Sightline Weekly Market Update: CPI Rises Amid Near-Record Job Openings
Two weeks ago, fear that the omicron variant would cause the economy to deaccelerate found relief last week following news that the new variant was not as severe as previous variants. Investor sentiment reversed, sending equity markets higher, with the S&P MidCap 400 reaching a new high by week’s end. The TSX gained 1.20%. The Dow Jones jumped 4.02%, the S&P 500 rallied 3.61%, the MidCap 400 rose 2.88%, and the Russell increased 2.43%. In Europe, markets rebounded on the same news sending the pan-European STOXX Europe 600 Index 2.76% higher, Germany’s Dax jumped 2.99%, France’s CAC 40 gained 3.34%, the Italian FTSE MIB increased 3.02%, and the UK’s FTSE 100 finished the week 2.38% higher.
With investor focus on omicron, market participants greeted economic news largely favorably. On Tuesday, the US Labor Department reported third-quarter labor productivity decreased 5.2%, the largest decline since the second quarter of 1960 when productivity declined 6.2%. Output increased 1.8%, hours worked increased by 7.4%, and unit labor costs increased at an annual rate of 9.6%, reflecting an increase in hourly wages of 3.9% and the 5.2% decrease in productivity.1 On Wednesday, the Labor Department reported that the number of job openings increased to 11 million as of October 31, increasing 431,000 from the previous reading. Several industries experienced increasing job openings, with accommodation and food services leading with 254,000 jobs, followed by nondurable manufacturing with 45,000, and educational services with 42,000. State and local government less education lost 115,000. For the 12 months ending October 31, net employment gain was 5.7 million, with total hires at 73.8 million and separations totaling 68.1 million.2 The near-record job openings reflect the persistent labor shortage employers are facing. Initial unemployment claims released Thursday by the US Department of Labor decreased by 41,000 from the previous week to 184,000. This is the lowest level of initial claims since September 6, 1969. Continuing claims for all programs decreased by 350,527 to 1,947,598.3
On Friday, the Bureau of Labor Statistics reported the Consumer Price Index for the 12 months ending in November rose to 6.8%, the highest rate since June of 1982. The core rate of inflation ex-energy and food for the 12 months climbed to 4.9%.4 An alternative calculation for inflation using the 1980-based calculation reported by John Williams of Shadow Stats indicates inflation at 14.9%, similar to the early 1980s.5 As bottlenecks in the supply chain are slowly untangled, the expectation is for price inflation to slow. With persistent labor shortages, employers are likely to continue offering higher wages to attract workers. In addition, as mentioned previously, labor unions are encouraged by a supportive administration and tight labor markets as an opportunity to force employers for higher wages. Wage pressure is unlikely to subside any time soon, possibly causing the Fed to adjust its policy response in the latter half of 2022.
The University of Michigan Consumer Sentiment Index jumped to 70.4 from the November reading of 67.4 but well short of the 80.7 December 2020 reading. Also, the Current Economic Conditions reading increased to 74.6 from the November reading of 73.6 and a December 2020 reading of 90.0. The Index of Consumer Expectations followed the same trend, coming in at 67.8 compared to a November reading of 63.5 and a December 2020 reading of 74.6.6
The rebound in equity markets could be short-lived as investors are forced to digest announcements from the FOMC meeting this week. With inflation continuing to be elevated, the Fed policymakers may announce plans to accelerate the pace of the tapering process, permitting them to raise rates earlier in 2022 than initially planned. In addition, the Fed is expected to release updated projections for unemployment expectations, inflation, and US growth. Chairman Powell’s upcoming press conference could jolt equity markets, and once again, we could see an increase in volatility. However, if history is any guide, the rising equity market can co-exist with the initial stages of rate-hiking.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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