Powell’s Hawkish Pivot

19 Dec Powell’s Hawkish Pivot

December 16th, 2022

Market Indexes:

It was one of the busiest weeks of year for economic events and data releases, which were highlighted by the following: Federal Reserve’s announcement to raise rates .50%, November Consumer Price Index (CPI), November Industrial Production, U.S. November Retail Sales, New York Fed’s December Empire Manufacturing survey, the Philly Fed’s December Manufacturing survey, and finally the U.S. Jobless claims data. Nearly all the data released showed decelerating economic numbers. Combined with surprising “hawkish” rhetoric from the Federal Reserve and together, it resulted in another down week for market indexes.

Economic Data:

U.S. November Industrial Production came in at -0.2% M/M, which was a deceleration from October at -0.1%.  On a Y/Y basis Industrial Production slowed to +2.5%, from +3.3% in October.

U.S. November Retail Sales also decelerated down -0.6% M/M, versus a +1.3% M/M increase in October (this was foreshadowed in Redbook Weekly Retail Sales)

On an annual basis, sales were up +6.5% Y/Y, but when incorporating inflation this implies a down volume number and, also, well below October at +8.3% Y/Y

Both regional Fed survey’s this week also came in with negative numbers

New York Fed’s December Empire Manufacturing survey registered at -11.2, which was well below November at +4.5. Within the survey, orders ticked lower while prices remained steady

Philly Fed’s December Manufacturing survey remained negative at -13.8. New orders were the lowest since April 2020

Finally, Weekly U.S. Jobless claims improved W/W to 211K, versus +231K

Steady as she goes in the U.S. labor market as jobless claims remain near historical lows

Company Data:

There wasn’t a lot of company information this week, so we’ll hit on the main event of the week…the Fed’s rate announcement.   The Federal Reserve raised the short-term interest rates by 0.50%, bringing benchmark interest rates to the highest level since 2007 while suggesting more rate hikes are coming in 2023.  Wednesday’s move brings the Fed funds rate to a range of 4.25%-4.5%, capping a year that saw the central bank raise rates by a collective 4.25%.

In its statement announcing Wednesday’s move, the central bank included wording which said it anticipates “ongoing increases” in interest rates, implying the Fed does not intend to pause rate hikes imminently.  “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to two percent over time,” the Fed’s statement said.  Stocks sold off immediately following those words and continued their selloff through the end of the week as investors were hoping to hear words of a pause in hikes and even a cut.  Chairman Powell if anything sounded more “hawkish” on rates than “dovish”.

We stated previously that our belief is that the Federal Reserve is close to a pause in interest rates, and moving into 2023, the ensuing corporate earnings recession will be more important than inflation and central bank rate hikes. 

In next week’s Market Summary we’ll discuss our 2023 market outlook and highlight a couple of key areas of the market to be watching. Have a great week!