Hawkish Fed tone hurts equities – Weekly Investment Review 10 January 2022

Equities fell last week as markets struck a more cautious tone following the
release of the minutes from the December Federal Reserve meeting. The
minutes suggests that the Fed are considering letting their balance sheet
reduce at a faster rate than what was previously forecast. Growth stocks,
namely technology, were worst hit as the US treasury yield rose sharply as a
result. Last week also saw the latest monthly US jobs report which saw mixed
results. The headline number of 199,000 jobs added was lower than forecast
(400,000), but the unemployment rate fell further and now stands at 3.9%.
This provided further evidence that the US jobs market may have undergone
a structural shift during the pandemic, with companies struggling to entice
workers back. A fact supported by the persistent wage growth currently
evident in the US.
Other US data was also mixed with the manufacturing PMI falling to 58.7 in
December. This is still comfortably in expansion territory (above 50), the fall
was mainly due to shorter supplier delivery times, which could be interpreted
as an easing of the supply chain blockages. The services reading also
missed expectations but similarly remains above 50.
In the eurozone, inflation in December came in at 5% (YoY) which was above
expectations of 4.8%, albeit only a slight tick up from the November reading
of 4.9%. The gains were largely attributed to energy increases as core CPI
remained flat at 2.6% whilst the services component saw a decline. Eurozone
retail sales saw gains, rising 1% in Q4 versus Q3. Eurozone shares took their
lead from the US, and also posted losses for the week. Core bond yields
rose, with the 10 year German Bund almost moving back into positive
territory at one point, before settling just below zero. In the UK the FTSE 100
rallied, helped by its relative weighting to the energy and bank sectors.