Halyard’s Weekly Wrap – 12/03/21
Trading this week was dominated by Chairman Powell’s sudden hawkishness and the November jobs report. The headline nonfarm payrolls came in well below expectation, registering 210,000 new jobs versus consensus expectation of 531,000. That statistic is based on a survey of businesses. The Bureau of Labor also releases an employment measure based on a survey of households and that measure showed a gain of 1.1 million new jobs in the month, significantly above expectations and the polar opposite of the nonfarm farm result. Moreover, the household report showed that 594,000 persons reentered the workforce and, as a result, the unemployment rate fell to 4.2%, down from 6.3% in January of this year and well below the 14.8% rate registered in April 2020. So based on that report, either the economy is slowing and we can expect to be back at trend growth, or its rapid growth is showing no sign of slowing. We believe the latter to be true. Further driving home the growth acceleration argument was the Institute for Supply Mangers Services survey which registered 69.1, an all-time record.
The falling unemployment rate and the above expectation rate of inflation has not been lost on the Fed. Virtually every speaker this week, including Powell, struck a hawkish tone. Divining from their comments, we expect that the rate of tapering will be accelerated at the December 15th FOMC meeting. In addition, the markets, according to Fed Fund futures, are betting that the first Fed Fund rate hike will occur by March 2022, with two hikes in 2022 and another two in 2023.
Stocks have not reacted well to the prospect of early rate hikes, with the S&P falling nearly 5% since November 20th.
Bond traders, on the other hand, are delighted at the prospect. The 2-year/30-year yield curve spread has fallen to 109 basis point from 229 basis points earlier this year. Taking a page out of the bond traders playbook, traders flatten the curve when the Fed becomes hawkish in anticipation that the rate hikes will dampen inflation. We think it’s much too soon to assume that Powell and company will have the stomach to fight inflation to the degree that will be needed.
Meanwhile the debt ceiling has not yet been raised and Janet Yellen is saying that we’ll run out of cash by mid-December. Taken together, December is looking to shape up as a volatile month.
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