Week in Review: December 16, 2022

December 18, 2022

Recap & Commentary

Markets ended the week lower following the Federal Reserve’s December Federal Open Market Committee (FOMC) meeting and signs of a prolonged battle against inflation. Consumer price data that showed inflation cooling quickly also revealed that “sticky” inflation remains stubbornly high, adding to investor angst regarding future Fed actions.

As expected, the Fed raised rates by 0.50% at its FOMC meeting, bringing the Fed Funds rate to a range of 4.25-4.50%, up from 0-0.25% at the start of the year. In addition, the Fed released a series of forecasts showing it now expects the terminal Fed Funds rate to reach 5.1% in 2023. These are up from prior forecasts of 4.6% in September and 2023 GDP growth of just 0.5%, down from its previous forecast of 1.2%. In addition, the Fed increased its Fed Funds rate outlook for 2024 and 2025 by 0.2% to 2.9% and 3.1%, respectively. The increases were consistent with Fed Chair Jay Powell’s recent comments about rates needing to move higher and remain elevated for longer to regain control of inflation.

After the meeting, Powell again reinforced the message saying, “we think that we’ll have to maintain a restrictive stance of policy for some time.” Regarding investors’ desire for a “pivot,” Powell quashed those hopes, stating, “our focus right now is really on moving our policy stance to one that is restrictive enough to ensure a return of inflation to our 2 percent goal over time. It’s not on rate cuts.”

Economic Commentary

Headline consumer inflation index (CPI) rose 0.1% in November, lower than the forecasted 0.3%. Compared to a year ago, inflation slowed to 7.1%, following a reading of 7.7% in October. That marked the fifth consecutive monthly decline. November’s reading is the lowest since December 2021. Despite the decline in headline inflation, services prices remained unchanged at 6.4%, likely contributing to the Fed’s stance that it must remain aggressive.

Retail sales weakened in November, showing signs of a slowing economy. Sales fell 0.6%, the sharpest decline of the year. The dip followed a sizable 1.3% gain in October related to early holiday shopping, while in November, budget-conscious consumers pulled back. Vehicle sales, which account for roughly 1/5 of retail sales, fell 2.3%, the most since May.

Industrial production fell 0.2% in November, down in three of the past four months. On a year-over-year basis, industrial production is still up 2.5%. However, this is the slowest pace since March 2021. Manufacturing output, which accounts for about 3/4 of industrial production, fell 0.6% for the month, its first decline since June. Higher borrowing costs are dampening demand and business fixed investments.

Weekly jobless claims dropped 20K to 211K, their lowest level since September. The continued strength of the labor markets illustrates what the Fed describes as an “imbalance” that it would like to reverse to cool inflation.

Of Note

For the first time in history, scientists created a fusion reaction that produced more energy than was required to initiate it. Whether or not fusion will ever be a viable energy source could take decades to answer. Nonetheless, the experiment represented a significant milestone toward that goal.

S&P 500 -2.1%
Small Caps -1.9%
Intl. Developed -2.1%
Intl. Emerging -2.1%
Commodities 1.0%
U.S. Bond Market 0.8%
10-Year Treas. Yield 3.49%
U.S. Dollar 0.0%
WTI Oil ($/bl) $75
Gold ($/oz) $1,803

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • New Home Sales
  • Consumer Confidence
  • Durable Good Orders
  • Personal Spending & Income
  • Weekly Jobless Claims

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