December 2021 Economic Review

New York  CLASS Economic Update - December

Goodbye Transitory, Hello Tightening

Volatility in financial markets has accelerated since the discovery of the Omicron variant in late November as market participants attempt to gauge the potential economic fallout associated with the spread of this latest virus strain. While Omicron introduces an added layer of uncertainty to the growth outlook, economists generally expect the new variant to have a more muted impact on global economies than initially feared.

Although Omicron may threaten to further exacerbate ongoing challenges to the job market recovery, recent data points to a continued tightening of labor market conditions. The unemployment rate declined from 4.6% in October to 4.2% in November, while initial jobless claims in the week ended December 4 fell to 184k, the lowest recorded level since September 1969.

Recent improvement in the labor market in conjunction with persistently high inflation supports the Fed’s more hawkish pivot with respect to monetary policy in recent weeks. Last month, the FOMC outlined plans to gradually wind down its bond-buying stimulus program by June. Having finally acknowledged that inflationary pressures can no longer be considered “transitory” as previously expected, Fed officials are now prepared to accelerate the tapering process, potentially ending the program by March and paving the way for a first rate hike by mid-2022. Strong consumer demand and pandemic-induced bottlenecks in the global supply chain continue to put upward pressure on prices, further evidenced by the November CPI reading of 6.8%.

The Fed has conceded that its earlier inflation forecasts missed the mark as data continues to suggest that the only thing “transitory” about the current inflation narrative appears to be the term itself. In response, rates along the front end of the curve continue to move higher in anticipation of tighter monetary policy in 2022, a welcome development for money market investors to close the year.

Treasury Yields
Maturity 12/9/21 11/9/21 Change
3-Month 0.054% 0.038% 0.016%
6-Month 0.119% 0.056% 0.063%
1-Year 0.262% 0.127% 0.135%
2-Year 0.688% 0.421% 0.267%
3-Year 1.016% 0.726% 0.290%
5-Year 1.268% 1.081% 0.187%
10-Year 1.499% 1.436% 0.063%
30-Year 1.876% 1.818% 0.058%

Agency Yields
Maturity 12/9/21 11/9/21 Change
3-Month 0.077% 0.061% 0.016%
6-Month 0.100% 0.075% 0.025%
1-Year 0.161% 0.116% 0.045%
2-Year 0.736% 0.439% 0.297%
3-Year 1.024% 0.725% 0.299%
5-Year 1.315% 1.097% 0.218%
Current Economic Releases
Data Period Value
GDP QoQ Q3 ’21 2.00%
U.S. Unemployment Nov ’21 4.20%
ISM Manufacturing Nov ’21 61.10
PPI YoY Oct ’21 12.50%
CPI YoY Nov ’21 6.80%
Fed Funds Target December 10, 2021 0.00% – 0.25%

Source: Bloomberg
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