Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.
Week in Review
November 29-December 5
Fact or fiction: pro athletes tend to put up unusually good performance statistics during the year immediately before their contracts expire.
It’s a fair question, and one that sparks a lot of debate in sports bars nationwide. But having never tried to hit a 101-mph fastball, sprinted to escape a blitzing 260-lb linebacker or attempted to sink a 3-pointer with LeBron in my face, I’m utterly unqualified to answer for the simple reason that I have no idea whether elite athletes have enough control over their own performances that they can pad their game stats in one year in order to secure a sweeter deal the next.
But I have to admit, the logic has some appeal. It runs like this: knowing that their job status (and their income) for the next several years is on the line, some athletes work harder to put up superb stats during “contract years” than they do during non-contract years. Then, as soon as the ink is dry on their shiny new employment deals, they return to slightly-less-fabulous form, comfortable in the knowledge that their jobs are secure for at least the next few years.
Could it be that something very similar is currently going on at the Fed? Consider this: Chairman Powell’s latest pivot – which markets have interpreted as a shift toward focusing more on inflation-fighting and away from GDP-enhancing and therefore overtly hawkish – occurred within a few days of when he was re-nominated to a second term as Fed Chair. That represented a material change from the earlier, pre- re-nomination version of Powell, where inflation was still transitory and tapering of the Fed’s bond-buying program could occur at a more leisurely, market-friendly (and therefore more “Powell-for-a-second term” friendly) pace. Nomination in hand, perhaps Powell felt comfortable easing back into the politically awkward role of inflation-fighter.
Of course, this line of commentary is all very much tongue-in-cheek. I’m certain Chairman Powell’s motives were upright, and besides, just like I’ve never laced up skates with the Avalanche or the Bruins, I’ve never run a central bank either, so I have no idea whether the timing of the Chairman’s pivot coincidental or something more self-serving in nature (and, truth be told, I think the change in tone might have been slightly overdue to begin with.) But regardless, one thing I am fairly certain about is that the riskier segments of the market like stocks didn’t like Powell’s latest pivot, regardless of the timing: equity markets declined again last week, even though Powell only hinted at speeding up the taper.
Market participants in other areas besides just stocks took note of the change in tone at the Fed, too, and began placing bets that not only the taper would be accelerated, but so too would be the timeline for the much-feared lift-off (that date, at some point in the future, when the Federal Funds Rate is no longer pinned at zero.) For the first time in a long time, the odds for a Fed Funds rate that is anything other than zero by May of next year were better than 50/50 (by Wednesday, futures traders were placing roughly even odds that rates would be zero or something higher, like 0.25% or even 0.50%.)
But it would probably be inaccurate to pin all the blame for last week’s volatility on a suddenly more hawkish Fed. After all, the new COVID variant, Omicron, also had an influence on markets. Take Wednesday’s action for example: stocks spent most of the day firmly in the green but plummeted when reports broke that the first US case of Omicron had been identified in California. The S&P 500 swung more than 3% lower in the space of about two hours and eventually ended the day lower. So as tempting as it might seem to point the finger forever at the Fed when the market moves big, the virus still has an equal ability to impress (or, perhaps more appropriately, depress.)
Ironically, these two things – the Fed and Omicron – might be linked in more than just one way. The obvious link is of course that a dramatically rising COVID case count could lead to a reinstitution of economy-draining lockdowns and restrictions, which might in turn actually imply a friendlier Fed than the one we were promised a few short weeks ago when the idea of the taper was first communicated. On the other hand, those very same COVID mitigation efforts might also prove to be inflationary: a resurgent virus might give would-be workers more reason to stay home and shelter in place, further exacerbating the labor market disconnect that is likely one of the chief reasons inflation is running so hot. Similar things could be said about the supply chain snarls that continue to keep the basket of goods that we’re all chasing with our pandemic-swollen bank accounts smaller than it would be otherwise – a COVID Winter wouldn’t help unsnarl things at all. Powell’s pivot might therefore prove to be well-timed after all, and those exact relationships – between Omicron and inflation – received airtime from other Fed luminaries last week as well.
And that was enough to spark a fair amount of volatility in rates last week. Short-term rates rose at least partially in anticipation that the Fed would act on that inflation-fighting impulse and boost rates sooner than most had expected. Meanwhile, longer-term yields fell as a result of worries that a Fed so emboldened might over-shoot and dampen economic growth in the longer term. The net result was a flatter yield curve that some observers will undoubtedly say portends a decline in growth – if not outright recession – in the future.
