U.S. equity markets closed modestly higher Wednesday across all major indices. 

Energy, real estate and utilities sectors all outperformed, while technology stocks were also positive, reversing declines of the last couple days. 

This comes as the 10-year Treasury yield moved down, to 1.64 percent levels, despite the core Personal Consumption Expenditures price index inflation reading remaining elevated, up 4.1 percent year over year.

Meanwhile, the U.S. dollar index continues its ascent, now close to 97 levels, the highest for the year.

This continues to put some pressure on global companies and parts of emerging market economies as well.

Jobless claims Wednesday came in at 199,000, the lowest level since 1969. That continues to support the narrative that the labor market in the U.S. is improving gradually, as employers continue to hire across sectors and the unemployment rate has fallen now to 4.6 percent. 

Still, employment remains 4.2 million jobs below its peak in February 2020, and labor participation also remains below prepandemic levels at 61.6 percent.

The Federal Reserve will be keeping a close eye on the labor picture as well, as it hopes for a broader and more inclusive labor market recovery.

Meanwhile, all eyes remain on the Federal Reserve and what path it will take on tapering and raising rates in the year ahead. 

This week, statements from Federal Reserve officials like Fed Atlanta President Bostic – as well as Wednesday’s Fed minutes – have suggested the Fed’s balance sheet tapering process could be accelerated.

Markets have picked up on this narrative as well, pricing in two to three rate hikes in 2022, given elevated inflation and fears that the Fed remains “behind the curve.”

However, many analysts continue to believe inflation may ease, particularly in the second half of next year, as supply chain issues and labor markets improve, as commodity prices do not see a repeat of dramatic increases and as comps for inflation get tougher. 

The Fed could continue to have room to be patient and deliberate, particularly as it monitors both labor market and inflation trends.

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