Week in Review: December 15, 2023

December 18, 2023

Recap & Commentary

Markets ended the week higher, with the S&P 500 notching its 7th consecutive weekly gain, the longest such streak since 2017. The release of the Federal Reserve’s updated rate projections following the conclusion of its December meeting, and inflation data largely inline with expectations, were the primary drivers of the week’s rally. Through Friday, the S&P 500 has risen 14.6% since briefly entering correction territory at the end of October.

As expected, the Federal Reserve left rates unchanged at its December meeting. Given the widely expected nature of the decision, markets were far more interested in the Fed’s updated 2024 rate projections. Investors were clearly pleased to see that the newest projections showed the Fed expects its Fed Funds rate to end 2024 at ~4.6%, effectively implying three 0.25% rate cuts over the course of 2024. The prior set of projections, released in September, had suggested just one rate hike.  However, since then inflation and other economic data have continued to show signs of cooling, likely increasing the Fed’s confidence that its current rate hike cycle is slowly achieving its stated objective of returning inflation to the Fed’s longer-term target of 2%. Investors were also pleased to hear Fed Chair Powell say, “we’re likely at or near the peak of rate hikes for this cycle.” Should the Fed begin to lower rates in 2024, and the economy avoids a recession, the Fed will have achieved its quest to deliver an elusive “soft landing.”

Economic Commentary

Headline consumer inflation (CPI) dipped to 3.1% in November as energy costs continued to decline during the month. Excluding food and energy costs, core inflation accelerated to 0.3% vs. October’s increase of 0.2%. Year over year, prices held steady at a 4% rate. Both measures of inflation were in line with estimates, but the report continued to illustrate the stubbornness of prices in the services categories.  Rent costs, and an equivalent measure for homeowners, both increased 0.5% during the month, with the latter accelerating from 0.4% in October.  Services excluding energy accelerated to 0.5% in November, up from 0.3% in October.

On the producer side, both headline and core producer inflation (PPI) were unchanged in November, matching consensus expectations. Energy prices declined 1.2% and food prices increased 0.6%.  Excluding these categories, core PPI rose 2% since last year, the lowest annual increase since January 2021.  Final demand goods and services prices were both flat in November.

Retail sales increased 0.3% in November beating forecasts for a decline of 0.1%.  Since last year, retail sails are up 4.1%.  Core sales, which exclude sales of autos, building materials, and gas stations, and feed into GDP calculations increased 0.6%.  Core sales had increased 0.1% in October and were expected to be flat in November.

Of Note

Similar to the US Fed, the European Central Bank (ECB) and Bank of England (BOE) left rates unchanged.  However, unlike the Fed, both banks spoke much for forcefully about the need to maintain their flight against inflation. In the case of the ECB, President Christine Lagarde said there was no discussion of rate cuts, while the official BOE statement said monetary policy is “likely to need to be restrictive for an extended period of time.”

Market Indices   (As of 12/15/2023)

• Core PCE Inflation
• Housing Starts
• Existing Home Sales
• New Home Sales
• Personal Income & Spending
• Durable Good Orders
• Consumer Confidence