FOMC sees three rate hikes in 2022

• The FOMC decided to speed up the tapering of asset purchases to USD 30bn from USD 15bn currently, bringing and end to the programme by next March, rather than mid-2022 on the previous schedule.  The Fed cited a strengthening labour market, which they believe will reach maximum employment next year, and still elevated inflation.  The DOT plot now shows the majority of FOMC members expect three rate hikes next year, compared with an even split of no-change and one rate hike in September. Another three hikes are expected in 2023, and two more in 2024 with the Fed Funds rate expected to reach the 2.5% over the longer term.
• The new economic projections published by the Fed yesterday showed slightly slower growth expected in 2021 relative to the September forecasts, with the growth forecast for 2022 revised higher to 4.0% from 3.8% previously.  The unemployment rate is expected to fall to 3.5% by the end of 2022 vs end-2033 previously.  Core PCE inflation is expected to reach 4.4% this year, up from 3.7% in the September projections, but is forecast to fall sharply to 2.7% in 2022, up from 2.3% previously.  The Fed cited some uncertainty around the outlook due to risks posed by new variants of the coronavirus but in his post-meeting press conference, Chairman Powell indicated that Americans are learning to live with new waves of the coronavirus and it was unclear how it would impact inflation or employment.
• US retail sales rose by a weaker than expected 0.3% m/m in November, although upward revisions to October data (1.8% m/m) suggest consumers have brought forward their holiday spending over fears of supply chain delays. Consumer spending in Q4 is still expected to be robust.
• UK CPI surged to 5.1% y/y in November from 4.2% y/y in October, above consensus forecasts.  Higher fuel prices, increased duties on tobacco and supply chain disruptions contributed to the jump in consumer prices last month.  Fuel prices are likely to ease going forward as crude oil prices appear to have peaked for now, but supply chain issues may persist into 2022.  Core inflation rose to 4.0% y/y from 3.4% in October, reflecting these more broad-based inflation pressures.  The median forecast is for the Bank of England’s MPC to keep rates on hold tomorrow, despite higher inflation, as new restrictions on activity in response to the surge in Covid cases are likely to be a drag on growth through the end of the year. However, the decision is likely to be a close one.

Today’s Economic Data and Events

• 13:00 EZ flash composite PMI (Dec) forecast 57.8
• 13:30 UK flash composite PMI (Dec) forecast 56.3
• 16:00 Bank of England MPC rate decision forecast 0.1%
• 16:45 ECB main refinancing rate forecast 0.0%
• 17:30 US initial jobless claims forecast 200k
• 17:30 US housing starts (Nov) forecast 1567k
• 18:15 US industrial production (Nov) forecast 0.6%

Fixed Income

• Rates on US treasuries picked up yesterday following the FOMC meeting. The yield on the 2-yr rose by 0.6bps to 0.6631% while the 10-yr added 1.54bps to 1.4565. The reaction to the meeting was comparatively muted as an acceleration of the pace of tapering was widely anticipated given recent data around jobs and inflation.

• In the UK, yields on gilts picked up following the high inflation reading, with the 2-yr adding 4.2bps to 0.476% while the 10-yr rose 1.1bps to 0.733%.

FX

• The dollar index ended the day almost flat yesterday, down less than -0.1% at 96.511. Most majors advanced against the greenback, with commodity currencies in particular performing well as the NZD, CAD and AUD gained 0.2%, 0.6% and 0.9% respectively. The NZD had been at a ytd low before the tightening news out of the US provided a fillip.
• GBP gained 0.2% yesterday to 1.3262, despite the ominous signals around surging Covid-19 cases, as high inflation raised speculation about the chance of a tightening at the upcoming BoE meeting. The EUR added 0.3% to 1.1289.
• The Turkish lira lost a further 2.9% yesterday ahead of the central bank meeting today to close at 14.8113. The currency has lost nearly half of its value so far this year.

Equities

• The acceleration in tightening by the FOMC has so far been taken positively by markets, with risk-on sentiment bolstered by expectations that inflation will be curbed without hindering the economic recovery. US equity markets rose after the meeting, with the NASDAQ closing up 2.2%, followed by the S&P 500 (1.6%) and the Dow Jones (1.1%).
• Prior to the meeting the situation was more mixed in Europe. While the DAX (0.2%) and the CAC (0.5%) both closed higher, the FTSE 100 lost -0.7% as new Covid-19 cases there surged to an all-time high.
• In Asia yesterday the Nikkei added 0.1% and the Shanghai Composite lost -0.4%, but there are gains almost across the board this morning following the news out of the US last night. The two indices are up 0.4% and 1.6% respectively at the time of writing.

Commodities

• Brent futures added 0.2% yesterday to USD 73.9/b, while WTI also added, to USD 71.5/b. Both benchmarks are also tracking higher this morning, up 0.7% and 0.9% respectively so far. Prices have benefitted both from the post-FOMC uptick in risk-on sentiment generally, and also a sharp fall in US stockpiles.
• The EIA reported that US crude stocks fell by 4.6mn bbl last week, the biggest fall since September, suggesting that concerns around the Omicron variant are not derailing the demand trajectory to any significant degree. The four-week average for petrol demand has risen to 9.1mn b/d, the highest at this time of year since 2015.

Click here for charts and tables