It’s unclear what the immediate catalyst for this move is (Biden repeating the same “Omicron is cause for concern, not panic” and Powell following same hawkish path as yesterday), but as European markets close, US equity indices and bond yields started to tumble.
Some traders are suggesting that comments from Fed’s Williams are a catalyst as he warned that if the new version of the virus leads to another wave of infections, it could exacerbate the disruptions that have caused prices to rise at their fastest pace in three decades.
“Clearly, it adds a lot of uncertainty to the outlook,” Mr. Williams said of the new variant. He later added that a risk with the new variant is that it “will continue that excess demand in the areas that don’t have capacity, and will stall the recovery in the areas where we actually have the capacity.”
That, he said, would “mean a somewhat slower rebound overall” and “also does increase those inflationary pressures, in those areas that are in high demand.”
All of which sounds very stagflationary.
Small Caps have erased all of the overnight gains…
And the long-end of the yield curve is now lower on the day…
At the short-end, STIRs continue to shift hawkishly towards earlier and faster rate hikes.
And Fed’s Williams’ comments certainly reinforce the fact that The Fed will be forced to act sooner to tamp down inflation in the face of an economic slowdown.