Friday's Market Minute: Markets are Awakening to the End of Easy Money

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Today’s labor report will help shape expectations for interest rate lift off from the Fed as the labor market nudges closer and closer to full employment. Consensus expectations are looking for a 400K rise in December payrolls, with a wide range in analyst forecasts between 150K and 1.1 million. The prior jobs report disappointed on the headline, seeing only 210K jobs created in November even as measures of employment slack (participation rate, employment to population ratio, and U6 underemployment) all improved from the prior print, but remained beneath pre-pandemic levels.

According to the minutes from its latest meeting, the FOMC declared they may need to raise interest rates “sooner or at a faster pace” than officials had initially anticipated due to inflation that turned out to be more than transitory. It is clear the Fed has become discomfited with elevated inflation, even with their confidence that the U.S. economy will recover strongly despite the risk of the Omicron variant. The minutes seem to have been more hawkish than expected, and the bumpy shift from growth-to-value continues to generate alpha despite heightened volatility surrounding the tactical policy pivot set forth by the Fed at the end of 2021. As rates rise, investors should duly expect institutions to favor stocks with current cash flows over those offering future ones. As the discount rates rise, and with the perception of less available liquidity, rotation from the most expensive areas of the market such as technology may be long overdue.

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