by Greg Valliere, AGF Management Ltd.
THE NEW YEAR BEGINS with many of last year’s major themes intact — Joe Biden’s poll numbers are in the doldrums, Covid is still a concern but less lethal, Congress remains dysfunctional, and serious challenges loom from Russia and China. But there’s one big difference — interest rates.
YIELDS MAY BE BREAKING OUT to the upside, as investors grapple with three major developments: the tight labor market, which should be apparent in this Friday’s jobs data; signs that inflation and the supply chain gridlock aren’t over; and the determination of the Federal Reserve to begin tightening policy.
THIS UPSIDE THREAT WAS CLEAR YESTERDAY, as the Treasury 10-year bond yield rose to 1.63%, shrugging off the media hysteria over Omicron, which has infected millions but seems to be no worse than a bad flu.
THE BIDEN ADMINISTRATION has done a terrible job of messaging on Covid; even Dr. Anthony Fauci seems to change his assessment every few days. The bottom line appears to be increasingly clear: the new variant will probably peak within weeks and — finally — the virus may subside by spring.
SO WE THINK THAT ANY COVID-RELATED ECONOMIC WEAKNESS in the first quarter will be temporary, and the bond market apparently agrees. (Fourth quarter growth should be robust; the Atlanta Fed GDP forecast is for growth of 7.6%).
AN EVEN MORE BULLISH SIGNAL comes from the labor market, where persistent shortages have prompted employers to raise salaries, accept COLA hikes, and offer sign-up bonuses. Friday’s non-farm payrolls are expected to rise by about 400,000 jobs, with the unemployment rate nearing 4% — perhaps a sign of imminent full employment.
WE STILL DON’T RULE OUT FISCAL STIMULUS this year, as progressive Democrats browbeat Sen. Joe Manchin, who could agree to a package of “only” $1 trillion or so. Biden, facing a GOP takeover in the House in November, will take whatever deal he can get.
BIDEN DESPERATELY NEEDS TO SHOW THE PUBLIC that inflation is subsiding, but that may not occur until summer or later. So he will accuse meat producers, energy firms and other companies of price-gouging, very convenient scapegoats. What Biden needs is a Fed Chairman who will talk tough on inflation, and it looks like he has one.
THUS THE YEAR BEGINS with a clearly hawkish Fed, inflation still hot, and the economy in surprisingly good shape. Two or three rate hikes in 2022 won’t crush the economy or the markets, especially as Covid begins to subside. The big change in 2022 will be learning to live — and invest — with higher yields.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2022 AGF Management Limited. All rights reserved.
This post was first published at the AGF Perspectives Blog.
