The S&P 500 Index recorded its second consecutive weekly loss as it retraced 1.18%. The index finished the month of November down 0.83% after rising to record highs early in the month and falling in the last week to its final level. Equity markets were spooked by the announcement of a new Covid-19 variant of concern, Omicron, which originated in South Africa but has been identified in several US states already. The VIX volatility index spiked over 100% from an October low to the highest level seen since January of this year. Equity markets also responded negatively to Fed Chair Jay Powell’s comments on Tuesday that current inflation may not be as “transitory” as previously expected, although he indicated that the Fed still plans to move forward on the easing of the accommodative monetary policy that has propped up asset values throughout the Covid crisis.
Federal Reserve Chairman Jerome Powell surprised markets last week when he signaled that the Fed could tighten monetary policy earlier than expected given the strong economy and high inflation, adding it’s probably time to stop using the word “transitory” to explain the recent surge in inflation. Powell also cited the risks that Omicron, the new coronavirus variant, could slow the labor market’s recovery and intensify supply chain disruptions. The market now expects at least one rate hike by next July, earlier than the September 2022 hike expected before Powell’s comments. The spread between 5 and 30-year Treasury yields also flattened to its lowest level since March 2020 on the comments. Friday’s jobs report was mixed, showing U.S. job growth was well short of expectations in November but the labor force participation rate climbed to its highest level of the recovery. The unemployment rate also dropped to 4.2%, its lowest level since February 2020.
