Risk assets have endured a very bumpy two weeks and as usual, the markets are looking for a scapegoat. Even though Omicron shares some of the blame, that’s not the whole story.
The first trigger two weeks ago was of course the recent Omicron variant which sent jitters through markets across the board. However, Friday’s bigger sell off was triggered by further hawkish expectations for Fed policy.
The most important chart of last week was the Eurodollar Calendar Spreads between 2023 and 2024, which showed no hikes for 2024. Essentially, the market is implying that the aggressive tilt from the Fed is a policy mistake.
Even though consensus already expected growth and inflation to slow in 2022, the Fed’s hawkish tilt seems to have deteriorated that outlook as the curve has put in a very punchy flattening. This is setting up for a crossroads for markets in the near-term.
As always, we have more on this and how we can take advantage of it in our week ahead video.