Monday Morning Coffee: Losses on Wall Street As Interest Rates and Omicron Increase

Posted by Steve Graham on 1/9/22 1:41 PM

Wall Street wrapped up the first week of the year with daily and weekly losses as investors worry about looming U.S. interest rate hikes and unfolding Omicron infections. Stocks fell after data showed the U.S. jobs market was at or near maximum employment, even though employment rose by far less than expected in December. On Wednesday, minutes released of the Fed’s Dec. 14-15 meeting showed officials that the labor market is “very tight” and signaled that the Fed may have to raise rates sooner than expected. The Dow Jones Industrial Average fell 4.81 points, or 0.01% to 36,231.66, the S&P lost 19,02 points, or 0.41% to 4,677.03 and the NASDAQ Composite dropped 144.96 points, or 0.96% to 14,935.90. For the week, the Dow dropped 0.3%, the S&P declined 1.9% and the NASDAQ dropped 4.5%. Investors are concerned that employment will continue to be tight, affected by the Omicron variant, and that the Fed will move more quickly than expected. Investors have been rotating out of technology-heavy growth stocks and into more value-oriented shares, which they think will do better in a high-interest rate environment.

Non-farm payrolls rose less than expected in December, with employers adding 199,000 jobs. Also, job growth in the preceding two months was revised higher. The unemployment rate fell to 3.9%. Jobs data released before the report supported the view that employers should have stronger. The ADP added 807,000 jobs in December and the Challenger layoffs and jobless claims fell sharply from November, suggesting a stronger labor market than the official announcement. There also seems to be a divergence between the establishment survey and the household survey. While the establishment survey showed much lower-than-expected job gains, the household survey showed a gain of 651,000. We suspect the Bureau of Labor Statistics may be having difficulty with the seasonal adjustments in the large swings in employment that occurred during the pandemic. Seasonal adjustments are particularly large in the holiday season and large swings in the leisure and hospitality sector may be affecting the headline number. Next month, the BLS will release its annual revision to non-farm payrolls, incorporate more complete source data, and update seasonal adjustments. The overall employment totals may not change much but we may see a different view of the data.

One thing that seems clear about the labor market, it is tight. The November JOLTS data showed a record-high 4.5 million people quit their jobs in November. While job openings fell by 529,000 during the month, they remain exceptionally high at 10.56 million jobs, which is 51% higher than before the pandemic. Businesses are having trouble finding workers after dramatically raising compensation. The household survey showed that employment grew by 4.4 million since June, the date when several large states ended their participation in the Federal Unemployment Emergency Compensation program. Statistically, there were few differences between the states that ended the program and those who kept it. However, pressure to add employment is strong. While the household survey is more volatile than the establishment one, large gains in that survey do tend to precede large gains in the establishment survey. This is just another piece of data that shows demand for workers is strong and supply is continuing to be tight. The surveys did not catch the full effect of the Omicron variant, which will continue to keep workers on the sidelines.

There have been tentative signs of improvement in the supply chains. The ISM manufacturing survey fell 2.4 points in December to 58.7. The larger-than-expected drop was mostly due to a 7.3-point drop in the supplier delivery index to 64.0, the lowest since November 2020. Normally, a shortening in the index is negative for the economy, However, in this case, it appears the result of progress in the supply chains. Also, the prices paid index fell 14.2 points to 68.2, also the lowest since November 2020. The ISM services index recorded an even larger 11.8-point drop in supplier deliveries. However, the prices paid index rose 0.2 to 82.5. The services sector includes construction, affected, by the rains in British Columbia. Lumber prices spiked in December as the rains in western Canada disrupted supply chains bringing logs to lumber mills.

