The Market Today
1 Million COVID-19 Cases; Concerns Growing About Already-Damaged Supply Chain
by Craig Dismuke, Dudley Carter
The U.S. reported a record-high 1 million new cases yesterday. The soaring infections continue to appear to produce milder symptoms, but there is continued uncertainty about how the sheer volume of cases could impact hospital systems and increasing concern about how it will impact the already-damaged supply chain. Ontario closed indoor dining and other venues and moved schools online until January 17. The FDA announced emergency approval of the Pfizer-BioNTech booster for 12- to 15-year olds. The FDA said myocarditis risk remains the same in the new data with the overwhelming majority of cases being mild. The FDA also shortened the window to receive a Pfizer booster to five months from the second dose for all ages.
Data on Supply Chain and Labor Imbalance: Today’s economic calendar will bring the December ISM Manufacturing Index (9:00 a.m. CT), November Job Openings report (9:00 a.m.), and December’s Total Vehicle Sales data (afternoon). The economic data have been firm heading into December but this morning’s ISM report is expected to show manufacturing activity slowed. With new COVID-19 cases rising rapidly, the supply chain is increasingly expected to be hindered further. The JOLTs data are expected to show job openings hit a new record-high as the labor imbalance intensifies.
OTHER ECONOMIC NEWS
Construction Spending Picks Up on Boost from Residential Projects and Prior Revisions: Total construction spending rose 0.4% in November, slightly weaker than the 0.6% gain economists had expected. However, October’s 0.2% improvement was revised up to 0.4% and a 0.1% decline in September was changed to show a 1.0% jump. Construction in the private sector rose 0.6%, primarily reflecting a 0.9% jump in residential activity on gains in single family building and remodeling; multi-family spending slipped 0.3%. Private-sector nonresidential spending, or business-related construction, inched 0.1% higher. Construction related to lodging, or hotels, rose for the first time in eight months. Public-sector construction spending slipped 0.2% as outlays at the federal, state, and local levels declined.
Markit Revised December’s PMI Down from 57.8 to 57.7, Lowest of 2021: Markit revised its initial estimate of its Manufacturing PMI for December down from 57.8 to 57.7, confirming a fifth monthly decline to the lowest level of the year. Markit noted a “subdued upturn in production” and “the softest rise in new orders for a year.” Despite small improvements, materials shortages and vendor delivery delays remained an issue, according to the report, and order backlogs rose, but at a slower rate than in recent months. Inflation indicators, while still high, edged down to the lowest levels since the first half of the year.
ICYMI – December 2021 Monthly Review: Investors spent December accumulating data on the health effects of Omicron and assessing its potential impact on an economy facing fading fiscal stimulus and staring down a faster pace of monetary tightening. Despite being more transmissible, early anecdotal and scientific evidence indicated Omicron infections were associated with milder health consequences than Delta. Nonetheless, the rapid rise in cases led to a return of restrictions and resulted in speculation the presumed headwinds for economic activity could slow central banks’ plans to tighten policy. That speculation would prove incorrect. The Fed doubled the pace of tapering and forecasted a notably faster path of rate increases in response to persistently fast and broadening inflation and an increasingly tight labor market. While markets have priced for three rate hikes in 2022, they are less convinced the Fed will be able to tighten as much as officials expect. Click here to view the full recap.
ICYMI – 2021 YEAR-IN-CHARTS – A YEAR TO RIVAL 2020: 2021 was another eventful year including three COVID-19 waves, a third wave of direct stimulus payments, expansion of the economy but imbalances throughout, a lagging labor recovery, the hottest inflation since the early 1980s, and a substantial pivot from the Fed. We recap the highlights of the year in our 2021 Year-in-Charts. (links: video, chartbook)
Treasury Curve Soars Higher and Steeper to Start 2022: Treasury yields broke higher to start the new year, particularly intermediate and longer maturities, following a couple of low-volume, uneventful weeks around the Christmas and New Year’s holidays. Yields had moved higher overnight but soared during U.S. trading. The lack of an obvious catalyst in the news headlines and a benign start to a busy economic calendar led analysts to point to positioning, technicals, and private-sector issuances. There were reports of trading in futures that targeted a sharp move up in yields early this year and a busy daily calendar of investment grade corporate deals was said to have enhanced the upward pressure on rates. Equities also rose, further fueling stronger yield gains and sending the S&P 500 and Dow to close at new all-time highs. The S&P 500 rose 0.6%, the Dow gained 0.7%, and the Nasdaq rallied 1.2%. By the close, the 2-year yield rose 3.6 bps to a new cycle-high of 0.77%. The 5-year yield jumped 9.1 bps to 1.35%, its highest level since February 2020. The 10-year yield soared 11.8 bps to 1.63%, beyond its 50-day moving average and the highest close since Omicron’s emergence. The 11.8-bp jump was the largest in a day since September and second largest since February, both daily surges that were tied to central bank signaling. The 85 bps of spread between the 2-year and 10-year notes was the steepest since November.
The risk-on momentum that drove U.S. stocks and yields higher to start 2022 has continued into global trading on Tuesday. Most equity markets in Asia strengthened and broad gains across Europe pushed the Stoxx 600 up to a new record. A PMI tracking small-and-medium-sized manufacturers in China accelerated unexpectedly in December, rising from 49.9 to 50.9. U.S. equity futures had risen between 0.2% and 0.4% at 7:30 a.m. CT after Monday’s strong start. Notably, Treasury yields added to yesterday’s sizable increases and continued to steepen. The 2-year yield was 2.0 bps higher at a new cycle-high of 0.79%, the 5-year yield rose 3.1 bps to a new cycle-high of 1.39%, and the 10-year yield climbed 4.4 bps to 1.673%, overtaking its final pre-Omicron close on the day before Thanksgiving.