Interest Rate Hikes
This year is coming to a close, and very few market participants would disagree with the idea that inflation and the Federal Reserve have been the two stories that have driven the market higher and lower this year. We’re about to get both reports on top of each other as the inflation CPI report comes out on the 13th, and the next day the Fed is going to announce its final rate decision for 2022. These are two very enormous data points to see if inflation is going to be on the naughty or nice list. Will we get a Santa Claus rally? If it’s going to start, it’s got to start here this week. There are no other major data points between now and the end of the year that can push the market out of its current state to begin that Santa Claus rally. The markets reacted a few weeks ago when Jerome Powell made his last public statement. They go through a blackout period where they can’t talk to the media before Fed decisions. During his last statement, he said, “The time for moderating the pace of rate increases may come as soon as the December meeting”. That one sentence sent the market higher. Since then, the market has come back down to earth because of worse-than-expected economic data. This week, the market is expecting the Federal Reserve to raise rates by 50 basis points. That expectation is built off of the fact that the market expects inflation to come in at 7.3%, which is down from 7.7% last month. We must see this number continue to come down so that it locks in that peak inflation number that we saw over the summer and continue to come down. The Fed can then take that data in before their announcement on the 14th. They don’t have a lot of time for their models to take in that new data so if it’s aggressive one way or the other, the Fed doesn’t have a lot of leeway to move. The next day, on the 15th, the Fed is expected to announce its decision. Will Jerome Powell stick to his words, that if the inflation data is positive, the December meeting will be the beginning of the end of a tight fed? The market would love to hear that. These are the two data points to write down. The 50 basis points hike from the Fed and a 7.3% number for CPI. If we’re above either of those numbers, the market is likely to fall. If we are below either of those numbers, the market will likely rally to close the year. That’s what we are looking at as we head into the holiday.
The Fed is expected to raise interest rates again this week as we continue to look at the overall impact higher rates are having on the economy and the markets. With the Fed’s goal of slowing down the economy, or having what we call demand destruction, we like to look first at consumer spending. Consumer credit reports show that consumers are still willing to spend money despite concerns about the economy. Perhaps they’re taking comfort in the fact that the labor market remains really strong which is a good thing for the economy and the markets. One area where we are seeing evidence of the Fed’s policies working is wholesale prices of used cars. Prices have reached their lowest levels as interest rate hikes have raised borrowing costs. Used car wholesale prices have declined 15.6% from the record levels that we saw back in January. Lower used car prices should help spending across other industries, that’s good for the economy and the markets.
After the market traded back last week, we wanted to give an update on technicals, as the market will be greatly impacted by the Fed’s actions this week. The S&P 500 has been sandwiched into a very tight trading range. The S&P 500 closed last week at 3,934. If the S&P 500 goes above the price of 4,100 to the upside, it will be a positive breakout. Anything under a price of 3,900 would probably imply weakness. So, there’s a lot on the line this week with the Fed raising rates again.
It doesn’t feel like it, but it’s been a remarkable year. Gas prices year-over-year are virtually flat. Over the summer, gas prices hit an average of $5 a gallon nationwide. Consumers were concerned and inflation numbers were hot. Since then, it has come down to $3.50 a gallon nationwide. It has kind of been a tug-of-war between OPEC production cuts and global recession fears. With oil, there’s more than meets the eye when it comes to pricing. We started using the strategic reserve we had, the OPEC production costs changed, and the EU last week started capping oil prices from Russian oil at $60 a barrel. Russia said they were not going to go down to $60 a barrel and said they would quit producing or find other buyers before they let that happen. With that being said, it’s going to be an interesting dynamic going forward and we don’t think this is the end of the talk regarding gas prices. It has been a remarkable year just going from $5 a gallon back down to flat year-over-year cost.
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