The US Federal Reserve (Fed) left interest rates unchanged at the near zero level on 27 January with Fed officials stating that they remain committed to continue buying bonds until inflation and growth expectations are met. The pace of the economic recovery in the US, while not necessarily faltering in recent months, has certainly moderated and that is something they acknowledged firmly, so the prospect of any tapering of asset purchases is still some way off.
On 28 January, we saw that Q4 GDP growth in the US came in slightly under expectations, printing 4% at an annualised pace in the quarter against forecasts of 4.2%. Consumer spending was pulled back and even reduced government spending acted as a drag during the quarter. Jobless claims showed a modest improvement on the week with 847,000 claims against the previous week of 900,000 but both prints still point to softness in the jobs market and the growth outlook (remember the US economy is still USD 270 billion lower in nominal terms than it was before the pandemic started) and further encourages more aggressive stimulus should it be allowed through Congress. Right now the markets are struggling to reconcile the reflation narrative of the last few months with the cold hard facts that present themselves in these data prints.
In the short term, it could be argued that the WallStreetBets crowd are not particularly helping the situation either – targeting hedge fund short positions may afford them a sense of social justice but in the same way Bitcoin flashed and fell, many will likely be nursing a lot of pain in the end. Some hedge fund managers are obviously are the ones feeling it most right now in this monumental short squeeze (and being forced to liquidate long positions further exacerbating market volatility) but eventually the majority of the WallStreetBets crowd will inevitably feel the pain as trying to play a wild momentum ride instead of focusing on stock fundamentals is not a great strategy, in our view. Getting off that horse elegantly is notoriously difficult, falling off it is a lot easier and we believe it could get much messier from here.