In this week’s Monday Market Insights, we discuss recent inflation data, Jerome Powell’s Senate confirmation hearing, and the December jobs report. Our Chart of the Week highlights the waning government stimulus and its potential impact on inflation. Finally, we discuss how the increase in hourly wages has not been consistent across industries and will likely slow in the year ahead.
- Coming in Hot – Last week’s Consumer Price Index (CPI) for December came in at 7% on a year-over-year basis, the largest 12-month increase since 1982. The month-over-month reading of a 0.5% rise was higher than the 0.4%, which was expected, but a deceleration from the 0.8% in November. Supply-chain constraints continue to pressure prices of used cars and trucks, some of the biggest contributors to the increase. The U.S. stock market largely shrugged off the high inflation reading, with stocks rising modestly in the hours following its release. We expect supply-chain issues and price pressures to ease in 2022, both supportive developments for the global economy.
- Powell Speaks – Federal Reserve Chairman, Jerome Powell, seemed to provide some relief to markets during his Senate confirmation hearing last week. Specifically, while Powell indicated that interest rate hikes are coming, he may give more time for balance sheet run-off. The market currently anticipates four rate hikes during 2022, with liftoff occurring at the March Federal Reserve (Fed) meeting. We believe the Fed will not hike rates as many times as the market currently expects as core inflation should decline as stimulus runs its course and supply-chain issues subside. Powell’s Senate hearing helped calm market fears that the Fed could make a policy error by tightening too quickly.
- U.S. December Jobs – The U.S. Department of Labor Employment Situation report provided mixed messages during December. Job growth of 199,000 missed consensus estimates for 400,000 jobs and was well below the monthly average of 537,000 for 2021. The lackluster job growth is likely a function of companies unable to find candidates. Conversely, the unemployment rate continues to decline, falling to 3.9% in December, compared to estimates of 4.1%. There are currently 6.3 million unemployed, which is above the 5.7 million recorded during February 2020, just before the onset of the coronavirus pandemic. Similarly, the labor force participation rate of 61.9% is still 1.5 percentage points below its February 2020 level. We expect the employment situation to continue to improve during 2022, supporting U.S. economic growth.
|Russell 1000 Value||1.2||1.5||22.7||16.79||11.35||1.77|
|Russell 1000 Growth||0.0||(3.5)||23.4||30.79||23.83||0.64|
|MSCI EM (Emerging Markets)||3.7||2.9||(4.0)||11.03||10.03||2.38*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.3)||(1.5)||(1.9)||4.21||3.16||1.98|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||(0.6)||4.6||7.50||5.93||4.45|
|Bloomberg Barclays Municipal Bond||(0.7)||(0.9)||0.7||4.30||3.74||1.31|
|Bloomberg Barclays Global Aggregate x US (Country)||0.3||(0.3)||(5.8)||2.44||2.94||1.15|
|Crude Oil WTI (NYM $/bbl) Continuous||6.2||9.9||55.3||17.0||9.3||82.6|
|Natural Gas (NYM $/mmbtu) Continuous||16.6||21.6||59.8||13.7||5.1||4.3|
|Gold NYMEX Near Term ($/ozt)||0.1||(0.0)||(0.9)||12.4||8.8||1,827.2|
|Copper Cash Official LME ($/mt)||(1.2)||(0.2)||21.1||17.7||10.9||9,665.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.13||1.24||1.22||1.15||1.07||1.14|
|Japanese Yen per U.S. Dollar||115.79||115.16||104.20||108.41||114.03||114.85|
|U.S. Dollar per British Pounds||1.36||1.35||1.36||1.28||1.22||1.37|
Chart of the Week: Excess Demand Should Wane
- The substantial government stimulus provided to consumers peaked in April 2021 and has been declining ever since. This influx of cash and resulting increase in demand for goods was likely one of the factors driving prices higher in 2021.
- With consumer savings receding toward pre-pandemic levels, spending should also decelerate from record highs. As such, consumer spending should be more modest and driven by growth in worker compensation and higher employment levels.
- The return of consumer spending to more normal levels should be a welcome development to overwhelmed supply chains and bring supply/demand back into balance. This balance should also help bring inflation levels back to more optimum levels.
Commentary: Unsynchronized Wage Growth
Record increases in hourly wages have not been as widespread as many would believe. As you can see in the table below, much of the recent labor issues have come from areas that benefitted the most from elevated unemployment insurance benefits, namely leisure and hospitality. Attractive unemployment benefits reduced the amount of available labor, resulting in a large supply/demand imbalance within the lower wage groups as the economy reopened. Reduced available labor led to a significant jump in wages in some areas like Retail and Leisure, and Hospitality, but much smaller increases in Financial Services and Information Technology. The run-off of government stimulus should improve labor supply and slow the pace of wage growth in the most impacted areas.