Real Yields turning positive AND More...

1. Minutes of the Dec FOMC meeting brought to light the political overhang of ensuing inflation. The Fed is committed to do everything to tame inflation in the US. They have indicated that inflation wouldn’t stop early and supply chain bottlenecks would continue longer than expected. This clearly shows that the Fed is now super charged to hike sooner than expected, taper, and start a balance sheet reduction process.

2. The markets were shaken by the detailed minutes from the meeting. Since the stance now seems very hawkish and thus indicates a clear trajectory to tighter conditions. As this comes with a surprise, tech stocks are as usual most sensitive to the rate hike announcements. The rising Omicron cases makes USD movements interesting, given the stance by the Fed. Ideally USD shall strengthen ahead, but if the world moves into a risk on theme, it can normalize to 93 by June.

3. This week also marks the first week without LIBOR. So far markets have absorbed the impact and transitioned smoothly to the new RFRs. While in Europe, markets have moved to the local LIBOR or the EURIBOR, GBP and JPY markets have completely transitioned to the overnight RFRs.

4. Inflationary trajectory is significantly influenced by the labor market recovery and the pace at which we move towards full employment. Job reports are taken as a gauge for future inflation. Though the job report hinted at a below expected NFP numbers, the wage growth remains strong and unemployment rate inched lower. But I am even more interested in the labor force participation rate, which has remained sticky below at 61% from the pandemic lows.

5. The interest rate policy divergence between eur and usd roots from their inflation expectation. While USD expects inflation to remain above its long term target of 2%, EUR expects it to settle within an year and sustain below its target.

6. A vast difference in approach towards thwarting covid resurgence is evident from zero covid tolerance of China, while UK maintains a position that Omicron isn't that bad and hence doesn’t warrant lockdowns. This difference will reaffirm itself in the industrial confidence and production numbers in the coming weeks.

7. The ECB also seems to be tightening money supply over the next few months. They have already started reducing their asset purchases. Japan on the flipside took an unconventional route to infuse liquidity. They resorted to targeted ETFs to aid the securities in need. But now they seem to have significantly reduced their ETFs buying.

8. What happens when the real yields turn back and emerge from a negative regime? As central banks start tightening, riskier assets like HY bonds and emerging market debt would suffer.

9. The wage increases over the past few months have been astronomical, especially for the tech folks. This has two interesting stories, first: while it may seem that the labor market is competitive to hire top talent, real wages have been in the negative regime over the past 9 months, second: these wage hikes are now manifesting in the operational expenses of the tech giants, as was highlighted in the Q4 earnings releases.

10. The composition of the CPI inflation baskets is very different between India and the US. While the Indian CPI index is heavy with food, the US index is more than 70 percent linked to housing rates. This implies that a rate control mechanism would be more effective to control the CPI numbers in the US than in India, as food are staples, thus rates form a small portion of the price dynamics.

11. Interesting Charts: