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Week in Review: November 12, 2021

Recap & Commentary

Markets bounced around, before ending the week lower as investors sought to balance higher inflation readings with ongoing expectations that the current surge in prices will ultimately prove to be temporary.

General convention holds that in an inflationary environment interest rates will rise as investors eschew bonds due to the erosion of purchasing power and effect on real returns. Currently, however, that does not appear to be the case. Despite stronger-than-expected inflation readings, the 10-Year Treasury yield ended the week at 1.58%, up 0.13% for the week, but below its most recent high of 1.70% in late October. Interestingly, the 10-Year Treasury yield actually fell 0.09% on Tuesday, following the release of producer price data.

So where do rates go from here? Ultimately inflation will be the primary determinate. In the near-term they may very well drift higher. However, looking into 2022, as supply chain bottlenecks subside, so too should pricing pressures, and by extension interest rates. In addition, growth is expected to decelerate as the effects of recent fiscal stimulus wane and momentum from the post-pandemic economic rebound subsides. All else being equal, slower growth should restrict rates from moving higher. Based on the behavior of rates this past week, it appears the bond market may already have its sights set on 2022.

Through Friday, 92% of S&P 500 companies had reported 3Q21 earnings. Thus far, 81% of reporting companies have exceeded their consensus estimates.  According to industry group Factset, aggregate earnings growth for the quarter is expected to be 39%, up from the initial estimate of 28%.

Economic Bullet Points

Inflation pressures continued to build in October, as evidenced by further price increases at both the producer and consumer levels. At the producer level, prices rose 8.6% compared to a year ago, the fastest pace on record since the Labor Department began tracking the data nearly 11 years ago. Surging prices for autos and gasoline pushed the index higher, which is heavily influenced by prices for goods.

At the consumer level, prices rose 6.2% from a year ago, well above the 5.4% rate recorded in September, and the fastest pace since December 1990. At the core level (excluding food and energy), prices rose 4.6%, the fastest pace since August 1991. Despite recent wage gains for many employees, inflation-adjusted average hourly earnings fell 1.2% in October. Should prices remain elevated for an extended period, pressure on the U. S. Federal Reserve to raise rates sooner than later will continue to intensify.

Consumer sentiment fell to a 10-year low, dragged down by declines in consumers’ views on both current and future conditions. Inflation expectations rose 0.1% to 4.9%. In response to rising prices, 1-in-4 respondents indicated that they have scaled back their standard of living.

Weekly jobless claims fell 4K to a new recovery low of 267K.

Of Note

A record 4.4M workers quit their jobs in September. While challenging for employers, high quit rates are indicative of a strong labor market. When labor conditions are weak, employees are more likely to stick with their current job.

S&P 500-0.3%
Small Caps-1.0%
Intl. Developed-0.4%
Intl. Emerging1.7%
Commodities0.1%
U.S. Bond Market-0.8%
10-Year Treas. Yield1.58%
US Dollar0.8%
WTI Oil ($/bl)$81
Gold ($/oz)$1,868

The Week Ahead

  • Empire State Mfg. Index
  • Philly Fed Mfg. Index
  • Retail Sales
  • Industrial Production
  • Housing Starts
  • Weekly Jobless Claims

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