The nation’s trade deficit widened in November as a surge in imports outran a small rise in imports. The nation’s trade deficit widened by $15.1 billion to a record $99 billion. The wider trade deficit will weigh on fourth-quarter growth. A big part of the rise in imports were industrial supplies, needed by manufacturers. However, the global increase in Omicron infections threatens to slow the progress in righting supply chains. There are ports in China that are seeing shutdowns and are making it more difficult to find workers in the U.S. While the Omicron variant seems less deadly than other COVID variants, it is highly contagious, with more than a million cases recorded across the U.S. That means, fewer workers and fewer students and threatens to slow progress in the supply chains, which are feeding inflation. COVID is still affecting our lives and the economy for the third year.

This week will be meaningful for economic data, we get a look at CPI, retail sales, business inventories, and industrial production.

Tags: Economy, Monday Coffee

Latest Data

The U.S. Economy:

Construction spending increased 0.4% in November, Outlays on residential construction surged 0.9%, fueled by a 1.2% advance in single-family construction spending. The multifamily housing sector dipped 0.3%. In the past year, total construction spending was up 9.3% and the residential sector saw a 12.5% advance. Nonresidential construction dipped 0.1% but was up 12.5% from a year earlier. Although the month-to-month report was not earth-shattering, it was interesting to note that after months of weakness, the most hard-hit sectors in nonresidential construction are turning. The lodging category has stabilized and is up 3.4% year-over-year, The office sector was up 1.4% in November, but down 30.7% y/y. Manufacturing increased 0.9%, up 22.4% year-over-year. Public construction spending fell 0.2% in November and was 0.9% down from November 2020.

U.S. manufacturing activity slowed in December, falling 2.4 percentage points to 58.7 from a 61.1 reading in November. The new orders index fell 1.1 percentage points to 60.4, with 13 out of 18 industries reporting growth in new orders. The production index fell by 2.3 percentage points to 59.2, with 10 industries reporting greater production. The Employment Index increased by 0.9 of a percentage point to 54.2, with 8 industries reporting greater employment. The supplier deliveries index fell by 7.3 percentage points to 64.9, with 14 out of 18 industries reporting slower deliveries. Delivery times are still decelerating but at a slower rate than the previous month and suggest that the supplier network is making progress with demand. Inventories fell by 2.1 percentage points to 54.7. The price index fell 14.2 percentage points to 68.2, indicating a slower rate of price increases. Sixteen out of 18 industries reported paying higher prices. Backlogs fell by 0.9 pf a percentage point to 62.8, with 11 industries reporting higher backlogs. Exports fell by 0.6 of a percentage point to 53.6, with six industries reporting higher export orders. Imports increased by 1.2 percentage points to 53.8.

The December reading of the ISM index still shows a demand-driven supply chain-constrained environment. However, there were improvements in employment, supplier deliveries, and prices paid that suggest that the supply constraints are starting to ease. This does not mean that the problems in the supply chains have disappeared. Timothy Fiore chair of the ISM manufacturing committee noted that “shortages of critical lowest-tied materials, high commodity prices and difficulties in transporting products continue to plague reliable consumption.” The survey does not fully capture the impact of the Omicron COVID variant, which is rapidly spreading across the U.S. A rise in infections could prompt more stay-at-home activity and halt the tentative progress in the supply chains. Respondent statements allude to the signs of progress. Manufacturers of fabricated metal products expressed optimism that “we have reached the top of the hill to start down a gentle glide back to something that resembles normal.” Their counterparts in the chemical products industry said the “gut feeling says it’s getting easier to source chemical raw materials.” Machinery makers reported that “costs for steel seem to be coming down some.” They noted improvements in “performance by suppliers” and “on-time deliveries.” The ISM’s Fiore said that transportation networks, a harbinger of future supply delivery performance, were still performing erratically, but there are signs of improvement. The supplier deliveries index fell by 7.3 percentage points to 64.9. Inflation is also showing signs of cooling. The price index fell 14.2 percentage points to 68.2. The 14.2 drop was the biggest since October 2011. This supports the view that the recent push in inflation is “transitory” and may have big implications for monetary policy.

