US Close: ISM shows pricing pressures ease, Jolts show the Great Resignation continues, Fed’s dove sees 2 hikes in 2022

It wasn’t much of a rally, but we did get a Santa rally.  The second trading day of the New Year marks the end of the Santa rally and more importantly the latest updates over how quickly global supply constraints are easing, but sadly that might not last due to omicron.  US stocks could not hold onto earlier gains as tech stocks got pummeled over fears that Treasury yields will go much higher.

Wall Street knows the first quarter of the year will be all about ramping up Fed rate hike expectations as investors assess the impact of elevated energy prices, surging Treasury yields, and the neverending focus of new COVID variants (IHU, the new B.1.640.2 variant).  Risk appetite fizzled out after both a softer-than-expected ISM manufacturing report and Jolts job openings suggested wages will have to rise.  Not helping sentiment was the latest update from Washington DC, Punchbowl news reported that Senator Manchin has not yet had any conversations about Build Back Better since his statement a few weeks ago.

Rotation Tuesday trade was all about jumping back into energy stocks as oil prices are poised to remain elevated, financials got a boost from surging yields, and expectations for Build Back Better to get done supported industrials and material stocks.

US Data

The ISM manufacturing report delivered a headline miss, but most traders focused on the drop in prices paid as pipeline pressures improved.  The headline ISM Manufacturing index dropped 2.4 points to 58.7, a miss of the consensus estimate of 60.0 and also the lowest reading in a year.  Prices paid plunged from 82.4 to 68.2, a big miss of the analysts’ estimate of 79.3. This massive drop in prices paid could be a sign that peak is in for inflation.  Omicron will undoubtedly contribute one last hurdle to a complete return to normal factory activity, but the optimism is growing that pricing pressures could be steadily improving.

The Jolts

The Jolts report showed a record number of quits, while the total number of job openings dropped.  The Great Resignation is complicating the Fed’s goal to recover all the jobs lost due to COVID.  The November job openings fell to 10.56 million, a miss of the 11.08 million consensus estimate.  The quits rate rose 3.0% to a series high at 4.5 million. The key takeaway from the Jolts report is that the Great Resignation means wages are going higher.

Fed

One of the more dovish Fed members, Neil Kashkari said he supports two rate increases this year, which might mean pricing in three rate hikes this year might not be enough.  Kashkari conceded that “inflation has been higher and more persistent.”  Tomorrow, the Fed will release their minutes to the December 15^th policy decision, on Thursday, we hear from the hawkish Fed’s Bullard and on Friday Fed’s Daly talks about monetary policy and Fed’s Bostic speaks on diversity.

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