The Market Today

Fed Expected to Shift into Hawkish Mode


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Retail Sales Remain Elevated but Do Not Jump as Much as in Previous Novembers: Retail sales gained another 0.3% MoM in November, disappointing expectations but remaining elevated above pre-stimulus levels.  As shown in the Chart of the Day, the seasonal adjustments appear to still be skewing the headline results.  Sales have historically risen at an 2.5% pace in November but only rose 2.4% this year.  However, this is, once again, coming off a higher basis in previous months and nominal sales in November remain well above any previous year’s same-month results.  The data by category were mixed; but, again, reflect distorted seasonal adjustments as well as rising prices.  Gasoline station sales rose 1.7% MoM on higher gas prices.  Food and beverage sales, also affected by higher prices, rose 1.3% MoM. The category with the largest seasonality in previous Novembers, electronics and appliances, reported the largest monthly decline, -4.6% MoM.  Historically, electronics and appliances sales rise 31% in November but only rose 21.6% this year.  The biggest concern with retail sales currently is the increasingly large impact of rising prices on real activity.

Empire Manufacturing Picks Up on Mixed Details: The New York Fed’s Empire Manufacturing index rose unexpectedly in December to a three-month high of 31.9. However, the underlying details were mixed and led to a small decline in the ISM-derived composite reading from 62.5 to 60.8. Current readings for orders, shipments, and the labor market all eased in December. Inflation indicators remained high but edged lower and supplier delivery times posted a sharp drop, pointing to some potential improvement in the supply chain. Looking ahead six months, the outlook for inflation was mixed and fewer supplier delays were expected. New orders and shipments fell marginally and the labor market metrics inched higher.

Import and Export Prices Fall In Line with Fast Inflation Narrative: Import and export prices rose more than expected in November and October’s gains were revised slightly higher, feeding the current narrative about too-fast inflation. Import prices rose 0.7% MoM including and excluding petroleum. Import prices were 11.7% higher than a year ago, a monthly acceleration and the fastest annual increase since 2011. Export prices rose 1.0% for the month and by a record 18.2% from a year ago.

Mortgage Applications Pull Back: Mortgage applications for the week ending December 10 fell 4.0% on a 6.4% decrease in refi apps and a 0.7% increase in purchase apps.  The average 30-year mortgage rate was unchanged at 3.30%. Refi apps are now down 48% from January’s average.  Purchase apps, which were down 27% through July, are now down just 12% from January.

Inventories and Homebuilder Sentiment:  At 9:00 a.m. CT, the business inventories report is expected to show a 1.1% increase in October.  Also at 9:00 a.m., the December NAHB homebuilder confidence index is expected to tick up 1 point to 84, ending the year at a very high level.

Fed Expected to Shift into Hawkish Mode: The most consequential event this week, the Fed will conclude its final meeting of the year at 1:00 p.m. CT.  Expectations are that the Fed will be decidedly more hawkish in this policy decision. They are expected to double the pace of tapering from $15 billion per month to $30 billion, setting the table for a March conclusion to their quantitative easing.  Their Summary of Economic Projections are expected to show a migration higher for their overnight rate projections.  As of their September SEP, the eighteen participants were evenly split on one rate hike in 2022. Participants were also split between two or three hikes by the end of 2023.  Fed Funds futures contracts show investors now debating the likelihood of a hike as early as May 2022 and the potential for three hikes in 2022. Also notable will be the revisions to their inflation outlook.  In the September SEP, the median projection for core PCE was 3.7% for 2021 and 2.3% for 2022.


CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts

More and more governments and private companies are implementing restrictions amid rising cases and the Omicron threat. The WHO said that Omicron is spreading more quickly than any previous strain. The U.K. voted to require COVID-19 passes to get into nightclubs and other types of businesses and reintroduced a mask mandate. Italy will require testing for any visitors from elsewhere in the EU. Scotland asked citizens to limit holiday mingling to three households. Zimbabwe extended its lockdown by two weeks and the Netherlands pushed its lockdown out through January 14. In the U.S., Cornell moved final exams online and canceled social gatherings after the new variant was found on campus. Apple will require masks in all of its U.S. retail stores. JPMorgan will require vaccination to enter nine of its Manhattan buildings and the NFL will reportedly require booster for coaches and some other personnel. On a more positive note, Pfizer said its antiviral drug was 89% effective against hospitalization and death in high-risk adults and effective against Omicron.


OTHER ECONOMIC NEWS

Democrats Raise the Debt Ceiling by $2.5 Trillion: Senators Schumer and McConnell agreed last week to a one-time rule change that would allow Democrats to raise the debt ceiling with a simple majority vote. The measure was intended to remove the near-term risk of default without Democrats having to trudge through the cumbersome reconciliation process or Republicans having to sign on in support. The proposed legislation would lift the debt ceiling by $2.5 trillion, seen as pushing the next scuffle over the topic past next year’s midterm elections and into 2023. The bill successfully passed the Senate Tuesday afternoon and the House voted in favor late Tuesday evening. Treasury Secretary Yellen had previously said December 15 would be a key date past which Treasury’s cash pile might not be sufficient to satisfy federal obligations. Total U.S. public debt outstanding is currently just shy of $29 trillion, where it’s hovered since the debt ceiling was temporarily lifted by $480 billion in early October.


TRADING ACTVITY

Stocks Slumped and Yields Rose on Fed Eve: U.S. equities slipped Tuesday for a second session since last Friday’s record close as investors awaited the Fed’s highly anticipated decision later this afternoon. The tech-focused Nasdaq slipped 1.1%, outpacing declines of 0.8% and 0.3% for the S&P 500 and Dow. Although tech was the hardest hit sector, nine of the ten remaining sectors weakened. Financials were the only sector to close higher for the day, helped out by a small recovery higher for Treasury yields. Investors anticipate a more hawkish sound from the Eccles building this afternoon amid stronger-than-expected inflation pressures that have led officials to publicly support a faster removal of accommodation. Data earlier in the day showed record-fast producer price inflation and the greatest number of small businesses raising prices in more than four decades. The 2-year yield rose 2.4 bps Tuesday to 0.66% while the 10-year yield added 2.6 bps to 1.44%. The 5-year and 7-year notes both rose 3.1 bps. Fed funds futures closed Tuesday pricing in a year-end rate for 2022 of around 0.76%, implying two rate hikes next year with a more than 70% chance of a third. Not surprisingly, updated rate projections will be a key focus of today’s decision.

Not surprisingly, global markets lacked a cohesive tone overnight ahead of today’s Fed announcement which kicks off a run of decisions this week by major world central banks. Stocks were mixed across both Asia and Europe and U.S. futures were hovering tightly around opening levels. Most sovereign yield curves moved modestly higher around sizeable increases in the U.K. A slew of inflation indicators from the former European country came in hotter than expected, including an acceleration for CPI from 4.2% to 5.1%, the fastest in ten years. Expectations that the Bank of England could raise rates at tomorrow’s meeting have swayed between hot inflation and rising risks to the growth outlook posed by omicron and new restrictions. The U.K. 2-year yield rose 6.6 bps and the 10-year yield added 4.2 bps. Comparatively, increases of less than 1 bp across the Treasury curve ahead of this morning’s retail sales data were light. After initially dipping on the weaker-than-expected topline results for retail sales, yields were back near pre-release levels around 7:50 a.m. CT.


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