Traders Now Pricing In Three Rate Hikes in 2022

Front end of yield curve rises as early hospital data suggests Omicron variant could result in less serious illness. Cautious optimism around a decline in virulence in the Omicron coronavirus variant helped risk assets bounce back and short-term Treasury yields rise as markets re-assessed the risk posed to the global economy. Yields and swap rates rose 4-6 basis points during the session, 2-year Treasury yields hitting a year-to-date high at 0.69%. Fed Funds futures now imply a 0.78% rate a year from now, suggesting three distinct 25bp rate hikes by the end of 2022. Risk assets for their part also rose, the S&P 500 and Nasdaq Composite rising 2.07% and 3.03% respectively.

Third-quarter labor productivity hits lowest level since 1960 while labor costs rise.  The Labor Department’s report showed that nonfarm business productivity dropped 5.2% from the second quarter, below analysts’ expectations of a 5.0% decrease. As productivity fell, labor costs continued to increase at 9.6% quarter-over-quarter, well above estimates of 8.4%. The lower productivity levels compounded with higher labor costs could increase inflationary pressures in the near term as producers increase prices to combat lower production and higher input costs.

Commercial Real Estate (CRE) and C&I lending growth hit 2021 highs at U.S. banks. The most recent Fed H8 loan data release for the week ending November 27 shows CRE lending at small U.S. banks and C&I lending at large U.S. banks are on pace to have their best quarter of the year if recent growth trends hold. Thus far in 3Q, CRE growth hit 10.69% on a quarter-to-date annualized basis at small banks, while large bank C&I quarter-to-date annualized growth hit 10.82%. Total loan growth is another bright spot for small and large institutions with quarter-to-date annualized growth at 7.62% and 7.94%, respectively.