WHAT A WEEK!

Wow!  What a week!  The election outcome in New Jersey and Virginia was not expected.  Volumes have already been written about the infinite number of potential ramifications.  Then there is the Fed meeting.

The Federal Reserve will begin winding down its monthly asset purchases later this month at a pace of $15 billion per month, while expressing less certainty that the jump in inflation will prove temporary. It will adjust the pace of purchases if warranted by changes in the economic outlook but currently believes “tapering” will end by July.

Has the word “transitory” been eliminated from the Fed’s lexicon, meeting the same fate as past phases such as “Irrational Exuberance” and the “The subprime mortgage issue is contained?”

The Committee decided to maintain the target range for its benchmark policy at zero to 0.25%, a level that it expects to maintain “until the economy achieves maximum employment.”

As widely noted, several measures of the labor market remain weaker than pre-pandemic levels, specifically the labor participation rate.  The LPR is 61.6%, slightly higher than the pandemic nadir of 60.20% but considerably lower than the pre-pandemic rate of 63.4%.  The difference is about 5 million jobs.

Before the Great Financial Crisis, the LPR averaged about 66.2%.

Today is the conclusion of an OPEC+ meeting.  As widely reported OPEC+ is heading for a politically consequential showdown with President Biden as Saudi Arabia and its allies must choose whether to heed American demand for more oil.

If the cartel rebuffs the request, Saudi Arabia is headed for a possible raucous fight with the White House, which is worried that inflation caused by high energy prices could further derail the Administration.  Bowing to the pressure could prove to be politically and financially expensive to the Kingdom given the current crude price recovery is shoring up its shaky finances.

Will Saudi Arabia acquiesce?   Bloomberg has reported that Biden has repeatedly rebuffed Saudi’s request to meet with his Administration, a move that is “infuriating” Riyadh.

OPEC+ has reiterated that it cannot materially increase production given capacity constraints.  Does this statement have any validity?

Tomorrow is the release of the all-inclusive BLS employment data.  Any deviation from expected levels can have an outsized impact.

For what it is worth department, the private sector ADP Employment Survey exceeded expectations.  Additionally, the employment component of the ISM’s service sector index was stronger than anticipated, a major reason as to why this gauge rose to the highest level since the 1997 inception of this indicator.

Commenting on yesterday’s market action, equities rose on a dovish interpretation of the Fed’s statement that it intends to maintain accommodative monetary policy for the for see able future.  The yield curve also steepened for the same reason as longer dated Treasuries sold off as the Committee stressed that the tapering decision does not mean rate hikes are coming anytime soon.

What will happen today?

Last night the foreign markets were up.  London was up 0.01%, Paris up 0.37% and Frankfurt up 0.53%.  China was up 0.81%, Japan up 0.93% and Hang Seng up 0.80%.

The Dow should open flat.  The 10-year is off 1/32 to yield 1.58%.  Oil is up about 2% as OPEC + as little change is expected from its meeting.

 

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