Fed day

The Fed meeting today is clouding all other market events, as inflation pressures have now been acknowledged by Powell and most US central bankers. Indeed, as US CPI and PPI continued to soar, the market anticipates a rise in target rate by May/June according to Fed rate futures. The most likely path in our view is still to accelerate the departure of the Fed’s bond-buying program by reducing the notional buying by $30B per month instead of $15B. The impact on the equity market could be significant to the downside, as bonds start to better reflect the true market yields. Risky assets such as commodities, Asian and emerging market equities could be particularly at risk, especially if the dollar continues to strengthen. Looking at market indices, the S&P 500 dropped by 100 points yesterday, while Asian equity markets maintained their levels overnight. There is still debate whether the Fed plans to hike interest rates by two or three times over 2022 with 25 basis points increases, which we will see thanks to the dots, a plot showing central bankers expectations of the trajectory of the target rate path.

Looking at data releases, China’s industrial production and retail sales grew by 3.8% y/y and 3.9 %y/y in November. This remains one of the slowest expansions prior to the COVID-era, with both economic indicators usually above 5% growth y/y. The breakdown of retail sales points towards slow growth in electronics and home appliances, likely due to the global supply bottlenecks limiting the supply.

November’s UK inflation reached 5% according to this morning’s data release when consensus was anticipating 4.2%, which should put the UK central bank in a tough spot for tomorrow’s rate decision, amid a resurgence of the pandemic in the country.