dec 14  welcome to the home for realtime coverage of markets brought to you by reuters reporters you can share your thoughts with us at marketsresearchthomsonreuterscom it came from dc what wall street can expect or not from washington in 2022 1245 est1745 gmt with the books closing on yet another volatile year chockfull of surprises and unknowns market participants are turning their gaze beyond the federal reserve to capitol hill for clues as what to expect in the new year the cowen washington research group provides a summary of what investors might be on the lookout for once the ball drops and president biden completes his first year at the helm lead analyst eric assaraf is quick to point out that 2021 between the infrastructure bill and the american rescue plan lawmakers pumped more than 3 trillion in fiscal spending into the economy the speed scope and scale for fiscal policy under biden is unprecedented assaraf writes and the party isnt quite over the bring back better bbb reconciliation package the passage of which now has a deadline coinciding with bidens february state of the union address is expected to add a 185 trillion cherry to the top of the fiscal aid cake according to the note beyond that assaraf sees likely gridlockfiscal drag for 2 years post midterms at a sector level cowen makes the following observances  aerospacedefense shifting foreign policy under the biden administration presents mediumterm risk for the sector particularly in the area of foreign sales of defense goods  financials a fresh crop of bidenappointed regulators likely will crack down on the concentration of economic power affecting ma activity in the space as will appointments to the fed  healthcare while assaraf sees drug pricing revisions outside the bbb as unlikely he believes lobbyists will continue to seek changes to government negotiation policies between now and when price cuts are scheduled to begin in 2025 additionally legislation could result in permanent telehealth an accelerated coverage pathway and lab test reform  sustainableesg cowen sees usbased solar manufacturers and electric auto assembly benefiting from tariff extensions as bidens environmental focus shifts from legislation to regulation  mediatechtelecom assaraf believes if the heavyhitters can hold antitrust legislation at bay until august that can is likely kicked down the road until 2025 biden himself in the wild card here if the president gets personally involved likelihood of passage grows from 40 to 65 he writes in his latest market deliberations this week robert doll chief investment officer at crossmark global investments is noting that volatility has picked up in financial markets primarily driven by covid19 variants coupled with signs that the liquidity boom will start to unwind next year as for this weeks fomc meeting doll is expecting the speech of qe tapering to notch higher with this he says the likelihood of earlier rate hikes in 2022 has increased eventually doll also expects the uptrend at the shortend of the us yield curve to spill over to the long end leading to higher yields there too according to doll further patience is needed to assess the severity of the omicron threat meanwhile he expects the inflationary backdrop to persist overall he says crossmark remains mildly constructive in their investment stance mostly due to a bearish weighting in bonds rather than an aggressive tilt toward equities in the end he believes the cyclical rise in inflation will persist and eventually put upward pressure on longterm bond yields and force central banks to turn less accommodative however he adds that such an end point likely lies beyond 2022 given lingering covid concerns entrenched reflationary biases at central banks and still behaving bond markets fed and tech not a nice mix for europe 1153 est1653 gmt it was a choppy session from the start but things really started to go downhill for europe once the us ppi data came out fears of faster fed tapering and future rate hikes are typically bad news for growth stocks and today was no exception the stoxx 600 ended the day down over 08 with the tech sector dropping 24 mirroring a drop for the nasdaq as one would expect in these circumstances it was a much better day for banks and miners which rose 08 and 13 respectively so far though european equity markets are up about 14 in december which of course doesnt qualify for a santa rally but its probably an outcome many investors would sign up for right now theres a lot at stake in terms of central bank action with the fed the boe and the ecb all lined up for the next couple of days of course theres a sense policy makers wont rock a boat facing another covid19 storm but in any event some volatility seems inevitable cruising forward a record more than 500 billion net decline in us treasuries held by investment funds in the third quarter raises the risk of higher rates and volatility in 2022 particularly as the federal reserve shrinks its purchases of the governments debt according to john canavan lead analyst at oxford economics the decline which was concentrated in treasury bills held by money market funds came as outstanding bill supply was slashed investment funds us bond and note holdings were about flat and the fed remained a big purchaser of treasuries canavan wrote in a report on monday he added that the market will need to find other sources of support going forward as the fed has already begun to taper quantitative easing and we expect purchases will end by march 2022 foreign investors own the biggest share of treasuries however foreign allotments in treasury auctions while strong have not compensated for a sharp drop in allotments to investment funds over the past few months which helped fuel a volatility rise since midseptember canavan noted as markets contend with sticky