Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
Major U.S. equity benchmarks ended the week broadly lower in a volatile week of trading. Investors continue to assess rising COVID-19 risks and surging inflation, along with the latest global central bank decisions including a hawkish tilt from the U.S. Fed. The S&P 500 Index dropped 1.9% in total return, while the tech heavy Nasdaq Composite plunged 2.9%, and the Dow Jones Industrial Average fell 1.7%. Despite a difficult week of trading, U.S. stocks have enjoyed strong gains year to date with the S&P 500 up 24.7%, the Dow up 17.7%, and the NASDAQ up 18.5% through December 16th. The U.S. 10-year Treasury yield ended the week at 1.40%, down eight basis points from the previous Friday’s close. Gold was up 0.8%, ending the week at $1,798/oz. West Texas Intermediate Crude Oil fell 1.9% to end the week at $70.33/barrel.
The primary explanation for last week's pullback was the Fed. The Federal Reserve's Federal Open Market Committee (FOMC) voted to double the pace of tapering asset purchases from a reduction of $15 billion per month to $30 billion per month. This puts the Fed on track to conclude the program in March 2022, rather than in June 2022 as previously planned. The faster pace puts officials in a position to raise short-term interest rates sooner to counter inflation pressures if needed. Projections published in the so-called dot plot of officials’ expectations showed policy makers expect that three 25 basis point increases in the Fed funds rate will be appropriate in 2022, a major shift from the last time forecasts were updated in September. Fed Chair Powell cited inflation developments and further improvement in the labor market for the policy pivot. Powell’s statement also removed the transitory reference to inflation, along with its forward guidance about maintaining an accommodative policy stance until its targeted inflation outcomes are achieved. The policy pivot was seen as the headwind on growth and other riskier asset’s performance in financial markets, even though interest rates were lower last week.
The domestic economic calendar was busy last week with mixed information. Hotter producer prices and weaker-than-expected retail sales were not particularly supportive. Housing and industrial production were more optimistic. Producer prices posted a record year-over-year increase in a broad advance among goods and services. The producer price index (PPI) rose 9.6% from a year earlier in November. On a month-over-month basis, PPI rose 0.8%. Both measures exceeded estimates. Retail sales rose 0.3% in November, below estimates and down from a revised-higher 1.8% in October. The data may suggest consumers are tempering purchases amid rising inflation. U.S. housing starts rose a more-than-expected 11.8% in November to a 1.68 million annualized rate, the fastest pace in eight months. Building permits, a proxy for future construction, rose 3.6% to an annualized 1.71 million units, also surpassing forecasts. Industrial production rose 0.5% in November. Output at U.S. factories advanced 0.7% in a broad advance. Total industrial capacity utilization increased to 76.8%, while manufacturing capacity rose to 77.3%, the highest since December 2018.
In the week ahead, economic data releases and central bank activity slows. U.S. markets are closed on Friday, December 24 in observance of the Christmas holiday. On the U.S. economic calendar, we'll be watching the third reading on third quarter GDP, as well as the personal consumption measures released with it. We will also get consumer confidence, housing data, and durable goods orders.
We would like to take this time to extend our warmest wishes for a joyous holiday season and a happy new year. The Economic Beat will be back in the second week of January 2022. Thank you.