So here’s what we’re left with: a Fed that has mostly abandoned the idea that inflation was really all that transitory to begin with and is therefore likely to become a little more aggressive at combating it now that Omicron has made its way here. Meanwhile, unresolved questions surrounding the Omicron variant mean its arrival here in the US could either stoke inflation, cool economic growth, or both. Add to that the third big miss in payrolls since May, and its little wonder that markets are more, uh, interesting than they have been for quite a while.
But about that payrolls report. It wasn’t the kind of miss that makes economists run for their microphones and predict a looming recession or other such nastiness: after all, the US economy still created 210,000 new jobs, and Wednesday’s estimate by payroll processor ADP showed an encouraging broadening out of job creation away from a singular focus on leisure and hospitality jobs and toward areas of the economy that truly need workers – namely, areas like manufacturing, transportation and trade (those very same areas where supply chain stress gets its start). It’s just that the figure has developed a bad habit of delivering well below what analysts had hoped for with disappointing regularity.
With all this talk about viruses, jobs and imagined political intrigue at the Fed, it’s easy to forget that there were other economic happenings last week as well. For example, I could write that last week’s PMI and ISM figures for November were impressive, even if cost pressures and labor shortages continue to hold back potential and threaten a stalling-out of these important forward-looking indicators. Or, I could point out that consumers are slightly more worried than they were even a few months ago, with inflation and COVID weighing on their psyche. But you already know all that – we’ve been writing about those things for months, and for the most part November’s data was just more of the same.
If there was anything new and different to mention, it would probably be a slight firming in housing – an important segment of the economy that has cooled noticeably in recent months. More recently, though, there has been an uptick in activity, including word that pending home sales rose 7.5% in October – a big acceleration from September and way ahead of estimates. Also encouraging were hints that home price appreciation, while still stunning, may have peaked in July. That insight came from the FHFA’s latest home quarterly price report, released on Tuesday.
So yeah, lots going on (including the latest can-kicking exercise by Congress, who reached a deal on Friday to keep the government funded through February.) But for the time being, COVID and the Fed are probably still calling the shots.
What to Watch This Week
|Notable economic events (December 6-12)
Monday: No major events planned
Tuesday: Productivity and labor costs
Thursday: Weekly jobless claims
Friday: CPI, UofM Consumer Sentiment (Dec. preliminary)
This week promises to be fairly light on the economic calendar, with only a small handful of releases likely to catch the market’s attention. That, plus the apparent temporary resolution of the government funding debate late last week will leave Omicron and the always exciting game of trying to predict what the Fed will do very much in charge of market sentiment.
Probably the biggest single event on the calendar will be Friday’s read of consumer prices (CPI.) With inflation now firmly on the Fed’s radar as something other than transitory, inflation data will get even more scrutiny than it has over the last year. If the CPI accelerates and/or inflation continues its migration to areas thought to be “stickier” than just energy and COVID-impacted sectors, markets will probably react negatively. On the other hand, a deceleration in prices might help walk back some of the volatility in both equities and rates that we’ve seen over the last two weeks or so.
Next on the list of potentially impactful releases is Friday’s preliminary read of December confidence by the University of Michigan. Consumers have grown increasingly wary of prices, growth, and now a new and potentially scary variant of COVID. Friday’s release will be the first opportunity to see how much that last bit – Omicron – matters to consumers. In addition, the good professors at UofM have written extensively about the potential emergence of an “inflationary psychology” that would signal a worsening of the inflation issue as higher prices become more entrenched in the national consciousness. Look for any signs of such a development in Friday’s release.
There are also a pair of labor-related releases to watch, including (as always,) Thursday’s initial jobless claims figure. That number ducked below the 200,000 level at the end of November and has been hovering around that level since. While last Friday’s payrolls report suggests progress on jobs hasn’t been as robust as some had expected, at least the “leakage” represented by unemployment claims seems to have slowed to pre-COVID levels. In addition, Thursday’s Job Openings, Leavings, and Turnover Survey (aka “JOLTS”) will once again highlight how extensive the mismatch between labor supply and demand has become.
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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.
 https://www.markiteconomics.com, https://www.ismworld.org