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Week in Review: December 17, 2021

Recap & Commentary

Markets ended the week lower as concerns about higher interest rates pressured stocks, particularly more highly valued names. That was evident in the plight of the tech-heavy NASDAQ which fell 3.0%.

As expected, following its December meeting, the Federal Reserve announced plans to conclude its tapering by March of 2022, three months earlier than previously planned.  In addition, it now expects to raise rates three times before the end of 2022. For its part, the market sees a 50% chance of the first rate hike occurring at the Fed’s March 2022 meeting and a 65% chance that it occurs by the May meeting.

Ironically, all the talk about future rate increases resulted in actual rates declining during the week. At the long end of the curve, the 10-Year and 30-Year Treasury rates fell 0.07% and 0.06%, respectively, as investors, concerned about the prospect of rising rates, sold equities and sought the relative safety of bonds.  At the short end of the curve, the 2-Year Treasury yield was effectively unchanged dropping just 0.01% over the course of the week.

While the Fed’s announcement dominated headlines, it wasn’t the only central bank to announce tightening measures.  Across the pond, the Bank of England unexpectedly raised its main benchmark rate from 0.1% to 0.25%, a move the bank described as necessary to meets its 2% inflation target. Additionally, the Bank of Norway increased its benchmark rate from 0.25% to 0.50%, its second increase in three months. Finally, the Bank of Japan, announced that it will begin tapering its bond buying program.

Economic Bullet Points

Producer inflation (PPI) jumped 9.6% in November, its fastest pace on record.  Excluding more volatile food and energy prices, “core” PPI rose 7.7%, also the highest pace on record. While there has been anecdotal evidence that some supply chain issues are beginning to ease, November’s PPI data showed that broader inflation pressures remain strong.

Retail sales slowed dramatically in November, gaining just 0.3%, well below the expected 1.4% increase and October’s 1.8% gain.  Some of that may have been due to consumers beginning their holiday shopping earlier than normal in an effort to avoid supply chain issues. Compared to a year ago, sales jumped 18%.

Housing starts jumped nearly 12% in November to their highest level since March. Compared to a year ago, starts increased 8%. Housing data is notoriously volatile, but November’s increase pointed to continued strong demand despite various headwinds facing the sector. Building permits, a leading indicator of future building activity increased 3.6%.

Preliminary data released by industry group IHS Markit showed manufacturing and service sector activity slowed slightly in the first half of December but remained at very strong levels. Inflation pressures persisted as input prices continued to rise.

Of Note

Prior to adjourning until 2022, Congress voted to raise the debt ceiling by $2.5T, enough to prevent the government from defaulting on its debts until early 2023.  The Senate, however, was unable to reach agreement on President Biden’s build Back Better Act.

S&P 500-1.9%
Small Caps-1.7%
Intl. Developed-0.5%
Intl. Emerging-1.8%
Commodities-0.5%
U.S. Bond Market0.4%
10-Year Treas. Yield1.41%
US Dollar0.6%
WTI Oil ($/bl)$70
Gold ($/oz)$1,799

The Week Ahead

  • Existing Home Sales
  • New Home Sales
  • Durable Goods Orders
  • PCE Inflation
  • Consumer Sentiment
  • Personal Spending & Income
  • Weekly Jobless Claims

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