The Market Today

New COVID-19 Variant in South Africa Roils Global Markets

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts

New Variant Identified in South Africa: South African health officials announced Thursday that a new variant of COVID-19 had been identified and was rapidly becoming the dominant strain in the country. In an update posted to the website of the Network for Genomic Surveillance in South Africa, officials said the variant had a “high number of mutations, which are concerning for predicted immune evasion and transmissibility.” Officials said the variant had a “very unusual constellation of mutations” with more than 30 mutations identified on the spike protein. The WHO is meeting today to discuss the new variant. Several countries, including the U.K. and Singapore, have already restricted travel from certain regions in South Africa with others announcing they were monitoring the situation.


New COVID-19 Variant Roils Global Markets: Global equities and sovereign yields are sharply lower Friday after South Africa announced on Thursday it had identified a new variant of COVID-19 “with a large number of mutations,” according to the WHO. Markets were already anxious about the rapid increase in cases in Europe that has led to a new national lockdown in Austria and restrictions in other countries. The news out of South Africa has aggravated those anxieties and sparked a severe aversion to risk assets around the world on Friday. Stocks dropped nearly 2% in Asia and Europe’s Stoxx 600 was down 2.7% around 7:30 a.m. CT. While the losses are broad across sectors, travel and leisure stocks are among the hardest hit. Dow futures were 2.2% lower, the S&P 500 was off 1.6%, and the Nasdaq had declined 1.0%. Japan’s haven yen was stronger with gold while oil prices crumbled more than 5%. The Treasury curve was markedly lower amid a broad bid that also forced sovereign yields lower across Asia and Europe. The 2-year Treasury yield was 9.1 bps lower at 0.55%, up from an earlier session low of 0.49%. The 5-year yield was 12.1 bps lower at 1.22%, having dropped as low as 1.16%. The 10-year yield had declined 10.0 bps to 1.53%, above a low of 1.50%. Although volumes are light, the fed funds futures curve is flattening notably, indicating investors suspect this may complicate the outlook for monetary policy. Suspicions had grown in recent weeks that the Fed may be forced to become more aggressive to fight inflation.


There are no economic reports on today’s calendar.


Wednesday’s economic calendar was one of the busiest in recent memory, broken into two waves. Below is a summary of the reports released in the second wave after Wednesday’s Market Today was published.

Personal Income and Spending Remain Solid in October: Personal income recovered 0.5% in October from a 1.0% drop in September that was almost entirely related to the expiration of federal unemployment benefits that month. The October gain outpaced expectations for a 0.2% improvement was primarily the result of stronger employment income, which rose a firm 0.8% for a second month. In annualized dollar terms, personal income grew by $93.4b while employee compensation rose $96.6b. Overall government transfers declined $19.5b as gains in several categories offset a $51.7b drop in unemployment insurance. Personal spending was also solid to start the fourth quarter. Spending rose 1.3% in October in nominal terms, better than the 1.0% gain expected, and 0.7% when adjusted for inflation, outpacing the expected 0.5% increase. Spending on goods and services both accelerated from September. Netting the gains for income and spending, the savings rate fell from 8.2% to 7.3%, a pandemic low and below the 2019 average rate of 7.6%.

Core PCE Inflation Matches Expectations at the Fastest Rate Since 1991: The same report also included the latest readings for the Fed’s preferred PCE inflation measures. Both 0.1% less than expected, headline PCE inflation rose 0.6% MoM and 5.0% YoY, an increase from 4.4% in September and the strongest annual increase since November 1990. Core inflation was in line with expectations, rising 0.4% on the month and 4.1% over a year ago, an acceleration from 3.7% in September and the fastest rate of gain since January 1991. Prices for durable and nondurable goods both rose 1.2% in October. Autos were the largest contributor for the durables’ gain while rising energy costs caused the biggest swing for nondurables. Services inflation rose 0.3%.

Consumer Sentiment Still at a 10-Year Low as Inflation Expectations Match 10-Year High: A small positive revision to the University of Michigan’s consumer sentiment index for November, from 66.8 to 67.4, left the index at a 10-year low. The slight improvement from initial estimates was spread across the current assessment and expectations indices. Equally as important in the current economic environment, consumers’ longer-term expectations were revised up from 2.9% to 3.0%, matching the highest level since 2011.

Recent Trend for New Home Sales Is Lower Than Expected after October Report: The trajectory for new home sales is lower and less steep than previously estimated after October’s pace came up short of expectations and the prior three months were each revised down. Combines sales in July and August were notched down 17k annualized units and September’s 14.0% surge to 800k units was revised to a 7.1% gain to 742k. From that lower base, sales inched up 0.4% in October to 745k, short of the 800k units economists expected. The current pace is a marked slowdown from January’s peak of 993k and below the pre-pandemic peak of 756k from January 2020. Months supply rose from 6.1 to 6.3 while the annual gain for the median price was steady 17.5%.

November Fed Minutes Highlight Growing Angst Among Officials About Inflation Amid Lingering Economic Imbalances: Officials primarily blamed the Delta variant for the third quarter slowdown but expected activity to pick back up and be “robust” in 2022. This outlook was contingent, in part, on the “easing of supply constraints.” The Minutes cited bottlenecks, supply chain disruptions, strong demand, labor and materials shortages, and low inventories as constraints on activity. Some officials described the labor market as “very tight” and opinions were split on labor force participation. Several believed participation “would be structurally lower than in the past,” partly due to a wave of retirements, while several others expected further improvement as pandemic disruptions abated. Officials “judged that inflation pressures could take longer to subside than they had previously assessed” and some noted pressures “had become more widespread.” Officials continued to expect significant moderation in inflation next year but admitted uncertainty about this assessment had risen. Many officials saw evidence inflation could prove more persistent while some others focused on reasons it would wane. There was lengthy debate about the factors affecting the balance of risks to inflation and inflation expectations. Considering the elevated uncertainty, officials “stressed…maintaining flexibility” on future policy changes was paramount. Some supported a quicker tapering process in November. Various others indicated tapering could be sped up and interest rates hiked sooner than expected if inflation doesn’t moderate. A number focused on remaining patient to watch how the economy and the headwinds it faces evolve in the months ahead.


Yield Curve Flattened Amid Bets Fed Discussion of Need for Faster Tightening May be Prescient: Treasury yields rose after a heavy first wave of economic reports included a surprise decline in new jobless claims to their lowest level since 1969. While weeks around holidays can be volatile, the data broadly reflected continued improvement in the labor market. A second wave of data at 9 a.m. showed strong employment income growth continued to support strong spending in October, despite another firm month for inflation. The Fed’s preferred PCE inflation measure showed core prices rose 0.43% MoM and accelerated from 3.7% to 4.1% on a year ago basis, the fastest rate since 1991. Shorter yields remained higher as the report added to speculation strong inflation could cause the Fed to be more aggressive, a dynamic that drove longer yields back down and lower for the day. The back end of the curve dipped further after the Fed’s November Minutes (more above) showed officials already discussed whether policy may need to be tightened more quickly, even before the latest inflation readings. By the close, the 2-year yield had added 2.6 bps to 0.64%, a high since March 2020, as fed funds futures repriced to imply a greater than 75% chance of three rate hikes in 2022. The 10-year yield fell 3.1 bps to 1.63%. The spread between the two securities tightened to 98.8 bps, its narrowest since mid-July. Amid the rate developments, the S&P 500 rose 0.2% as energy and tech shares rose to offset declines in other cyclical sectors.

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