Beginning of February


There were some events that took place this week that we feel will be looked back upon as pivotal to the changing landscape we have been talking about since late 2021.

The first is that both the ECB and Bank of England are now in the hawkish camp along with the Fed.  The BOE raised rates for a second time to 0.5%. Christine Lagarde backed away from her zero-bound rates through 2022 mantra and admitted that the situation had changed (i.e., inflation) and now has a “step by step” approach regarding the reduction of asset purchases this year.

With that we saw German 10-year Bunds drop and their yields turn positive at 0.20% and at the highest levels since 2019. The US 10-year also pierced through 2019 highs and now yields 1.93% Italian yields are now 120 basis points higher than a year ago and yields in Greece have jumped 161 basis points in a year.  Higher rates across the globe are here and the move has likely just begun.  There is now a 26% chance of a 50bps rate hike in March, up from 18%, and Fed Fund Futures are pricing in 5 rate hikes in 2022.

The root cause for this move is inflation. 

This week we saw WTI trade well north of $90 per barrel and saw gasoline and natural gas prices continue to surge.  As if that wasn’t a big enough tax on the consumer, we now have surging soybean, soy oil, corn, cotton, cattle, lean hogs, and oat prices that are seemingly making new highs daily and sending shivers down the world central bankers’ collective spines.  A blowout job number this morning and higher hourly wages are giving the Fed even more ammo to continue their new hawkish stance.

Also, this week we saw Facebook, or Meta, fall 26% in a single day after their earnings and, in addition, saw Pay Pal tumble 20%+ after a lackluster report.  However, Google did blow away the street and declare a 20-1 stock split which gave the shares a strong, yet temporary boost.  These types of reactions to earnings are eerily reminiscent of the late 1990’s tech market.

Bitcoin prices leapt nearly 10% this week, finally showing some life.  And we saw some resilience in the metals even with surging yields and a persistently strong dollar. Maybe the inflation hedges are starting to take hold?

We have been saying that 2022 was going to be a year like no other and this week just solidified the thesis. The forced move toward a hawkish stance now by all the world’s major central banks due to almost out-of-control inflation is by far the driving force behind the permanently increased levels of volatility.

Mark down this week in your mental calendars as one that we can reflect on later in the year as the spark that accelerated the rapidly changing environment we have been speaking of.