Economic Update 12-13-2021

• In a lighter week for economic data, releases included consumer price inflation reaching a 40-year high, while jobs statistics continued to show improvement.

• Global equity markets rose with waning concern over the severity of the Covid omicron variant, and its potential impacts on economic growth. Bonds were mixed, with high-grade debt falling back due to rising rates, while bonds of lower credit quality fared positively. Commodities gained as crude oil prices bounced back strongly.

U.S. stocks experienced their strongest weekly gain in six months, with technology leading the way, up 6%, while financials, consumer discretionary, and utilities came in the rear, although still up 2-3% each. Real estate gained just under 3% on the week, fueled by financial risk sentiment rather than interest rates, which rose.

Based on a week or so of commentary from medical experts, it appears that concern over the Covid omicron variant has calmed a bit. The crux of this is transmissibility (which is high, and far more so than delta), but also the severity of cases and effectiveness of current vaccines/boosters on hospitalizations and mortality (which appears better than expected so far). A good deal more information is required to make a deeper assessment in coming weeks, but some infectious disease specialists have expected such mutations to eventually occur, causing the virus to become progressively less severe, albeit still contagious. (The common cold, also a coronavirus, has been thought to have evolved this way—into its current form as a fairly minor annoyance.) By mid-week, reports that Pfizer vaccine protection against omicron is several times lower than prior variants caused a bit of a pause in the optimism.

The U.S. debt ceiling battle continues, with Treasury Secretary Yellen indicating a headline of Dec. 15, while others have referenced Jan. 2022 in reality. The Senate did vote to allow Congress to raise the debt ceiling with a simple majority vote, which simplifies the process. Prospects for the Build Back Better infrastructure bill have weakened, as the timeline looks to be delayed from the hoped-for year-end to possibly January, and even beyond. The trickiness comes as primary party campaigns for the mid-term election year begin and divert attention from Congressional operations.

Foreign stocks also fared well, along with potentially positive news about the omicron variant, although several European nations continued to tighten restrictions related to delta cases. Industrial production in Germany rose at a higher rate than expected, which helped economic sentiment as well; this was offset by weaker economic growth reports in the U.K. and Japan.

The central bank of China lowered bank reserve requirements by -0.50%, which represented a form of easing in response to a slowing growth dynamic. Restrictions on house buying and mortgage lending could be eased as well, in a fine balance between keeping the housing sector sustained, while also attempting to avoid the excesses of less sustainable commercial real estate development (ending in cases such as Evergrande and others, which are having a difficult time with debt payments). Due to a lack of financial vehicles, housing speculation has been more prevalent in China in recent years, leading to government policy shifts and even public scolding.

U.S. bonds fell back last week, as interest rates ticked higher on the heels of decent economic data and stronger inflation, although yields rose prior to CPI being released. Both government bonds and investment-grade corporates fell nearly a percent, while high yield and floating rate bank loans gained. Foreign bonds were little changed, while emerging market debt gained along with pro-risk sentiment. The central banks of both Poland and Brazil raised interest rates last week, in a reflection of global inflation concerns.

Commodity indexes gained, almost exclusively due to higher energy prices, although industrial metals also rose a bit. The price of crude oil rebounded by 7% to just under $72/barrel. This was the largest weekly gain since the summer, led by dissipating fears over the Covid omicron variant, just as in the views boosting equity markets.

Period ending 12/10/2021	1 Week (%)	YTD (%)
DJIA	4.05	19.71
S&P 500	3.85	27.16
NASDAQ	3.62	22.03
Russell 2000	2.45	13.00
MSCI-EAFE	2.44	8.99
MSCI-EM	1.15	-2.20
BBgBarc U.S. Aggregate	-0.72	-1.67

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2020	0.09	0.13	0.36	0.93	1.65
12/3/2021	0.06	0.60	1.13	1.35	1.69
12/10/2021	0.06	0.67	1.25	1.48	1.88

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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