Fed Reaction: Rate hikes are coming, Retail sales miss, Empire shows manufacturing remains robust

US stocks turned positive after the Fed doubled the pace of tapering and forecasted three rate hikes in 2022 and another three increases in 2023. Financial markets were nervous the Fed was going to exercise caution with a doubling of the taper pace, which would have been a policy mistake. The yield curve is flattening as the short end of the curve pops. The dollar remains king and further dominance in the short-term should continue as emerging markets try to navigate their rate hikes as their COVID risks grow.

The Fed noted that “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation”. The Feds forecast for PCE inflation showed strong increases in 2022, which average around 2.6%.

US data

An early holiday shopping season has the American consumer spending much less than expected in November. US retail sales rose only 0.3% in November, a big miss of the 0.8% consensus estimate and upwardly revised prior reading of 1.8%. Inflation at a 39-year high is clearly having an impact on the consumer and if the pricing pressures accelerate much higher, this might not be quite the strong finish to the year many were expecting.

Electronic and appliance merchants saw declines and that will probably continue going forward as Americans spend much more on groceries and energy prices. Supply shortage issues are not going away anytime soon and that will chip away at what was a very strong US consumer.

The Empire manufacturing survey showed the factory continues to grow robustly. Price increases remain substantial, and firms are still optimistic. The headline index rose to 31.9, well above the median estimate of 25. Businesses feel confident they can keep pricing power but that could quickly change if widespread pricing pressures continue.

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