06 January 2022
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FOMC minutes highlight inflation concerns


By Emirates NBD Research

  • According to the minutes of their Dec. 14-15 policy meeting released yesterday, Federal Reserve officials said last month that the US labor market was "very tight" and the central bank may need not only to raise interest rates sooner than expected but also reduce its overall asset holdings to tame inflation. The minutes showed the Fed not just debating an initial rate increase, but also whether to use a second lever to curb inflation by allowing its holdings of US Treasury bonds and mortgage-backed securities to decline. The December meeting was held as coronavirus case counts had begun to climb due to the spread of the Omicron variant. Infections have risen sharply since then, and there has been no commentary from senior Fed officials yet to indicate whether the changing health situation has altered their views about appropriate monetary policy.
  • US Private payrolls increased by 807,000 jobs last month, the highest in seven months, after rising by 505,000 in November. This was significantly higher than the forecasted increase 400,000 jobs for December that the markets was expecting. The ADP National Employment Report showed a broad increase led by a rise of 246,000 in the leisure and hospitality industry, prrofessional and business services added 130,000 jobs, manufacturing hired 74,000 and construction added 62,000 jobs. Construction hiring is being supported by a strong housing market, though rising mortgage rates could slow demand. While the data points to underlying labor market strength, rising Covid-19 infections could slow momentum in the months ahead.
  • The final reading of the Eurozone Composite PMI dropped to 53.3 in December from 55.4 in November, its lowest since March, a touch below the earlier December flash estimate of 53.4. While the final reading did hold above the 50 mark separating growth from contraction, the data is an indication that the bloc’s economy ended 2021 on a weak note. Separately the bloc’s services PMI dropped to an eight-month low of 53.1 from November's 55.9, below a 53.3 flash estimate. The employment index fell to 53.6 from 55.4 as weaker demand and the threat of further restrictions on the horizon meant services firms increased headcount at the slowest pace since May.

Today’s Economic Data and Events

13:30     UK Composite PMI (Dec) Forecast 53.2

13:30     UK Services PMI (Dec) Forecast 53.2

17:30     US Initial Jobless Claims Forecast 200K

19:00     US ISM Non-Manufacturing PMI (Dec) Forecast 67.2        

Fixed Income

  • Minutes from the December FOMC showed just how hawkish the Federal Reserve has tilted with “some participants” favouring a rapid lift off in rates after the end of tapering asset purchases. The tone of the FOMC helped to sink US Treasuries further with yields rising across the curve. The 2yr UST yield rose almost 7bps to 0.8256% while the 10yr yield pushed up above 1.7% overnight, rising almost 6bps.
  • Movement in other developed markets was more limited and the Fed’s hawkish expectations will likely help widen yield differentials in favour of US Treasuries. Yields on 10yr bunds closed up almost 4bps at -0.087% while the 10yr gilt yield closed at 1.086%, up less than 1bp.
  • Turkish government bonds rallied sharply after the central bank there announced plans to resume a bond buying programme. Yields on the 10yr government bond fell almost 50bps overnight to close at 22.74%. Elsewhere in emerging markets action was more limited with South African yields falling 5bps to 9.811% and Indian bonds relatively unchanged.


  • Despite the further pop higher in UST yields the dollar tilted downward overnight. The broad DXY index fell less than 0.1% to 96.171 thanks to a steady move higher in EURUSD over the course of the day. The single currency settled at 1.1314, up 0.24%. The yen held relatively steady after selling off steeply earlier in the week while GBPUSD added another 0.2% to close at 1.3557.
  • Commodity currencies were softer across the board as the hawkish FOMC minutes likely stole the marches away from central banks in Canada, Australia and New Zealand which have all started or indicated plans for some form of tightening.


  • US equity markets were hit by the hawkish tone of the FOMC minutes released yesterday, with the tech-heavy NASDAQ, more sensitive to tightening moves, losing -3.3%. The blue chip Dow Jones dropped -1.1% and the broad-based S&P 500 -1.9%.
  • The sell-off has continued in early morning trading in Asia today, with the Nikkei already down -2.0% (it closed up 0.1% yesterday) and the Shanghai Composite down a further -1.0% so far after dropping by the same degree yesterday.
  • European markets were positive prior to the FOMC minutes release, continuing to benefit from greater optimism around the Omicron strain of Covid-19. The UK’s FTSE 100 added 0.2%, the DAX 0.7% and the CAC 0.8%.


  • Oil prices closed higher overnight, up by around 1% in both Brent and WTI futures but both contracts have given back those gains in early trading today. Brent is trading back below USD 80/b while WTI has moved to less than USD 77/b. The prospect of tighter US monetary policy earlier than had been previously expected, and consequently a stronger USD, will act as a headwind to oil even if fundamentals on the surface appear positive.
  • Data from the EIA showed a drop in US crude inventories of 2.1m bbl last week but that was offset by a large build in gasoline inventories, up more than 10m bbl while distillates stocks also increased, up 4.4m bbl. Oil production was unchanged at 11.8m b/d while product supplied fell back sharply, down more than 2.5m b/d to 19.7m b/d last week.

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Written By


Emirates NBD Research Research Analyst

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