Will Powell’s Pivot Impact Markets? | The Big Conversation | Refinitiv

TL;DR

The recent volatility in markets can be attributed to a combination of factors, including the new COVID variant and the Federal Reserve's pivot towards tighter monetary policy, which could have significant impacts on inflation and economic growth.

Transcript

over the last couple of weeks there has been a renewed bout of volatility across risk assets some people are blaming it on the new covid variant whilst others are pointing towards the power pivot on rate hikes and quantitative tightening but which of these will have the biggest impacts on markets going forward well that's the big conversation i'll ... Read More

Key Insights

• 🧑‍🏭 The Fed's pivot towards tighter policy is the most significant factor impacting markets.
• 👶 The new COVID variant will mainly affect supply chains and inflation levels.
• ❓ The Fed's pivot suggests a shift towards prioritizing price stability over economic growth.
• 😃 Flattening yield curves could impact positioning in cyclicals and benefit big-name tech stocks.
• 👀 Markets will closely watch the December FOMC meeting for clues on future policy direction.
• 🥺 The journey towards tightening policy could lead to higher volatility and rumors in markets.
• 🐢 Policymakers are likely to take a slow and cautious approach to avoid destabilizing the economy.
• 🧑‍🤝‍🧑 The impact of tightening policy on risk assets will depend on the level of long-dated yields.

Questions & Answers

Q: What are the main impacts of the new COVID variant on markets?

While the new variant may cause supply chain strains and inflationary bottlenecks, markets and policymakers are experienced in dealing with such uncertainties. The main impact could be on consumer price inflation and wages.

Q: Why is the Federal Reserve's pivot towards tighter policy surprising?

The expectation was for the Fed to maintain loose policy next year. The recent leadership discussions and pressure from higher consumer prices forced a shift towards containing inflation, altering the course of policy ahead of next year's midterm elections.

Q: What are the potential implications of the Fed's pivot on economic growth?

The pivot suggests that the Fed is prioritizing price stability over growth, which could impact cyclical stocks and the engine of growth. The U.S. yield curve has already shown signs of a deteriorating growth outlook.

Q: How will the Fed's tightening policy be implemented?

The sequencing of change is crucial, and it is likely to involve a halt in asset purchases, maintaining portfolio levels, and eventually selling down the portfolio. Policymakers are expected to take a cautious approach to avoid derailing the fragile recovery.

Summary & Key Takeaways

• The new COVID variant may strain supply chains and lead to inflationary bottlenecks, affecting consumer prices and wages.

• The surprise pivot by the Federal Reserve towards tighter policy is concerning for markets, as loose policy was expected.

• The Fed's pivot could potentially impact economic growth, especially for cyclical stocks, and lead to a flattening of the yield curve.