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CROSS-ASSET WEEKLY
21.01.2022

Fed Lift-off Day Is Nearing Fast

Summary
CAW
At its meeting on Wednesday the Fed will contribute to the discussion whether the path towards a neutral policy stance that markets currently price in is enough to reign in inflationary pressures, or whether more needs to be done. Against this background, an early start to the balance sheet run-off, i.e. quantitative tightening (QT), as highlighted in the Fed minutes, is a logical step forward in the current discussion. QT is a blunt instrument, which can come with unwanted side-effects. We don’t think QT will steepen the yield curve, but it could slow down the flattening process and force the terminal rate to move up somewhat, leading to a quicker real yield adjustment. The Fed needs to tread carefully and flag any steps well in advance to avoid real yield spikes and negative spill-over effects for risk markets.
Conversely, the People’s Bank of China (PBoC) has cut key rates this week and indicated to ease further. Going forward, we expect incremental rate cuts, use of lending facilities and government bond issuance to provide credit to the economy amid weak loan demand.
With inflation readings notably higher, the Bank of Canada is likely to deliver its first rate hike at its January 26. This should push the USD-CAD closer towards 1.20.
Finally, the Q4 reporting in the US is off to a soft start. Notably, financials disappoint on higher costs and lower trading revenues.

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