Morning Notes — Most Likely Scenario

The most likely scenario from here still looks like a resumption in the cyclical recovery based on an end to the pandemic.  The expansion we’ve seen since May’20 looks like four partial recoveries interrupted by each wave of Covid.  At this point, the acceleration in the spread of the Omicron variant looks like the beginning of a transition to an endemic state, and possibly the beginning of a full global recovery. The PBOC is the central bank for the world’s second largest economy and is now easing policy, while Beijing crafts targeted fiscal measures to boost growth.  Some portion of the recent inflation spike can be pinned to worker shortages as a result of the pandemic.  Ending worker shortages would slowly ease bottleneck pressures and associated inflation, while a transition to spending on services should help ease goods price inflation.  Services inflation is usually stickier, so any downtick in inflation will likely settle at levels above the Fed’s ~2.5% target.  If the scenario begins to unfold before the March Fed meeting, we’d likely see a resumption of curve steepening and more cyclical/value sector outperformance.