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Omicron Might Make it Worse China’s zero Covid case policy continues to stagnate its economy. With several cities under lockdown and factories continuously shuttered, outbound shipments are starting to become a problem. Tianjin was the latest city to put its 14 million residents through mandatory testing with lockdowns. That’s left the city’s sea and airport traffic suspended for the time being. While the U.S. works to wean itself off external supplies, it won’t happen overnight. These shutdowns aren’t only a problem for China. They make production of finished goods in the U.S. unreliable. Companies are grappling with higher material and labor costs. Shortages in expected shipments will only exacerbate the problem. And with Omicron’s higher transmissibility, the new variant could cause serious disruptions in economies, even if only temporarily. We’ve already seen airlines and schools struggle with employee turnout. So, even if the Fed raises rates, if Omicron continues to haunt us, their actions may not be enough to tame inflation. |
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Inflation |
Inflation Highest in 40 Years |
Key Data
Inflation made sure everyone knew its name, skyrocketing 7% from December of 2020. The Bad We found the usual culprits behind December’s huge price increase:
Supply chains starved of inventory continue to draw down inventories across the board, forcing consumers to pay higher prices than even their wage increases can’t keep up with. Analysts found few silver linings in the data. Even though school lunch prices decreased, many pointed to shuttered classrooms driven by Omicron. Fed Rate Hikes…A Near Given Markets already began pricing in rate hikes by the Fed into the March meeting after the release of the most recent Fed meeting minutes. That remained steady today, with expectations sitting around 75% for a rate hike at the March meeting. Traders are trying to figure out whether the Fed will look for three or four rate increases in 2022. Falling unemployment and rising rates continue to bolster the case for tighter monetary policy. That’s put pressure on high-growth tech stocks and will boost financials including the XLF and KRE ETFs. The Bottom Line: Nothing in this data suggests anything other than tighter monetary policy in the next 90 days. That means tighter credit conditions for borrowers and better rates for savers. Who knows, you might actually make more than 0.1% on that high-yield savings account some day. In the interim, we should expect technology to remain under pressure while value plays and banks start to outperform the market. |
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