- A November to Remember. Risk aversion escalated in November, driving equities lower across the globe. Heightened risk-off sentiment was driven by the Omicron virus strain spread, warnings of more sustained inflation, and communication that the Federal Reserve may wrap up its asset purchases earlier than planned.
- Transitory No More. The unusual restart dynamics of extraordinary demand bumping up against supply bottlenecks and upward wage pressure in a historically tight labor market have kept inflation levels elevated for longer. Tellingly, the newly reappointed Fed Chairman Jerome Powell said the central bank will back off using the word “transitory” to describe the fast pace of price increases.
- Supply Chain Easing. Even though inflationary pressure remain high, there are early signs that the supply chain disruptions are healing. In Asia, Covid-related factory closures, energy shortages, and port-capacity limits have eased in recent weeks. Similarly, ocean container freight rates have declined for several weeks in a row. Goods and items are slowly starting to return to retailer’s shelves just in time for the holiday season, and car dealers are starting to get some inventory of new cars. Inflation may remain persistent into 2022, but we are hopeful that many supply-demand imbalances will start to moderate from today’s elevated levels.
- Fed Tapering. In the early days of the pandemic, the Federal Reserve cut interest rates to zero, and initiated a program to buy $120 billion of bonds monthly to help maintain low interest rates and provide liquidity to the market. With inflationary pressures weighing on the economy, the Fed had previously announced plans to reduce the monthly bond purchases by $15B/month. The initial tapering announcement was expected, and sparked little market reaction. More recently however, the Fed said they will consider accelerating the timeline for tapering asset purchases. The comments came in more hawkish than anticipated, especially in light of the still-developing Omicron news.
- Infrastructure Bill. President Biden signed a long awaited $550 billion bipartisan infrastructure bill in order to upgrade roads, bridges, railways, and deploy electric vehicle charging stations across the country.
- US Economy. Economic data in the US continue to point toward improving cyclical activity, although supply and labor shortages remain a challenge to sustained progress. Consumer spending further strengthened in October, and is now more than 4% above its pre-Covid peak. ISM manufacturing and services data are both trending higher, and capacity utilization remains strong too.
- Market Outlook. We believe the economic restart has room to run, and remain mostly positive on the outlook for 2022. However, we acknowledge that downside risks have increased over the last few months, with inflation and Fed’s tightening being the key risk. We remain vigilant in monitoring the market’s dynamics, and stand ready to act, on behalf of our clients.
