Unrelated to any specific news, mortgage rates climbed steadily during the first few days of the new year and ended at the highest levels since April of last year. Investors typically adjust their portfolios now to reflect their outlook for the year, and they have favored stocks over bonds so far, mainly due to concerns about higher inflation.
The most significant economic report released over the past week was from the Institute of Supply Management (ISM). Its national manufacturing sector index fell to 58.7, which was below the consensus forecast of 60, and the lowest level since January of last year. While the latest data looked a bit weak when compared to recent months, it remained very high by historical standards. Levels above just 50 indicate that the sector is expanding, and readings above 60 are rare. Of note, many companies continued to report difficulties in hiring enough skilled workers to keep up with growing demand or indicated that supply chain disruptions were holding back production.
The Job Openings and Labor Turnover Survey (JOLTS) report indicated that the labor market remains very tight. At the end of November, there were a massive 10.6 million job openings, close to the recent record high, and almost 4 million more than in January 2020, prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. In addition, a record high 4.53 million employees also willingly left their jobs in November, which represents roughly 3% of the labor force. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.
The minutes from the December 15 Federal Reserve meeting released on Wednesday were a little more hawkish (favoring tighter monetary policy) than expected. The Fed is now in the process of tapering (scaling back) its massive bond purchase program, which was initiated near the start of the pandemic to help the economy recover. At the current pace, this program will conclude near the end of March. Investors anticipate that the first federal funds rate hike will take place shortly after that. In addition to not buying more bonds, almost all officials favor beginning to actually reduce the size of the Fed’s balance sheet “at some point” after the first rate hike. In short, investors now think that the Fed is just months away from ending bond purchases, raising the federal funds rate, and shrinking the balance sheet, which is a little sooner than previously anticipated.
ISM Manufacturing Index
January 6 — ISM Services Index
January 7 — Employment Report
January 12 — Consumer Price Index (CPI)