Pfizer Inc.'s (PFE) - Get Pfizer Inc. Report indication that its coronavirus vaccine provides solid protection against the Omicron variant has cleared a path for investors to focus on inflation risks as the economy roars into the final weeks of its historic 2021 post-pandemic recovery.
The Atlanta Federal Reserve's GDPNow forecasting tool, a real-time benchmark, suggests the U.S. economy is growing at an 8.6% clip, although that tally was dented by the emergence of the Omicron variant late last month. Prior readings put the growth rate at 9.7%.
The recovery has come at a cost, however, as renewed demand, coupled with soaring energy prices, supply chain disruptions and an historic labor shortage have combined to delivery the fastest pace of consumer price inflation in three decades.
The searing pace was enough to turn even the most dovish of central bankers -- Fed Chairman Jerome Powell -- into a hawkish turn last week, when he told Senate lawmakers that he needed to quicken the pace of tapering monthly bond purchases, the first of many steps towards an rate hike, even as the Omicron variant was pounding stock markets around the world. He also officially "retired' the word 'transitory' as it pertains to inflationary pressures.
Since then, Data from British drugmaker GlaxoSmithKline (GSK) - Get GlaxoSmithKline Plc Report suggested its antibody-based COVID therapy is effective against all Omicron mutations while reports from South Africa, the epicenter of the outbreak, continue to indicate milder infections from the rapidly spreading variant, while Pfizer is confident it will have an Omicron-specific vaccine by March of next year.
So, with growth worries seemingly brushed to the side as the variant risks fade, and vaccination take-up accelerates, interest rate markets are anticipating a more forceful Fed response when it meets next week in Washington. The CME Group's FedWatch tool, in fact, is showing an 81.5% chance of a rate hike in June of next year, up from around 50% at the beginning of November.
All of these moves have big implications for tech stocks - many of which are either cash-rich or growth-focused and thus sensitive to interest rate changes.
However, rate hikes have even more power to disrupt the recent rally given that only four tech stocks -- Apple (AAPL) - Get Apple Inc. Report, Microsoft (MSFT) - Get Microsoft Corporation Report, Google (GOOGL) - Get Alphabet Inc. Class A Report and Nvidia (NVDA) - Get NVIDIA Corporation Report -- are responsible for around 70% of the S&P 500's total returns over the past six months.
“A normalization of the valuation premium for growth stocks is a risk to many portfolios that are overweight the growth factor, which could result in relative performance issues," said Carl Ludwigson, research director at Bel Air Investment Advisors. "But the real tail risk to almost all asset prices is a wage/price spiral creating problematic sustained inflation which might force the Fed to raise rates more aggressively.”
In the meantime, investors will be closely watching today's $36 billion 10-year note auction, which some as benchmark yields head back to 1.5% following last week's Omicron-triggered pullback. Any indication that investors are shunning the re-opened issue, given that fixed income assets are highly sensitive to rate increases, will further stoke concerns for a longer run of faster inflation readings.
Friday's November CPI reading, meanwhile, is likely to accelerate beyond the 6.2% pace recorded in the November -- the highest since 1990 -- as used car, rents and airfare increases continue to build.