The Market Today

Powell: Appropriate to Consider Ending Taper Few Months Early

by Craig Dismuke, Dudley Carter


The ADP Employment report projected 534k private nonfarm payrolls were added in November, slightly better than the expected gain of 525k.  The solid pace of private sector job recovery portends another positive BLS report on Friday. November’s results were driven by gains in both the goods-producing and services sectors.  Goods-producing jobs recovered 110k versus their 12-month average rate of +60k per month.  Construction and manufacturing both contributed to the strength, adding 52k and 50k, respectively.  Services payrolls recovered 424k versus their 12-month average rate of +375k per month.  There remain 4.5 million private payrolls lost since February 2020 according to the ADP data.

Purchase Applications Continue Higher Despite Rising Mortgage Rates: Mortgage applications for the week ending November 26 fell 7.2% on a 14.8% drop in refi apps but another strong gain for purchase apps.  Purchase apps rose 5.1% and are now at their highest weekly level since early-February.  The average 30-year mortgage rate rose 7 bps to 3.31%.

Manufacturing PMIs, Beige Book Report, and Auto Sales: Fed Chair Powell and Treasury Secretary Yellen will be testifying before a House panel today at 9:00 a.m. CT.  The final Markit Manufacturing index for November is scheduled for 8:45 a.m. At 9:00 a.m., the November ISM Manufacturing Index is expected to remain high and improve further. The price and delivery indices remain particularly important, having shown no signs of improvement yet. The Fed is scheduled to release its Beige Book report at 1:00 p.m. CT in anticipation of its December 15 FOMC meeting.  November’s auto sales data from Ward’s is expected to show still-depressed levels of sales, but another increase in the monthly pace of sales. Auto sales inched higher in October but remained 23% below their average monthly rate from 2019.


Powell Says Faster Taper Is Warranted, Despite Potential Risks from Omicron: Fed Chair Powell told a group of Senators Tuesday that supply chain issues “have not really improved” and the “threat of persistently higher inflation has grown.” “Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy,” Powell said, “but it’s also the case that price increases have spread much more broadly in the recent few months.” Because “the economy is very strong and inflationary pressures are high, …it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases…perhaps a few months sooner,” he said. Although unemployment remains above the Fed’s estimate of full employment, lower participation could mean maximum employment is reached at a higher unemployment rate. Powell said, “It’s going to take longer to get labor force participation back. We’re not going back to the same economy.” The new virus variant poses “a risk to the baseline” outlook but the Fed will have to wait for analyses from health experts before assessing any implications for the economy. Powell said, “I’m not thinking that the effects on the economy will be remotely comparable to what happened last March.” His assessment of the variant risk was less dovish than his prepared remarks, released Monday afternoon, were interpreted to be.

Consumer Confidence Weakens in November as Inflation Expectations Rise: Consumer confidence was weaker than expected in the Conference Board’s November release. Even before Omicron upended markets, consumers reported less optimism about the current situation and expectations for the future. Combined, the softer readings dragged the headline index from 111.6 (revised down from 113.8) to 109.5, below the expected 110.9 and the weakest reading since February. While the current labor market assessment remained strong, most other indicators softened from October, including plans to purchase big ticket items such as cars, homes, and appliances. Notably, one-year inflation expectations rose to the third highest level in records back to 1987.

Cordray Considered for Fed Vice Chair of Supervision: In other Fed news, reports indicated the White House is considering the former director of the Consumer Financial Protection Bureau, Richard Cordray, fill the open position of Vice Chair of Supervision on the Fed’s Board of Governors. Fed Governor Brainard, who the President has nominated to be the next Vice Chair of the Board, was presumed to be the favorite to lead the central bank’s supervisory efforts after Fed Governor Quarles’ term expired in October.


Powell’s Call for Faster Taper Exasperates Markets Already Worried About New Variant : Stagflationary fears resurfaced and intensified Tuesday as Fed Chair Powell said a faster taper is warranted and may be announced at December’s meeting, deepening concerns about economic growth spurred by the new virus variant. Markets were already in an anxious mood overnight after Moderna’s CEO said he expects current vaccines will be much less effective against Omicron than they are against Delta. His remarks coincided with a sell-off in foreign equities, U.S. futures, and oil prices and a rally in Treasuries. Yields had unwound Monday’s modest recovery, flattening back below the lowest levels from Friday’s initial panic over the new variant. Volatility, however, intensified during the early part of the questions and answers portion of Fed Chair Powell’s Senate testimony. Despite the risk Omicron poses, Powell told Senators the Fed would discuss hastening the tapering process at the December meeting in response to inflation remaining firm and broadening out (more above). Stocks sold off sharply. The S&P 500 closed down 1.9% and near session lows. Shorter Treasury yields jumped markedly higher while longer yields held the lion’s share of earlier declines, capped by anxieties about Fed tightening at a time when growth may suffer amid spread of a new variant. By the close, the 2-year yield was 8.1 bps higher on the day at 0.57% while the 10-year yield had declined 5.4 bps to 1.44%, flattening the curve between the two maturities to around 87 bps, the lowest since January 5.

Markets reversed course again on Wednesday as the notable volatility since the announcement of the Omicron variant last Thursday continued. The MSCI Asia Pacific index rose more than 1% and European markets posted even stronger gains. Crude prices rallied more than 4%, pushing U.S. WTI back above $69 per barrel. Overshadowed by variant concerns and Chair Powell’s remarks about a faster taper, manufacturing PMIs across most of Asia were mixed but pointed to marginal expansion in November. A PMI tracking activity at small-to-medium sized manufacturers in China, however, slipped from 50.6 to 49.9, its second contraction since April 2020. European manufacturing PMIs were also mixed, although at a generally higher level than those in Asia. The Eurozone’s PMI was revised from 58.6 to 58.4, reflecting a smaller improvement from October (58.3) than was initially projected. Prior to the release of the ADP payroll data, S&P 500 futures had rebounded more than 1.2% and Treasury yields were higher by 3 bps to 5 bps across maturities out to the 10-year note. The market levels held after ADP printed close to expectations.

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