Friday's Market Minute: Short-Term Risks to Markets Have Increased

December is usually a good month for stocks, but this one is setting up to be bumpy so far as fear, uncertainty, and doubt are creeping back into financial markets. Uncertainty driven by the variant has prompted many investors to sell stocks to lock in this year’s gains, although choppy market conditions are enticing shorter-term traders to scalp for deals. The VIX is now at a nine-month high, and small-cap stocks are going through a meaningful route. The Russell 2000 is down about 10% since early November.

Treasury yield curves continue to flatten, and U.S. junk bond prices fell last month by the most in more than a year. Both are clear indications of how the emergence of a new strain of coronavirus has shifted investor sentiment away from the stocks and bonds of companies that are most vulnerable. On top of that, Federal Reserve chair Jay Powell has indicated an openness to a faster reduction in the pace of asset purchases, even as cautious sentiment manifested earlier in November due to high inflation and decelerating economic growth. Previously, the Fed was using COVID concerns to remain dovish, but this time around they may be pinned down on the inflation front in addition to a robust labor report expected this morning.

The consensus expectation is for 550K nonfarm payrolls to be added in November, which is slightly higher than October's 531K print, and the jobless rate is seen to falling to 4.5%. The next couple of weeks will be key in assessing the impact of the new variant as well as how certain the Fed appears to announce a quickening in the pace of QE tapering. There is no doubt market participants will be carefully watching all measures of labor market slack to gauge the progress towards the Fed's dual mandate of stable inflation and full employment. The inflation mandate has clearly been met, and the labor market data will form a key part of the Fed's arguments for rate hikes. All else equal, any significant improvement in these metrics may see markets further price in tighter rates next year.

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