Taper Time…Again

Weekly Market Update | December 13, 2021

Highlights

Global equities (as measured by the MSCI AC World index) jumped 3.0% as omicron volatility subsided. Initial reports that the variant may be milder than the delta variant also likely added to gains. In the U.S., the Dow Jones rallied 4.0% while the S&P 500 surged 3.8%. The NASDAQ trailed slightly, but still gained 3.6%. Non-U.S. markets posted more muted gains with European stocks rising 3.1% while Emerging Market stocks gained just 1.1%. The 10-year U.S. Treasury yield rose 14 basis points to 1.48%.

The Federal Reserve sent a strong signal to investors when Fed Chair Powell stated before Congress that the Fed’s asset purchases may need to end a “few months early.” By sending small hawkish surprises now, the Fed may be eliminating the risk of a larger hawkish surprise in 2022. It seems likely that the Fed will accelerate its pace of tapering from $15 billion a month to $30 billion a month at this Wednesday’s Federal Open Market Committee (FOMC) meeting. By ending its quantitative easing (QE) program early, the Fed is essentially clearing the path for rate hikes should it need to address inflation.

Interestingly, inflation expectations have eased a bit with the 10-year U.S. Treasury breakeven rate falling since mid-November. We suspect this reflects a slowing in the pace of commodity price gains over the past few weeks.