Brad Houle, CFA
Executive Vice President
Fixed Income Research and Portfolio Management
This week, volatility returned to capital markets due to the recent emergence of the Omicron variant. Initial reports indicate Omicron shows increased transmissibility and mild symptoms, a “mixed bag” of changes over Delta. And while it will be several weeks before we see a more accurate picture of its impact on human health, capital markets immediately responded with increased stock market volatility and lower interest rates. The decline, roughly 4% down from the peak of November 18, shows that as the pandemic wears on, market reactions have become more muted.
Our view is that Omicron will most likely not be impactful to the overall economic recovery and that we are still early in the cycle. Any decline in demand for goods and services that are disrupted by the resurgence of the virus is not demand destruction but merely a delay in demand. This delay may further lengthen the duration of the economic cycle.
A Hawkish Powell?
This week, Federal Reserve Chair Jerome Powell testified in front of Congress and officially declared that the characterization of inflation as "transitory” to no longer be correct. He also indicated the mid-December Federal Reserve Open Market Committee meeting might discuss accelerating the tapering of U.S. Treasury bond purchases. The purpose of buying U.S. Treasury bonds is to create liquidity and stimulate the economy. We expect the proposal to change the current monthly purchase of $15 billion to . . . $30 billion, which would end the purchase of bonds by spring of 2022.
The market is also anticipating the Federal Reserve to increase short-term interest rates in mid-2022, a decision which has been characterized as independent from the tapering decision. Inflation has been far more persistent than we had anticipated. However, we do expect inflation to moderate in the first half of 2022 as many of the pandemic-impacted price spikes are expected to subside.
Lastly, the U.S. Bureau of Labor Statistic’s report for November employment was released today with the economy creating 210,000 new nonfarm jobs, well below the estimate of 550,000 jobs created. Looking beyond the disappointing headline number, the unemployment rate dropped to 4.2% and the labor participation rate edged up, both of which are positive news. The disequilibrium of the job market, with more jobs available than unemployed people to fill them, will take some time to normalize. Until then, businesses will be short of labor and the “help wanted” signs will remain.
Takeaways for the Week:
The Omicron variant is creating market volatility, long before its true health impact is known
As the pandemic continues, the market reaction to subsequent virus variants and resurgences has become more muted