Baker Market Update – wk211231

Happy New Years to all as we wrap up the final trading week of the year. Looking at bonds this morning, the 30yr US Treasury is trading at a yield of 1.91%, along with 10yr at 1.51% and the 2Yr is 0.72%. Of recent note is the flattening of the yield curve. A common measure, the 10s versus 2s spread is currently 78 basis points coming down from a high earlier this year of 158bps in March. Recent curve flattening has been discussed as a potential challenge for the Fed as short-term rates continue increase due to the eventual increase of the Fed Funds rates and QE taper while longer term rates remain suppressed by supply/demand dynamics along with lower long-term growth and inflation expectations. As usual with the holiday week, it was relatively light on the economic data front.

On Monday, the Dallas Fed released their Manufacturing Activity index which assesses broader business conditions in the sector, it dropped to 8.1 from 11.8 while also missing expectations of 13.5 signaling overall activity has cooled somewhat. Tuesday gave us housing numbers showing home prices appreciated about 1.1% (FHFA) month over month and the S&P Core-Logic 20-city composite is now up 18% over this last year. The Richmond Fed also released their MFG index which actually surprised on the upside. Wednesday’s releases were the current US trade balance, showing a historically high $97 billion trade deficit and US wholesale inventories increased 1.2% month over month as companies stockpile during the shopping season. As we look to 2022, current bottlenecks should free up more, potentially alleviating some of the current inflation pressures today. And then Thursday’s weekly jobless claims continued to remain extremely low at 198K for the week as the US economy continues to see the unemployment rate drop (currently at 4.2%).

As we wrap up the final week of the year, let’s take a look at some of other major numbers and moves for the year. Looking at equities, the S&P notched an impressive 27% YTD return with the Nasdaq up 22% and Dow Jones rounding out at the group with an 18% gain. Commodities also pushed higher as both oil (WTI) and natural gas are up 57% and 44% respectively. Looking at the favorite precious metal, gold, it was basically flat for the year down 4% YTD. Finally on the agriculture side of things we saw solid gains with corn up 23%, cotton up 45% and wheat up 21%. As economic forecasters polish their crystal balls it appears most expectations for much more modest gains for equity indices in 2022.

Next week will bring key economic data related to December. ISM Manufacturing, PMI and durables goods order will come out earlier in the week and on Friday will include the Jobs report for December. January will also include a FOMC meeting at the end of the month which many will be the last before the potential “live” meeting in March for the potential first rate hike assuming QE tapering goes to plan.
Happy New Year to all and enjoy the College Bowl Games!

Go Blue, Roll Tide, Call the Dawgs, and Cheer Cincinnati!

Today’s Chart is Treasury Yields for 2021. As you can see the 2yt has seen the biggest increase in yield as the market is pricing in an increase in short term rates. Longer term rates such as the 30yr and 10year are still off of their highs earlier this year.

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The Baker Group Matt Harris, CFA

Matt Harris, CFA

Senior Vice President/Assistant Director of Asset/Liability Management
The Baker Group LP

mharris@GoBaker.com
800.937.2257

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