U.S. vehicle sales dropped to a 12.4 million seasonally adjusted annual pace in December from 12.9 million in December. The December result was the seventh consecutive month below the 16 to 18 million range, beating the six months from March through August 2020. Auto sales are largely a result of component shortages, that have limited production, resulting in plunging inventory and surging prices. As with other economic indicators, there are signs of easing supply chain issues. Domestic assemblies increased for a second consecutive month in November, coming in at 9.3 million at a seasonal adjusted annual rate, up from 9.0 million in October and 7.6 million in September, but still below the 11.2 million averages, for the five years through December 2019. Ward’s estimate of auto inventory came in at 109,300 in November, near the all-time low. The Bureau of Economic Analysis (BEA) estimates the inventory-to-sales ratio was a record low of 0.242 in November. Low inventories ha e pushed prices sharply higher. However, the price ticked down in November, with the average consumer expenditure for a car falling to $32,241 in November, while the price on a light truck fell to $47,875, representing year-over-year gains of 17.6% and 12.5%, respectively. There are signs that the number of vehicles on dealer lots is growing. Dealer lot inventories rose to more than 1 million last month for the first time since August but that is still 1.5 million below 2020 and 2.5 million lower than in 2019. Industry analysts say that supplies of chips are improving, but not certain when they will be back to the pre-pandemic level. The average gasoline vehicle uses about 1,000 chips and electric units twice that. Some of the increase in units at dealer lots can be attributed to managing the chips shortage better, rather than an increase in supply. Automakers are allocating their chips to their more expensive models.

The ISM services index fell 7.1 percentage points to 62 in December from the all-time high of 69.1%. The business activity index fell 7.0 percentage points to 67.6% and the new orders index fell 8.2 points to the all-time reading of 69.7 in November. Supplier deliveries registered 63.9%, 11.8 percentage points the 75.7 percent reading in November. The prices paid index reached the third-highest reading of 82.5 percent, up 0.2 from November. Although the index fell in December, it still represents strong growth for services. Respondents are still struggling with inflation, supply chain disruptions, capacity restraints, logistical challenges, and labor and materials. Respondents noted that supply chain issues continue, but businesses seem to be adapting. There seems to be progress in the supply chains, but the pressure is still in the critical range. Long lead times, transportation bottlenecks and delivery inconsistencies and price increases are still affecting products in the retail sales sector. Activity is broad-based and strong, across industries. The outlook for the service industries is optimistic, with the hope that the supply chain’s performance will continue to improve.

Factory orders increased 1.6% in November and orders for October were revised to 1.2% from the 1% original estimation. Excluding transportation, orders increased 0.8% after rising more than 1% in each of the previous two months. Orders for core capital goods were unchanged in November after falling 0.1% in October. There were increases in orders for computers and electronic products, as well as transportation equipment. Orders for machinery fell as did orders for electrical equipment, and appliances, and other components. Shipments increased 0.7% in November, following a 2.0% surge. Shipments of core capital goods increased 0.3% in November. The report suggests that demand remains solid in the transportation sector but is starting to cool in the areas that support business investment in equipment. Business investment on equipment contracted in the third quarter after a year of double-digit growth and will likely o have struggled in the fourth quarter.

The U.S. nominal trade deficit widened noticeably in November, rising from $67.2 billion in October to $80.2 billion in November. Nominal imports jumped 4.6% in November, the fourth consecutive monthly gain. Nominal exports edged 0.2% higher. Nominal imports jumped 4.6% in November, the fourth consecutive monthly gain. Nominal exports edged 0.3% higher. The goods deficit widened from $97.1 billion to $110.8 billion. The goods deficit is still mirroring the pandemic impact that favors goods imports over exports. The emergence and spread of the Omicron variant could favor more stay-at-home policies and slow global economic recovery. As COVID fades, the international sector will recover more quickly, and import demand will cool. This will help shift spending back to services and lower the trade balance.

