Market Monitor: December Mid-Month Update
Headlines and Highlights
- Fed raises rate again, eyes 5% for much of 2023: The Federal Reserve raised the benchmark interest rate by a half-point as expected to a target range of 4.25% to 4.5%, the highest in 15 years. The action marked a welcome easing of the pace after four consecutive three-quarter-point hikes, although Fed officials indicated they expect the rate to go higher than previously expected and stay elevated throughout next year. Their median rate forecast for the end of 2023 is now 5.1%, above market expectations and up from 4.6% in September. Chair Jerome Powell downplayed any notion that the Fed might reverse course and lower rates next year.
- Inflation slows more than expected: A key measure of U.S. consumer prices recorded its smallest monthly increase in over a year in November, meaningful evidence that inflation has likely peaked. The core Consumer Price Index rose 0.2% last month and 6.0% year over year, while headline CPI – which includes food and energy – pulled back to 7.1% from 7.7% in October and 8.2% in September.
- Stocks fall, bonds continue comeback: Investors have turned more cautious in December after two months of improved stock performance. The S&P 500 shed 4.4% in the first half of the month amid wariness about continuing rate hikes while the benchmark for international developed stocks managed a 1.0% rise. Bonds lessened their 2022 losses as yields fell, reflecting caution about the economic outlook. Our benchmarks for taxable and municipal bonds rose 1.9% and 0.9%, respectively.
Chart of Interest
Encouraging sign: Price increases have steadily decelerated since summer.
Sources: Federal Reserve of St. Louis, Altair Advisers
- The Fed’s plan for additional increases to push the federal funds rate above 5% have dimmed hopes of a significant easing of monetary policy next year. However, after boosting the rate for a seventh time in 2022, totaling 4.25%, the Fed appears to be approaching completion of its tightening process as long as consumer prices do not reaccelerate in coming months. Chair Powell’s comment Wednesday that “We’re getting close to that level of sufficiently restrictive” policy confirmed the likelihood that the Fed is nearing the end of its rate hikes. Market expectations are for the rate to peak below 5% and for rate cuts in the second half of 2023.
- A retail sales decline of 0.6% in November from the previous month testifies to the impact of months of elevated inflation and rapidly rising rates. Despite the weaker consumer spending – a sector that accounts for two-thirds of the economy – the GDP remains on a pace to grow at a solid annual pace of 2.8% in the fourth quarter, according to the latest projection by the Federal Reserve Bank of Atlanta.
- The labor market, another key pillar of the economy, remains resilient as evidenced Thursday by first-time unemployment claims falling unexpectedly to their lowest weekly level since September. While that bodes well for the economy, it complicates the Fed’s inflation crackdown and prospects for ultimately reducing rates. The central bank is hoping for a weakening of the labor market in order to constrain wage inflation, a big contributor to overall service-sector inflation.
- Central banks in Europe and England joined the Fed this week in slowing the pace of rate hikes while simultaneously signaling that they will step up the battle against high inflation with more increases in 2023. All three government banks raised their benchmark interest rate by half a percentage point, less than at previous meetings in response to a deceleration in consumer prices. But the international banks face bigger problems than the U.S. with inflation, which was 10% in the eurozone last month and 9.3% in the United Kingdom.
- Congressional leaders agreed to funding legislation in their lame-duck session to avoid an immediate government shutdown but failed to raise the debt ceiling before control of the two houses becomes split in January. That raises the risk of a political showdown over spending next year that could threaten markets. A dispute over the debt ceiling in 2011 resulted in the first-ever U.S. credit rating downgrade.
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