Conway’s QuickTake: Week of December 13, 2021

Here’s What Happened Last Week:

U.S. Equity Markets

  • U.S. stocks rebounded last week from the prior week’s downturn. Fears about the new omicron variant seemed to quickly subside and the S&P 500 Index recorded its best weekly gain since February.
  • Within the S&P 500, all sectors were positive. The clear leader was information technology up nearly 6% driven by strong gains in the sector’s largest company, Apple. Its market capitalization ended Friday just below $3 trillion, easily making it the world’s most valuable public company.
  • A few stocks that defined the week include Royal Caribbean Group (RCL), Carnival (CCL), and other cruise lines which spiked after initial fears of the omicron variant severity dissipated. Tyson Foods (TSN) plans to spend $1.3 billion to automate part of its production lines over the next three years as it navigates the tricky labor shortage, hoping to emerge stronger than ever and positioned to grow.
  • Large-cap stocks modestly beat small-caps and growth slightly led value although any disparity between the segments was not meaningful. For the year, small-cap growth has not followed suit with other specific size-and-styles, as it is only in the black by 1.5%.

International Equity Markets

  • International equities increased as developed markets advanced more than emerging markets. Broad emerging market stocks remain in negative territory for the year.
  • European equities rebounded like U.S. equities, following the abating omicron concerns. There were some localized restrictions implemented, however, as the U.K. rolled out Plan B encouraging people to work from home if possible and requiring mask-wearing indoors at places where it is practical to wear one. Other nations tightened measures including Denmark, Norway, Germany, Italy, France, and Ireland.
  • Japanese stocks rose as Prime Minister Fumio Kishida announced detailed plans relating to a shift to more digitalization, climate change mitigation, and a stronger ecosystem.
  • Chinese stocks rose last week after the People’s Bank of China announced it will cut the reserve requirement ratio for banks by 0.5% releasing ¥1.2 trillion (~ $188 billion) of liquidity into local markets.

Credit Markets (Perspectives from our partners at Piton Investment Management)

  • Treasury yields climbed following Friday’s jobs number, with the 10-year yield closing around 1.49%, up nearly 14 bps from the week prior.
  • The spread between 2s30s has increased by around 13 bps since the start of the month.
  • The reaction from the market does not indicate any major changes expected on the Fed’s course of tightening for next year.
  • Investment-grade corporate bond credit spreads tightened at the start of the week. However, such bonds fell week-over-week while high-yield corporates advanced. Investment-grade funds recorded a second straight week of outflows while high-yields reported net inflows.
  • Notable new corporate issues for next week include $8 billion in aggregate offered by Merck in five parts.
  • Municipal bonds remained the dominant investment-grade sector this week with the Bloomberg Municipal Bond index remaining unchanged while the taxable Bloomberg U.S. Aggregate Bond index was down over 20 basis points Friday morning.  High demand for tax-exempt bonds allowed municipals to shrug off inflationary data points last week.
  • Investors added to municipal bond funds for the 40th straight week to the tune of over $800 million.
Source: iStock 2021

U.S. Economic Data/News

  • Last week’s most likely notable story was that the November consumer price index rose 6.8% compared to a year ago, and 0.8% on a month-over-month basis. The annual increase is the largest jump since 1982 which had retreated from nearly 15% a few years prior to then. The increase was in line with expectations which was mostly broad-based implying wage pressures, supply chain issues, and energy costs were contributors. Nevertheless, the high level of inflation strengthens the case for the Federal Reserve to accelerate the planned tapering of monthly bond purchases and lessen other stimulus measures.
  • On Thursday, the Labor Department reported that 184,000 people filed for unemployment benefits the prior week, which is the lowest number since 1969, an amazing 52-year timeframe. In addition, the count of vacant jobs spiked to a record 11 million mostly concentrated in accommodation and food services. There are fewer people in the workforce than pre-pandemic, making it hard for employers to fill open positions even with upward pressure on wages.
  • It’s still not certain, but preliminary signs indicate the severity of U.S. cases of omicron were mild as reported by Rochelle Walensky, the head of the Centers for Disease Control and Prevention. However, she emphasized further analysis still needs to be done to verify these claims. Also, on Wednesday Pfizer and BioNTech reported the third dose of their vaccine was significantly more effective at generating antibodies and providing protection against the omicron variant than two doses do.

International Economic Data/News

  • As reported by their government, German industrial production rose more than expected in October by 2.8% on a monthly scale. Exports and imports both rose by 4.1% and 5% respectively showing economic strength. However, orders for the future plummeted by 6.9%.
  • In the U.K., the gross domestic product (GDP) figure grew by 0.1% in October, down from a 0.6% increase in September as the construction industry contracted given rising costs and supply chain disruptions.
  • The third-quarter Japanese GDP was revised lower to a 3.6% annual contraction due to lingering pandemic effects. Separately, the Bank of Japan showed a record 9% annual increase in producer prices due to the expected culprits – supply chain bottlenecks and higher costs for raw materials.
  • China released a host of economic readings. First, the annual tally of exports rose 22.0% in November while imports surged 31.7%. As a result, the trade surplus declined compared to October. Also, the Chinese consumer price index rose 2.3% year-over-year in November compared to a 1.5% gain in October.

Looking ahead…

Wednesday, December 15, 2021

  • US Retail Sales
  • UK CPI

Thursday, December 16, 2021

  • US Jobless Claims
  • US Manufacturing PMI
  • US Services PMI
  • Euro area Manufacturing PMI

Friday, December 17, 2021

  • UK Retail Sales

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, GS Weekly Market Monitor