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Week in Review: December 10, 2021

Recap & Commentary

Markets ended the week with the S&P 500 at a new record high, as concerns about Omicron continued to ease, despite the new variant’s rapid spread. While much work remains to be done, markets embraced early reports suggesting that Omicron causes less severe COVID-19 symptoms, even though it appears to be more transmissible. In addition, Pfizer announced that a booster shot of its vaccine provides significant protection against the new variant.

With Omicron concerns waning for the time being, markets refocused on inflation and monetary policy. On Friday, the Labor Department reported that consumer prices in November rose at their fastest pace in 39 years. Markets took the news in stride with the S&P 500 gaining nearly 1.0% on the day. Interestingly, the bond market showed little reaction, with the 10-Year Treasury yield ending the day up just 0.01%. Investors would be forgiven for assuming that such a strong inflation reading would elicit a greater response. Though Federal Reserve Chair Jerome Powell recently said that it is time to retire the word “transitory” when describing inflation, it appears the bond market disagrees. How else to explain the 10-Year Treasury yield hovering at 1.50%, despite inflation reaching levels last seen when E.T. was in movie theaters, unless the bond market continues to believe inflation will be transitory?

All eyes will be on the Fed this week as it is now widely expected to announce an acceleration of its tapering plans. Investors will be particularly keen to review the Feds’ updated “dot plot” indicating how many rate hikes the Fed expects to make in both 2022 and 2023.

Economic Bullet Points

Headline consumer price inflation (CPI) jumped to an annualized rate of 6.8% in November, the fastest pace since 1982. Excluding more volatile food and energy prices, core inflation rose 4.9%, the fastest pace since 1991. Despite wages increasing 4.8% over the past year, real wages, adjusted for inflation, have actually fallen by 1.9% over the same period.

Consumer sentiment improved some in early December led by improvements in both current conditions and future expectations. Interestingly, households in the bottom third of income distribution were most optimistic, in particular with respect to expected wage increases in 2022.

According to government data, the number of people quitting their jobs fell by 4.7% in October suggesting that the Great Resignation may be abating. Also in October, job openings increased 4.1% to 11.0M, exceeding job seekers by 3.6M.

The U.S. trade deficit fell 17.6% in October to $67.1B, inline with forecasts. The decline was driven by an 8.1% increase in exports, which rose to a record $223.6B. Imports rose 0.9% to $290.7B, also a new record high.

Weekly jobless claims fell 38K to 18K, the lowest level since 1969. While seasonal adjustments may have contributed to the number, the overall trend is positive as well as indicative of tight labor market conditions.

Of Note

Contrary to plans by the Fed and other central banks to tighten monetary policy, China’s central bank cut the amount of cash banks must hold in an effort to bolster the country’s slowing economy.

S&P 5003.8%
Small Caps2.4%
Intl. Developed2.4%
Intl. Emerging1.1%
Commodities1.2%
U.S. Bond Market-0.7%
10-Year Treas. Yield1.49%
US Dollar-0.1%
WTI Oil ($/bl)$72
Gold ($/oz)$1,783

The Week Ahead

  • Producer Inflation (PPI)
  • Retail Sales
  • Housing Starts
  • Markit PMI
  • Industrial Production
  • Weekly Jobless Claims

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