The Market Today

Strong Labor Data; Talk Turns Back to Quantitative Tightening

by Craig Dismuke, Dudley Carter


ADP Reports Economy Recovered 807k Private Payrolls in December: The economy recovered 807k of the 4.54mm still-lost private nonfarm payrolls in December according to the ADP Employment data.  The result was better than economists’ expectations for 410k payrolls and the best month of recovery since early 2021 (May).  Based on ADP data, the private labor market is still missing 3.7mm payrolls.  Looking forward to Friday’s BLS report, economists expect just 384k private payrolls to be recovered.  The ADP report will buoy expectations for Friday’s numbers.  Worth noting, the ADP report has missed the BLS report by an average margin of 267k per month in 2021.

Markit PMIs: Markit will finalize its December services and composite PMIs at 8:45 a.m. CT.  The services index dipped fractionally in the initial estimate.

FOMC Minutes – Quantitative Tightening Discussions: The Fed will release their December Meeting Minutes at 1:00 p.m.  According to a WSJ article from Nick Timiraos published yesterday, “Officials began discussing at [the] meeting what should happen to the bondholdings after [the conclusion of tapering], and some are pushing to start shrinking them sooner and faster than they did” in 2017.  During the previous cycle, the Fed began the quantitative tightening process after the fourth rate hike, allowing their balance sheet to shrink by up to $50 billion per month ($30B Treasurys, $20B MBS). Against today’s growth and inflation backdrop, Fed officials may choose to accelerate the process of getting to balance sheet reduction. The balance sheet is currently approaching $8.8 trillion, up $4.6 trillion from its pre-pandemic level.  Today’s Minutes are expected to give more insight into these discussions.


ISM Manufacturing Reports Some Cooling in Activity, Improvement in Supply-Side Strains: The ISM’s Manufacturing PMI cooled more than expected in December, falling 2.4 points to 58.7 and matching its 2021 low from January. The employment index inched up to an eight-month high of 54.2, the only increase among the indices used to calculate the headline reading. While indices tracking new orders (-1.1), production (-2.3), and inventories (-2.3) all cooled, a 7.3-point drop in the supplier deliveries index to a 13-month low accounted for roughly 60% of the decline in the headline PMI. The ISM’s Chair noted in his comments that, “Transportation networks, a harbinger of future supplier delivery performance, are still performing erratically; however, there are signs of improvement.” Away from those key metrics, the prices paid index tumbled. The 14.2-point decline was the largest since 2011 and 68.2 marked the lowest reading for the index since November 2020.

Job Openings Pull Back, but Layoffs Remain Low and Quits Hit a New Record: Total job openings fell unexpectedly in November, from a near-record 11.09 million to a five-month low of 10.56 million, still a historically stretched level for the series that reaches back to 2001. The 529k decline in openings from October was broad across the private sector, as eight of the ten major industry groups reported fewer job postings. Leisure and hospitality led with a decline of 268k while the construction sector reported 110k fewer open positions, both more than unwinding large increases from the prior month. However, the JOLTS data indicate that the labor market remains tight. The number of layoffs inched up but the layoffs rate remained at a record low of 0.9%. Job quits hit a new record of 4.5 million, nudging the quits rate back up to its series record of 3.0%.

Fed’s Kashkari Supported Faster Taper, Sees Two Rate Hikes This Year: Minneapolis Fed Bank President Kashkari said Tuesday that he was in favor of the Fed’s decision to signal a quicker pace of tightening at December’s meeting. Kashkari said the Fed faces “a tricky, tricky task” in balancing the risk that the strong inflation readings from recent months could lead to longer-term inflation expectations becoming unanchored with the risk that pre-pandemic disinflationary forces pull the economy back into the “low-inflation regime” that it faced for the last couple of decades. Nonetheless, he said in an online essay released earlier in the day that, “Given the high inflation we are experiencing, [accelerating the taper] seemed like a prudent decision that provides flexibility in the future for raising rates sooner if necessary. I brought forward two rate increases into 2022 because inflation has been higher and more persistent than I had expected.”

European Services PMIs Reflect Omicron Impact: The surge of Omicron cases and return of government restrictions impacted the services sector of Europe’s economy in December. Markit PMI data overnight showed slowdowns in services activity in Sweden (68.7 to 67.3), Spain (59.8 to 55.8), and Italy (55.9 to 53.0) that were larger than anticipated. Small downward revisions to initial estimates for France and Germany confirmed a divergent impact in those countries. France’s Services PMI slipped 0.4 to 57.0, near the top end of its 2021 range, while Germany’s dropped 4.0 to a contractionary 48.7, the weakest reading since February.

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U.K. Prime Minister Johnson cautioned Tuesday that the next few weeks will be “challenging” and said he “can’t rule anything out” on possible pandemic restrictions. He went on to say, however, that current restrictions are appropriate and commensurate with the risks Omicron poses. Top U.K. health officials said hospitalization rates are likely to increase further but added they don’t expect ICU admissions to match levels from previous waves. Johnson also said that disruptions from worker absenteeism will be less severe than the consequences of a lockdown. In the U.S., reports indicated that Walmart temporarily closed 60 stores in December for cleaning related to the virus and Macy’s reduced store hours because of rising virus cases.


U.S. Equities Checked Up Tuesday As Longer Treasury Yields Added to Monday’s Sharp Gains: The Dow jumped 0.6% Tuesday and closed at a record for a second consecutive session. The S&P 500, however, inched away from its all-time high as health care stocks continued a recent decline, losses piled up for tech companies, and the auto sector was dragged lower by Tesla. Shares of Ford and GM, however, soared to records as the former disclosed strong demand for its electric F-150, scheduled for release this spring, and the latter indicated dealer inventories were growing, a sign the chip shortage may be easing. Rising interest rates were a driving force of tech’s tumble but also a catalyst for strong gains for financials. The S&P 500’s financials sector rallied 2.6%, the second best performer behind energy names. Oil prices rose more than 1%, despite OPEC+ confirming plans to raise production by another 400k barrels per day in February as fears that Omicron will significantly hit demand ebb. Longer Treasury yields rose again Tuesday but closed well below session highs. The 10-year yield climbed 1.9 bps to 1.65%, its highest level since November 23 but down from an intraday peak of 1.68%. The 5-year yield added 0.3 bps to 1.36%, its highest level since February 2020, while the 2-year yield slipped 0.8 bps to 0.76%.

Yesterday’s rotation out of the tech sector in U.S. markets continued globally Wednesday, leading to mixed results for major equity indices even as Treasury yields pared their rise. Tech companies floundered near the bottom of major equity indices, driving losses across most of Asia and limiting gains for Europe’s Stoxx 600 to less than 0.1%. Nasdaq futures were 0.4% lower at 7 a.m. CT and leading modest losses for U.S. equity indices. Omicron’s impact on the European economy showed up in mostly weaker services PMIs for December (more above). Prior to ADP’s payroll estimate of hiring during the early weeks of the case surge, the Treasury curve was essentially unchanged. After private payroll growth nearly doubled expectations, yields moved up. At 7:35 a.m. CT, the 2-year yield was trading at 0.77%, the 5-year yield was at 1.37%, and the 10-year yield had gained to 1.66%, all reflecting moves of just over 1 bp.

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)

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