Building on yesterday’s rebound which saw a burst of short covering and bargain hunting after the big Fed decision unshackled investors, US index futures are all up about 0.6% this morning, adding to yesterday’s US index gains of 1-2%. Overseas markets are also on the rise today with the Dax jumping 1.6% and the FTSE gaining 1.0%.
Six weeks after starting to scale back emergency asset purchases, the US central bank accelerated doubled the pace of cutbacks to put it on track to end asset purchases by March instead of June. The dot plot of Fed Funds rate forecasts indicated that the majority of members are now expecting 2-3 rate hikes next year implying, at a rate of one rate hike per quarter, that US interest rate hikes could potentially start in June.
It remains to be seen if equities can continue to follow through on current enthusiasm through the whole day, but central banks have been following through on the Fed’s hawkish shift. This morning, the Bank of England announced a surprise interest rate increase to 0.25% from 0.10%, and the European Central Bank announced a cut to its asset purchases with their program currently scheduled to end in March as well. The Swiss National Bank did not make any changes and it remains to be seen what the Bank of Japan may do when it meets tonight or the People’s Bank of China when it meets next Monday.
In general, investors appear to be taking this news as a sign that despite the recent COVID Omicron wave, things are slowing getting back to normal. With economies getting back up on their feet, central banks appear to be starting to take rising inflation more seriously and shifting their focus there. In another sign of a normalizing economy, Delta Air Lines announced today that it expects to report a pretax profit for this quarter as traffic continues to rebound. Before getting too enthusiastic, however, investors should note that Turkey’s central bank cut interest rates today, a reminder that many areas continue to struggle.
In economic news, flash PMI reports, the first early peak at the December economy are out today. Results from Germany were disappointing where flash service PMI (48.4 vs street 51.0 and previous 52.7) rolled back under 50 into contraction territory. UK services also slowed (53.2 vs street 57.0 and previous 58.5). US flash PMI reports are due at 9:45 am EST with the street expecting steady readings of 58.5 for manufacturing and 58.7 for services.
Today’s other US numbers have been mixed so far. US housing starts (1.68M vs street 1.56M), and continuing employment claims (1.845M vs street 1.936M) beat expectations, while jobless claims (206K vs street 195K) and the Philadelphia Fed manufacturing survey (15.4 vs street 30.0) came in worse than expected. US industrial production is due at 9:15 am EDT today (street 0.7% vs previous 1.6%).