Tech stocks dive after hawkish Fed minutes
Investors received their first bad news for 2022 on Wednesday. The Federal Reserve is no longer able to tolerate high inflation levels. We may have heard this before when Fed officials last met on December 15th, but the way they will respond was not apparent until yesterday, and investors didn’t seem to like it.
The minutes released yesterday were possibly the most hawkish in recent history. The transition from easing to tightening is not likely to be as smooth as previously anticipated, and this led to a steep selloff in Tech stocks and a sharp spike in bond yields.
Here is a snapshot of what the minutes revealed:
“Participants remarked that the current economic outlook was much stronger, with higher inflation and a tighter labor market than at the beginning of the previous normalization episode”
“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate”
“Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.”
“it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.”
The Fed is transitioning from an extremely loose monetary policy towards a tighter one at a fast pace. Not only may interest rates end up being hiked more than three times this year, but the balance sheet will also be reduced soon, meaning that the Fed will begin selling off its holdings of Treasuries and mortgage-backed securities. The next big question is how further yields can go from here?
The good news is that the Fed sees a stronger economy heading into 2022, suggesting a different approach to investors. Growth firms, especially those unprofitable and with overstretched valuations, will feel most of the pain in such an environment. In contrast, value companies with reasonable valuations are likely to be the winners. The rotation from growth to value is already happening!
However, we are still early in the year, and market dynamics may change depending on economic data. For example, ISM manufacturing report delivered a positive surprise on Tuesday. Prices paid plunged from 82.4 to 68.2 in a sign that supply bottlenecks may have peaked, and if there’re further signs of easing supply chains, it could suggest inflation is heading south.
Focus today will turn to the US jobless claims and ISM services figures after the ADP crushed estimates, with businesses adding 807,000 jobs in December.