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Week in Review: January 7, 2022

Recap & Commentary

Markets ended the week lower as higher interest rates and fears that the Federal Reserve might become increasingly aggressive in fighting inflation took their toll on both equity and fixed income markets. Growth stocks were hit particularly hard, with the tech-heavy NASDAQ falling 4.5%. As interest rates rise, the present value of a company’s future earnings are worth less. This can be particularly impactful for high growth companies that produce little in the way of earnings today, but hold out the promise of greater earnings in the future.

The release of the Federal Open Market Committee (FOMC) meeting minutes revealed a lengthy discussion about policy normalization including reducing the size of the bank’s balance sheet. This helped drive interest rates across the yield curve higher. At the short-end, the 2-Year Treasury yield rose 0.14%, to 0.87%, its highest level since March 2020. In the middle of the curve, the 10-Year Treasury yield ended the week up 0.24% at 1.77%, its highest level since March 2021. At the long end of the curve, the 30-year Treasury yield rose 0.21% to end the week at 2.11%.

Similarly, mortgage rates moved higher over the course of the week with the average 30-year rate rising 0.17%, to 3.46%%, its highest level since May 2020.  Higher mortgage rates could be a double-edged sword for the the housing market. Rising borrowing costs can both reduce demand and force sellers to lower prices.  Such would negatively impact the growing “wealth effect” as new and existing home prices have risen 34% and 23%, respectively, since April 2020.

Economic Commentary

Employment data was front and center with the release of the December jobs report. On a headline basis, the report was disappointing with nonfarm payrolls adding just 199K new jobs. The consensus forecast had been for 400K new jobs. However, the household survey data used to calculate the unemployment rate showed 651K individuals found work in December. This coupled with an unchanged labor force participation rate resulted in the unemployment rate falling from 4.2% to 3.9%.

Leisure and hospitality added 53K new jobs in December, bringing full-year additions to 2.6M. However, employment remains 1.2M, or 7%, below February 2020 levels. In November, a record 4.5M individuals across the economy quit their jobs. Many of the resignations occurred in lower-wage industries. Thus, it appears that the biggest challenge for leisure and hospitality to recover the remaining jobs lost during the pandemic is one of supply rather than demand. Said differently, many previous workers, or those that might have considered working in leisure and hospitality, no longer want to do so.

Data from industry group ISM showed that both the manufacturing and services sectors decelerated some in December, while remaining solidly in expansion territory. Manufacturing also saw a significant deceleration in input prices, while service sector prices ticked slightly higher.

Of Note

Reflecting auto manufacturers’ efforts to meet rising demand, Ford announced that it will double production of its all-electric F-150 Lightning pickup to 150K/ year. Separately, GM unveiled an all-electric version of its Silverado pickup.

S&P 500-1.9%
Small Caps-2.9%
Intl. Developed-0.3%
Intl. Emerging-0.5%
Commodities2.1%
U.S. Bond Market-1.5%
10-Year Treas. Yield1.77%
US Dollar-0.2%
WTI Oil ($/bl)$79
Gold ($/oz)$1,796

The Week Ahead

  • Consumer Inflation (CPI)
  • Producer Inflation (PPI)
  • Retail Sales
  • Industrial Production
  • Consumer Sentiment
  • Weekly Jobless Claims

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