U.S. payrolls increased by 199,000 in December, less than expected. Job creation was highest in leisure/hospitality, which added 53,000. Professional and business services contributed 43,000, while manufacturing added 26,000. Construction added 22,000. Payrolls for November were revised by 39,000 to 249,000 and October was revised up by 102,000 to 648,000. For all of 2021, employment grew by 6.4 million jobs, or 537,000 a month. So far, the U.S. has recouped 18.8 million jobs, or 84% of the 22.4 million jobs lost during the pandemic, leaving 3.6 million shies of the pre-crisis level. The unemployment rate hit a fresh pandemic low of 3.9%. Wages climbed 0.6% in December, up 4.7% year-on-year. While the establishment survey showed much lower-than-expected job gains, the household survey showed a gain of 651,000 and there were upward revisions in November to 249,000 and October showed a gain of 648,000. The increased COVID infections in December likely slowed employment growth, and that will affect January’s numbers. The survey came before the omicron variant started to spread significantly across the U.S. The labor market will still recover but a more sustainable recovery will not appear until COVID fades.



China’s factory activity unexpectedly accelerated in December, but only by a slim margin. The official manufacturing PMI rose to 50.3 in December, up from 50.1 in November. The world’s second-largest economy lost some steam since last summer after rebounding from the pandemic slump in 2020. The country has seen a slowing manufacturing sector, debt problems in the nation’s property sector, carbon-emission curbs, and delays from COVID outbreaks. December’s data showed that new orders improved to 49.7 versus 49.4 in November but remained in a negative state. New export orders came in at 48.1, compared to 48.5 in November. Production came in at 51.4, but off from November’s 52.0 reading. Next year, China will face difficulties in trade, as production capacity in other countries recover from the pandemic and compete with China’s products. The official PMI, which included manufacturing and services stood at 52.2, unchanged from November. The economy grew 4.9% in the third quarter but likely slowed in the fourth quarter.

Important Data Releases This Week

  • The December NFIB small business optimism index will be released on Tuesday, January 11 at 6:00 AM. The index, which stood at 98.4 in November has been inching forward. Small businesses are having difficulty in finding labor and inflation of needed inputs is adding to the frustration. Still, demand is strong, and the index should move to 98.6 in December.
  • The December consumer price index report will be released on Wednesday, January 12 at 8:30 AM. Elevated demand for goods and disruption in the supply chains have led to the highest inflation in a generation. The CPI in November was up 6.8% over the year, the biggest reading since 1982. Inflation is broadening into the service sector and moving into housing and medical care. The CPI is projected to grow 0.4% in December, with some relief from energy prices. Signs of progress in the supply chains are threatened by Omicron, which delays the progress and keeps the inflation fire burning.
  • The December retail sales report will be released on Friday, January 14 at 8:30 AM. Consumers are starting to feel the pressure from inflation. Retail sales increased at a less-than=expected 0.3% in November. Higher prices for food and gas are forcing consumers to make choices in discretionary items. Also. Spending is slowly winding its way back to services. Omicron represents a threat to spend. We expect a weak reading for December, with a 0.2% decline.
  • The December industrial production report will be released on Friday, January 14 at 9:15 AM. Supply and labor shortages continue to be the biggest challenges for the factory sector. Industrial production grew 0.5% in November, a considerable slowdown from the 1.7% gain in October. Manufacturing rose0.7%, with gains in autos and parts. Auto assemblies picked up in November, but progress in the sector is still expected to be slow. Total IP is projected to have increased 0.3% in December. Warm weather in December will keep utility output subdued. December’s supply chain improvements suggest manufacturing will be solid and although we expect that the shadow of the chains will persist, the outlook for industrial activity looks good for 2022.
  • The December business inventories report will be released on Friday, January 14 at 10:00 AM. Despite the supply chain problems, progress in increasing inventories is being made. Stocks grew 1.2% in November. We think stocks will rise a solid 1.0% in December.






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