Risk assets were whipsawed last week by shifting sentiment around omicron and US monetarily policy. While it is increasingly clear that omicron is already widespread in the US, there is growing optimism that existing vaccines will provide protection against severe disease and death, AND that omicron may be more likely to cause milder cases of covid-19 in the first place. Meanwhile, Fed Chair Jerome Powell’s pivot towards inflation fighting has cooled some investors’ appetite for stocks, sending most US benchmarks lower. Traditional defensive sectors held up the best last week, with only utilities and real estate registering small gains.
Treasury investors responded to Powell’s hawkish turn by flattening the yield curve, under the assumption that more aggressive inflation-fighting in the near term should mean lower inflation and bond yields in the long term. Fed Fund futures are now pricing in ~2.5 rate hikes by the end of 2022. Meanwhile, investment grade credit spreads widened slightly to 95bp, equaling their widest level of the year, while high yield spreads moved in the opposite direction after having widened dramatically when omicron was first reported the day after Thanksgiving.
The BLS released its monthly payroll report. The change in nonfarm payrolls of +210k missed expectations, but all other aspects of the report were encouraging:
* U-3 Unemployment fell to 4.2%
* U-6 Underemployment fell to 7.8%
* Labor Force Participation rose to 61.8%
* Y/Y Growth in Avg Hourly Earnings cooled to 4.8%
