In the wake of yesterday’s failed rebound and with the potential for significant developments and hints on the future of US monetary policy, it comes as no surprise that US index futures are flat this morning with investors apparently content to sit on their hands until the Fed weighs in. There has been significant speculation in the business press over the last several days that the Fed could be preparing to move up its timetable for tapering and/or interest rate increases.
Factors favoring a more hawkish stance on monetary policy include increasing inflation pressures, highlighted by yesterday’s highest in over a decade producer price report, and last week’s highest in nearly 40 years consumer price report. Also, US politicians agreeing to raise the debt limit by $2.5 trillion which is widely expected to cover the country’s spending until sometime in 2023, after the 2022 midterm elections, has reduced the near-term risk of the US defaulting on its obligations, and removed a reason for the Fed to stand pat. Weaker than expected US retail sales announced this morning (0.3% vs street 0.8% and previous 1.8%) could give the Fed reason to hesitate on changing its current plan, along with uncertainty surrounding the impact of the Omicron wave of COVID (which appears to be putting pressure on crude oil again today).
When the Fed announcements arrive at 2:00 pm EST, investors may focus on 1) whether the Fed accelerates its tapering program. At the current pace of $15 billion per month it should end in June of 2022, but there has been media speculation recently that the end of tapering could potentially be moved up to March. 2) what the “dot plot” projections on the Fed Funds rate tells us about the number and timing of 2022 rate hikes. In September, FOMC members were split on 2022 with 9 thinking no hikes at all and 9 forecasting 1-2 rate hikes. If we consider that the Fed may look to raise rates once per quarter as it generally did in the last rate hike cycle, a consensus of 1 hike would suggest December 2022, 2 hikes could start as late as September of 2022, and 3 hikes would likely need to start in June.
The Fed decision may also give an indication on whether other central banks meeting this week (European Central Bank, Bank of England, Bank of Japan and Swiss National Bank) could make hawkish moves or hints of their own. Of that group, the Bank of England may be under the most pressure to do something as some investors were disappointed that it didn’t take action at its last meeting.
It’s a busy day for economic other economic news as well. US retail sales Canadian housing starts were very strong (301K vs street 234K), ahead of Bank of Canada Governor Macklem speaking at noon EST. Overnight, China reported mixed economic numbers with industrial production beating expectations (3.8% vs street 3.6%), but retail sales disappointing (3.9% vs street 4.6%). Tomorrow morning brings flash PMI reports in addition to central bank news.