated was much higher. Biden also spoke of the CPI data not reflecting the recent decline in energy prices, which could reduce the pressure on inflation this month. Most importantly, the Fed's next move has been fully anticipated. ”
Patrick Palefrey, senior equity strategist at Credit Suisse, believes that as fed policy gradually tightens, the focus of the market is mainly on the economy. A strong economy will allow the Fed to opt for a hardline option, while the market has the ability to continue higher. In confidence in a strong economic recovery and improved corporate earnings and profit margins, Credit Suisse raised its 2022 forecast for the S&P 500 to 5,200.
Individual investor enthusiasm for the market has heated up over the past week, and CBN has previously reported that in early December, when the US stock market fell into a correction, retail investors actively entered the bottom, and more than $2.6 billion flowed into the NASDAQ 100 INDEX ETF, and now this courage has been rewarded. Statistics from the Association of Individual Investors of the United States (AAII) show that the proportion of bearish markets in the week ended the 9th plummeted by nearly 28%, and the sentiment index returned to neutral levels from the September low.
With the recovery of the stock market, the derivatives market continues to be hot. According to data provided by Charles Schwab to the first financial reporter, the trading volume of US stock options in the first two weeks of December reached an average of 44.1 million shares per day. Randy Frederick, managing director of Trading and Derivatives at Charles Schwab, pointed out that institutional hedging needs are higher, with bears slightly prevailing in S&P 500 trading last week, and many funds need to hedge against the risk of short-term potential volatility adjustment in the face of the Fed's key interest rate meeting.