LSA Connect

Economic Update 2-14-2022

• In a light week for economic data, consumer price inflation came in higher than expected, again reaching new multi-decade levels. Consumer sentiment worsened, while jobless claims continued to show improvement.

• U.S. equity markets fell back with continued high inflation readings and an assumed hawkish Fed response in coming months; foreign equities were mixed for the week. Bonds fell back across the board, in keeping with higher interest rates in the middle part of the yield curve. Commodities gained again, led by higher prices for crude oil and metals.

Economic Update 2-07-2022

• Economic data for the week included a much stronger than expected employment situation report for January, as well as a pullback in the ISM manufacturing and services indexes, although the two still lie solidly in expansion.

• Global equity markets bounced back last week, with decent economic data and some improvement in the Covid caseload. Bonds fell back across the board, as interest rates continued to tick higher, along with the consensus opinion that central banks will be raising rates through 2020. Commodities gained ground again last week, led by crude oil prices, with high demand continuing to surpass more limited supply.

Economic Update 1-31-2022

• Economic data for the week included the Fed signaling upcoming rate hikes, a stronger-than-expected GDP growth report for Q4, and robust housing data, but a weaker durable goods report.

• U.S. equity markets ended mixed to higher in a volatile trading week, with large cap stocks outperforming small caps. Foreign stocks generally were negative, in keeping with a stronger dollar. Bonds fell back broadly along with higher interest rates following a hawkish Federal Reserve. Commodities gained, mostly in the energy sector—particularly due to weather, Ukraine, and market technicals in natural gas.

Fed Note:

The Federal Reserve Open Market Committee made no changes in interest rates today, as expected, staying with the target of 0.00-0.25%. But, times are changing.

The formal statement language was significantly simplified from December, that economic activity and employment have ‘continued to strengthen’, but also acknowledged the sharp recent rise in Covid cases on particular sectors. High inflation was attributed to ongoing ‘supply and demand imbalances’. However, the FOMC expects that it will ‘soon be appropriate’ to raise interest rates. The tapering off of treasury and mortgage-backed bond purchases was ramped up, scheduled to end in ‘early March’.

Economic Update 1-24-2022

• Economic data for the holiday-shortened week included mixed regional manufacturing results and housing data, higher jobless claims, but continued gains in the index of leading indicators.

• U.S. equity markets, especially the Nasdaq-heavy group of technology stocks, fell back near or into correction territory. Foreign stocks fared slightly better than U.S., although also in the negative. Bonds were mixed, based on risk level. Commodities gained a bit on net, along with continued tight supplies in crude oil markets.

Economic Update 1-18-2022

• Economic data for the week included continued historically-strong producer and consumer inflation readings, while retail sales came in weaker than expected.

• U.S. equity markets fell back last week, as investor continued to digest tighter monetary policy and the impact of the Covid omicron variant. Foreign stocks fared a bit better, due to a weaker dollar. Bonds were mixed, with lower-rated bonds outpacing investment-grade, with yields moving slightly higher. Commodities gained in keeping with a weaker dollar and rising crude oil prices.

Economic Update 1-10-2022

• Economic data for the week included a disappointment in December nonfarm payrolls, although the unemployment rate continued to improve. ISM manufacturing and services both fell back for the month, but remained solidly in expansion. Minutes from the Dec. Fed meeting showed a more hawkish tone than did the original statement released at the time.

• U.S. equity markets fell back along with higher yields, hawkish Fed meeting minutes, and higher commodity prices. Foreign stocks fared better, with mixed results. Bonds fell back sharply, as a result of higher long-term interest rates. Commodities gained, due to a geopolitical-based spike in energy prices.

Economic Update 1-3-2022

• For the final week of 2021, sparse economic data included a continued rise in national home prices, although pending sales fell back. Jobless claims continued to show downward improvement.

• Global equity markets ended the year on a positive note last week. Bonds were mixed, as interest rates were little changed. Commodities gained more ground, with help from a weaker dollar and hopes for continued demand recovery.

Economic Update 12-27-2021

• Economic data during the holiday week included a slight revision upward for Q3 U.S. GDP, and a slight improvement in consumer confidence. Durable goods orders and housing metrics were mixed.

• Global equity markets gained broadly last week, as fear of the Covid omicron variant’s severity seemed to subside a bit. Bonds were mixed to lower along with higher interest rates. Commodities also fared well, particularly in oil and metals, where the demand outlook was again viewed more positively.

Economic Update 12-20-2021

• Economic data for the week included the Federal Reserve announcing a faster pace in the tapering off of bond purchases, reflecting stronger growth and inflation pressures, as seen by last week’s high PPI number. Retail sales and industrial production rose, while several regional manufacturing indexes were mixed. Housing metrics also continued to improve.
• Global equity markets fell as fears of the omicron variant and Fed tightening intensified toward the end of the week. Bonds fared well with investors avoiding risk, which pushed long-term rates lower. Commodities were mixed, with gains in metals offset by declines in energy.

Fed Note:

The Federal Reserve Open Market Committee made no changes in interest rates today, as expected, staying at the target of 0.00-0.25%.

However, in keeping with intensified market expectations in recent weeks (and signaled by the Fed itself), a key policy change was a doubling in the pace of tapering (to $30 bil./month) off of treasury and mortgage-backed bond purchases. This implies they’ll finish buying completely by early Q2 2022. The tone was a bit more hawkish than the market perhaps expected.

The formal statement language noted that a variety of sectors continue to be affected by Covid, including new variants, although job gains have been ‘solid in recent months’. Supply/demand imbalances were still noted as contributing to elevated inflation.

The dot plot seems to imply three rate moves next year, at a median rate of 0.75-1.00%. Compared to the September report, inflation forecasts have risen sharply from 4.2% to 5.3% in 2021, but only from 2.2% to 2.6% in 2022. The unemployment rate forecasts have moved in the other direction, moving lower by -0.5% this year and by -0.3% in 2022 (to a low 3.5% level). GDP expectations have fallen by -0.4% this year, with mixed results over the next several years.

Persistent inflation being no longer ‘transitory’ (per Jerome Powell’s words), has been the most important recent change in sentiment, with growing pressure to move away from accommodative policy. This also pulls the timeline for rate increases forward, from late 2022 to possibly as soon as mid-2022. This means next year could much more interesting than the last few years.

The Fed’s evaluation metrics remain mixed and heavily debated (and more fluid than usual):

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.