Fed Chairman Powell Sparked Omicron Fears As CHF and Yen Rise

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Fed Chair Jerome Powell further agitated the markets by advocating for faster tapering at a time when the world is anxious and perplexed over the recently discovered Omicron. On substantial safe-haven flows, the strongest effects were seen in US government yields. Major stock indices have also fallen sharply, confirming the likelihood of a medium-term correction.

The Swiss Franc and the Yen were the greatest winners in the currency markets, followed by the Dollar. The poorest currency was the Australian Dollar, which was followed by the New Zealand Dollar and lastly Sterling. Current events suggest that equities, and especially yield, will experience more losses in the short term. The yen and Swiss franc would very certainly outperform the others.

Fed Chairman Jerome Powell surprised the markets by speaking out much more aggressively than expected last week. He acknowledged that inflationary pressures “spread much wider” and that “the threat of continued inflation has increased.” More importantly, he added that the FOMC “is going to talk at our next meeting about accelerating the narrowing and stopping asset purchases a few months earlier.” His comments were then supported by the Fedspeak Chorus.

Omicron is a source of great uncertainty. It will probably take several more weeks before it becomes clear how contagious, how deadly, and how effective the current vaccines are against it. From an economic standpoint, markets seem to view Omicron as an inflationary factor rather than a disinflationary one that prolongs supply chain disruptions. This may coincide with the thoughts of Fed policymakers.

Either way, as Fed futures show, markets are assessing the likelihood of a Fed rate hike of just over 50% or more at the May 4, 2022 meeting. This is noticeably higher than just 27% a month ago.

Sharp Drops in US Yields Indicate a Flight to Safety

Long-term US Treasury yields fell substantially last week, indicating a clear flight to safety. Yields are expected to continue to fall, bringing Yen pairings closer together.

Surprisingly, the 10-year yield smashed through 1.415 near-term support with a vengeance. The development confirmed that the bounce from 1.128 to 1.1693 was complete. Before bottoming, the corrective pattern from 1.765 is in its third leg, which might extend to 1.128 or perhaps to the 50% retracement of 0.398 to 1.765 at 1.081.