inflation and investors position themselves for increased fed policy rates we expect the fall in investment fund demand and the additional decline in demand from the federal reserve will sustain the increased volatility through early 2022 the report said adding that should pressure rates higher with the benchmark 10year yield rising to around 175 in 2022s first quarter welcome to fed tuesday where inflation is hot and the federal reserve is feeling the heat and with the polar icecaps melting the mercury is also on the rise at santas workshop in the north pole according to novembers ppi print the labor departments producer prices report ppi usppfdeci a gauge of the prices us goodsproducers get for their wares at the factory door came in significantly hotter than analysts expected unexpectedly accelerating to 08 from 06 and well above the 05 consensus read more yearoveryear the headline print jumped to a sweltering 98 while the core number which strips out food energy and trade services gained 06 percentage points to 69 price metrics have been running well above target for much longer than anticipated says rubeela farooqi chief us economist at high frequency economics these data support the fed’s switch to a faster taper that will likely precede a quicker tightening of policy next year as seen in the graphic below core ppi along with other major indicators has been launched into orbit sailing well above the federal reserves average annual 2 inflation target the picture it paints provides a rather clear rationale for the fed to stop batting the word transitory around like a shuttlecock in its monetary policy game of badminton and increasingly us businesses are planning on passing those prices along to the consumer while the national federation of independent business nfib optimism index usopineci inched up 02 points to a reading of 984 last month youd never know it from accompanying nfib press release the outlook for business conditions is not encouraging to small business owners as lawmakers propose additional mandates and tax increases writes bill dunkelberg nfibs chief economist owners are also pessimistic as many continue managing challenges like rampant inflation and supply chain disruptions that are impacting their businesses right now and the typical respondent is putting their money where their mouth is namely on the consumers plate as lydia boussour lead us economist at oxford economics points out small firms continue to pass along higher prices onto consumers boussour says the share of firms raising prices – a leading indicator of core inflation – jumped 6 points to a new record 59 and in a sign that high inflation is not going away any time soon the share of firms planning to raise prices climbed to a new record the uptick in the optimism index was attributable to a slight easing in the inability to find qualified workers and an increase in inventories it should be noted that the nfib is a politically active membership organization wall street fluctuated in morning trading with the marketleading tech associated stocks weighing on all three major us stock indexes the dow flipped nominally into negative territory its losses mitigated by financials value stocks ivx are a pale green while growth stocks igx are resolutely lower and then it was tuesday sp 500 extends its selloff 1001 est1501 gmt us stocks wobbled in early trading on tuesday as the latest in a string of hot inflation reports appeared to raise concerns over just how soon the fed will whisk the punch bowl away that said all three major stock indexes are off initial lows with the bluechip dow flipping green as producer prices came in well above consensus read more  just as the federal reserve is convening its twoday monetary policy meeting during which inflationary concerns were likely to take center stage value stocks ivx are off to a better session than growth igx and the biggest drags on the sp 500 and the nasdaq once again are the market leading techplus megacaps apple inc aaplo is the exception resuming its trudge toward reaching the 3 trillion market cap milestone meanwhile in washington lawmakers were expected to vote on raising the federal governments debt limit ending a monthslong stalemate read more despite a stellarstart to the 2021 microcaps have struggled to keep pace for much of the year the ishares microcap etf iwcp peaked in midmarch and is posting a 15 yeartodate gain vs the spdr sp 500 etf trusts spyp 25 rise of note on a weekly basis the iwcspy ratio peaked in midmarch just shy of a 15year resistance line perhaps not surprisingly it was also around this time that the retaildriven memestock mania was its most intense highly speculative stocks like microcaps tend to have greater volatility and are thus inherently riskier than largercap shares they can therefore be especially sensitive to the key drivers of liquidity and psychology recently the performance disparity between the iwc and spy has been particularly acute since november 8 the iwc has lost more than 13 while the spy is off just 06 having just recorded a fresh record close last friday with this the iwcspy ratio has plunged to its lowest level since november 2020 meanwhile the severity of the ratios decline from its peak has been especially sharp in fact in the time since the iwc topped in relative strength vs the spy the ratios 40week rateofchange has collapsed to an alltime low it now remains to be seen if the microcap ship can be righted in the midst of taxloss season and building fearofthefed however of concern for the sp 500 from 2007 to 2020 the five biggest spy declines from recordhigh territory were all preceded by protracted iwcspy ratio divergence for tuesdays live markets posts prior to 0900 est1400 gmt  click here read more terence gabriel is a reuters market analyst the views expressed are his own