After Another Great Year for Stocks, Peril Lingers… Bond Market Forecasts Bad News… Retail Sales Slide Sharply… 1970s Wall Street Dr. Doom, Blasts Powell on Inflation…

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After Another Great Year for Stocks, Peril Lingers

After a remarkably fruitful year in which the stock market shook off rising inflation and coronavirus cases, 2022 began with a decline. It may be the first in a series of ups and downs as Wall Street anticipates moves by the Federal Reserve and copes with the lingering pandemic.

It will be hard for investors to know what to do as the Delta variant gives way to Omicron and whatever variants evolve next. As for the Fed, the evolution of its policy is perplexing the markets, too. Recent statements and past behavior by its chair, Jerome Powell, suggest it will ramp up the effort to fight inflation, then change course if markets become unduly agitated.

“The markets have come to believe that if there’s a major correction in the equity market, Powell will help them out,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “The result is a seesaw motion in which the market corrects in anticipation of tightening, then the Fed eases and the market goes up.”

Bond Market Forecasts Bad Economic News

There are good reasons to believe that today’s hot economy may be just a temporary respite

With the best job growth in over 40 years, inflation a national obsession and the Federal Reserve preparing to raise interest rates, it is easy to forget how different the world was before the pandemic. The global environment then was marked by sluggish growth, lackluster investment, worryingly low inflation and low interest rates.

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Which could be where the U.S. is headed again.

The bond market seems to be betting on it. Even with U.S. inflation at a near-40 year high of 7%, 10-year Treasury yields are below 2%. Real bond yields—that is, adjusted for expected future inflation—are negative 0.2%, and have been mostly negative since the start of the pandemic, only the second such episode in 30 years.

Even as the Fed moves up plans to raise interest rates, markets have revised down how high they are likely to get. They see the federal-funds rate, now near zero, reaching only 2% in 2025, which would be slightly negative in real terms.

Investors, of course, may simply be wrong. Since the start of the year, investors appear to have reassessed the interest-rate outlook. Bonds have sold off, with the 10-year Treasury yield, which moves in the opposite direction to its price, jumping to 1.7% from 1.5% at the end of 2021.

U.S. retail sales slid last month amid inflation, Omicron hits

U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections.

The value of overall purchases decreased 1.9 per cent, after a revised 0.2 per cent gain a month earlier, Commerce Department figures showed Friday. The figures aren’t adjusted for inflation, suggesting price-adjusted receipts were even weaker than the headline number.

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The median estimate in a Bloomberg survey called for a 0.1 per cent drop in overall retail sales from the prior month.

 

Henry Kaufman, 1970s Wall Street Dr. Doom, Blasts Powell on Inflation…

(Bloomberg) — Henry Kaufman is one of the rare Wall Street veterans who can authoritatively draw parallels between the inflation scare of the 1970s and today’s alarming run-up in prices. And he has zero confidence Chair Jerome Powell’s Federal Reserve is ready for the battle it now faces.

Kaufman decades ago was the celebrated chief economist at Salomon Brothers nicknamed “Dr. Doom.” He correctly anticipated the era’s crippling inflation and approved when then-Fed Chairman Paul Volcker delivered the so-called Saturday Night Special, a radical — and unexpected — tightening of monetary policy on an October weekend in 1979.

To Kaufman, Powell is no Volcker. Not even close.

“I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally,” Kaufman, 94, said in a phone interview. “In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

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