Launch Pad

Futures rose this morning following another wild session for the market as investors await results from the Fed meeting expected to set the tone for 2022. The Fed is set to conclude its two-day policy meeting today and make an announcement this afternoon. The central bank is not expected to make any policy changes, but investors will look for clues on when (and by how much) the Fed will raise interest rates later this year. The recent market volatility is unlikely to deter the Fed from embarking on their interest rate hiking cycle this year. Still, there are some signs of easing turmoil with the VIX falling from a one-year high, snapping six days of gains. In Canada, eyes will be on the Bank of Canada this morning as the central bank is scheduled to make an announcement about its benchmark interest rate. Some economists are expecting the Bank to raise its key policy rate from its rock-bottom level of 0.25%, in the first of multiple hikes over the course of 2022. 

As online retail sales grow, shoppers have been returning items at a higher rate. A new survey found that on average, retailers expect to get back about 16.6% of the total merchandise that customers purchase, a jump from an average return rate of 10.6% just last year. Returns tend to be higher when consumers buy online, and with online sales growing, of the $4.583 trillion of total U.S. retail sales in 2021 the total amount returned comes to more than $761 billion. For some retailers, the returns dilemma has inspired acquisitions and new approaches. Walmart bought virtual fitting room start-up, Zeekit, while Best Buy has an online outlet where it sells open-box appliances, TVs, and more that are covered by a warranty. Other retailers such as Amazon have gone so far as providing refunds but telling consumers to keep some returned items, rather than dealing with the hassle and cost of shipping back and processing a bulky, custom-made or low-value item. 

The IMF cut its world economic growth forecast for 2022 as the pandemic enters its third year, citing persistent inflation and weaker prospects for the U.S. and China. The IMF estimates that the global economy will expand 4.4% this year (down from an estimate of 4.9% in October) according to the latest report released yesterday. The U.S. saw its forecast cut on the outlook for President Joe Biden’s spending agenda and on challenges in real estate (cough, cough, Evergrande) for China. The world economy expanded 5.9% last year, the most in four decades of detailed data which followed a 3.1% contraction in 2020 which was the worst peacetime decline since the Great Depression. Central banks that slashed interest rates to soften the pandemic-induced economic decline face pressure to tighten policy to confront surging consumer prices, threatening to curtail the growth rebound. Governments also have less fiscal space for spending to address health needs and buoy their economies after piling up record debt. 

One asset class is holding up well so far in 2022 – gold.  SPDR Gold shares (GLD), the largest physically backed gold ETF is up 1.5% so far this year and recorded record inflows on Friday with $1.6 billion going into the fund.  Amidst rising inflation, geopolitical tensions and an upcoming Fed meeting that will shed light on the timing and magnitude of the rate hikes, investors looking for some stability flocked to the asset class.  Gold has historically flourished during times of uncertainty and this time is no different.  Gold Spot is down –0.11% to US$1845.99/oz this morning. 

The International Air Transport Association (IATA) called on governments around the world to remove all travel barriers for fully vaccinated travelers, calling current travel restrictions a mess. The airline group, which represents 290 airlines including Air Canada, WestJet and Air Transat, released a statement urging governments to accelerate relaxation of travel restrictions as Covid continues to evolve from the pandemic to endemic stage. IATA said governments should remove all travel barriers, including mandatory quarantine and testing rules for fully vaccinated travelers, as well allow unvaccinated travelers to bypass quarantine if they provide a negative pre-departure antigen test result. The organization argued the easing of travel restrictions should be accelerated in recognition that travelers pose no greater risk for Covid spread than already exists in the general population. 


Diversion: It’s even cold in Florida.  

Oil prices are higher and knocking on US$90 as geopolitical tensions in Europe and the Middle East raising concerns about further disruption. President Biden said yesterday he would consider personal sanctions on President Putin if Russia invades Ukraine. On Monday, Yemen’s Houthi movement launched a missile attack on a UAE base. Looking ahead, OPEC+, will be meeting on Feb. 2 to consider another output increase. OPEC+ has been gradually unwinding 2020′s record output cuts, raising its monthly target by 400,000 bpd, though the actual increase in supply has fallen short of that as some countries struggle to raise production. At the time of writing, NYM WTI Crude futures are up +0.90% to US$86.37/bbl and ICE Brent Crude futures are up +1.11% at US$89.12/bbl.  

Supply chain chaos and lofty prices have sparked a reversal for lumber. Lumber futures are lower this morning and heading for their 7th straight decline, the longest slump since July. Since the pandemic began, wood prices have been very volatile - touching record highs amid a house building boom, then collapsing because sawmills ramped up production and high prices stifled demand. Flooding in B.C. has also disrupted supplies and shipments in late 2021 and now vaccine mandates that apply to truckers crossing the Canada-U.S. border are adding to transport woes, so expect the volatility to continue. Ok, it has to be said, “timber!” 

The day has finally come with North American markets being served a double dose of central bank policy pleasure. And for the first time in recent memory, it actually matters what they will say. The Bank of Canada begins the festivities at 10AM EST with their first live, in-person meeting since the pandemic started. Expectations are moving quickly with a now 72% likelihood that we see a hike today --- more than double the expectation from the second week of January. You can’t say it’s not warranted though with recent data making a case for an immediate tightening cycle. CPI sits at near 5% annualized (well above the 2% BoC target), unemployment sits below 6%, the Bank’s Business Outlook Survey shows that the output gap has closed, while home prices posted a parabolic +27% spike year-on-year. We get an accompanying Monetary Policy Report update too that should see Q4 GDP growth revised higher. All told, there’s no reason why officials can’t hike right now. 

 As the hawkish claws are out in full force domestically, we can’t quite say the same south of the 49th parallel. While today’s 2PM EST FOMC policy statement will likely alter its forward guidance to signal the potential for rate hikes beginning as early as the next meeting in March, we’ve seen many a false start from the central bank before. The last time the Fed began raising rates following the end of a quantitative easing regime (October 2014), they waited over a year before the first official hike. An immediate pivot towards tightening in March just as the current asset purchase program ends (as announced in the accelerated taper last month) seems drastic given recent history. Yes, we can assert that it’s virtually impossible to take the March move off the table at this point (a catastrophic event notwithstanding). But with worries about the impact from a hard landing, recent rising jobless claims, and geopolitical uncertainty from Russia/Ukraine, it says here that the Committee will today engineer the most dovish future tightening announcement markets have ever witnessed.