Speed bumps to watch for
Having said that, we are also seeing some speed bumps on the path to normal:
- Parts of the world are experiencing a big surge in COVID. COVID-19 is still spreading rapidly in parts of the world. And this spread is impacting economic growth, as evidenced in recent flash Purchasing Managers Index readings for the eurozone, Japan and the US.4 We also have to recognize that the spread of the Omicron variant is likely to increase supply chain disruptions, so that should slightly delay the return to normal for prices.
- There are fears that Ukraine could be invaded by Russia as early as this week. The ensuing sanctions against Russia could drive up the price of oil, which in turn could add to inflationary pressures in the short run.
So we won’t get back to normal tomorrow. And there are some aspects of the current situation that will be more persistent — such as labor market constraints and wage growth. We’ve been reminded of that in earnings results for the fourth quarter: As of Jan. 14, 60% of S&P 500 Index companies noted the negative impact of labor costs in their earnings calls.5
This inflation picture is what has market participants so worried about what the Fed might do; the monster under the bed gets bigger and uglier every day we continue to see elevated inflation and more sources of inflationary pressure.
What to watch this week
Looking ahead, I will be following these data releases particularly closely:
- US PCE Price Index. We always want to pay attention to the Fed’s preferred measure of inflation, although I don’t expect any surprises
- University of Michigan inflation expectations. This will be an important indicator of whether longer-term consumer inflation expectations remain relatively anchored, a metric that is important to the Fed
And of course, we have some central bank meetings this week, including the Bank of Canada. However, all eyes will be on the Fed. I think Fed Chair Jay Powell will try to “thread the needle” in his press conference, talking tough but providing enough clarity and calm to shine a light on the monster under the bed, and perhaps dispel the worst fears of market participants. However, I don’t believe volatility or sell-offs will end with Powell’s words; I expect them to continue until at least the first rate hike.
1 Source: Federal Reserve Bank of New York. The Empire State Manufacturing Survey is produced each month by the Federal Reserve Bank of New York to gauge manufacturing activity in the state of New York.
2 Source: Nikkei Asia, “China, Vietnam urge workers to hunker down over Lunar New Year,” Jan. 24, 2022
3 Source: Bloomberg, L.P., as of Jan. 24, 2022
4 Source: IHS Markit, Jan. 24, 2022. Purchasing Managers Indexes are based on monthly surveys of companies worldwide, and gauge business conditions within the manufacturing and services sectors.
5 Source: FactSet Earnings Insights, Jan. 14, 2022
