Market has a mistake on its mind
We're just about halfway through the month of December and it has not lived up yet to its advanced billing that it is a typically good month for the stock market. Losses for the major indices range from 1.8% to 3.5%.
The Russell 2000, which is home to small-cap companies with a mostly domestic orientation, has been the biggest loser. Looked at another way, the underperformance of the small-cap stocks is a reflection of growing concerns about a weakening economy.
Those concerns have been rooted in the Fed's aggressive rate hikes and Fed Chair Powell did not go out of his way yesterday to dispel those concerns. He attempted to make a case for why the Fed feels it needs to keep raising rates to bring inflation back down to its 2.0% target. He also emphasized that, when the terminal rate is reached, the Fed is apt to sit there for an extended period, recognizing that history has shown that it has been a mistake to prematurely loosen policy.
The mistake on the market's mind is that the Fed will raises rates too much and trigger a deeper economic setback. The other consideration on the market's mind is that the Fed is going to see a lot of weakening data in coming months that is going to pre-empt a move to the elevated levels envisioned in the latest Summary of Economic Projections. To that end, the latest estimate shows a median estimate of 5.10% for the terminal rate in 2023.
The market's thinking is apparent in the Treasury market. Notwithstanding the signaling that policy rates are headed higher, Treasury yields have shifted lower. A slate of generally disappointing economic data today has exacerbated the concerns about the economy being at risk of suffering a recession in coming months. The 2-yr note yield is down six basis points to 4.20% and the 10-yr note yield is down three basis points to 3.47%.
In turn, weaker-than-expected retail sales, industrial production, and fixed asset investment data for November out of China, along with a slate of rate hikes from other central banks today, which have also pointed to the likelihood of more rate hikes to come, have exacerbated concerns about a global economic slowdown.
Briefly, the ECB raised its benchmark rate by 50 basis points to 2.50%, the Bank of England increased its benchmark rate by 50 basis points to 3.50%, the Swiss National Bank upped its benchmark rate by 50 basis points to 1.00%, the Hong Kong Monetary Authority lifted its benchmark rate by 50 basis points to 4.75%, and the Norges Bank increased its benchmark rate by 25 basis points to 2.75%.
These policy moves were expected, but that still hasn't helped matters given the understanding that higher rates will inevitably weigh on economic activity.
It was evident in the November Retail Sales Report that inflation and waning personal savings has weighed on spending activity. Total retail sales, which are not adjusted for price changes, declined 0.6% month-over-month (Briefing.com consensus -0.1%) and retail sales, excluding autos, fell 0.2% month-over-month (Briefing.com consensus +0.2%).
The key takeaway from the report is that monthly sales declines were logged in nearly every discretionary category. The exceptions were miscellaneous store retailers (+0.5%) and food services and drinking places (+0.9%).
Separately, the December Philadelphia Fed Index checked in at -13.8 (Briefing.com consensus -10.0), versus -19.4 in November, and the December New York Empire Manufacturing Survey checked in at -11.2 (Briefing.com consensus -1.0), versus 4.5 in November.
The key takeaway from these reports is that they both indicate a contraction in manufacturing activity. The dividing line between expansion and contraction is 0.0.
The lone bright spot was initial jobless claims. In the week ending December 10, initial claims declined by 20,000 to 211,000 (Briefing.com consensus 227,000). Continuing claims for the week ending December 3 increased by 1,000 to 1.671 million.
The key takeaway from this report is that the low level of initial claims -- a leading indicator -- fits the Fed's own narrative that it needs to keep raising rates, which in turn will contribute to the market's concerns that the Fed will overdue things with its rate hikes and force a hard landing for the economy.
Currently, the S&P 500 futures are down 53 points and are trading 1.3% below fair value, the Nasdaq 100 futures are down 191 points and are trading 1.6% below fair value, and the Dow Jones Industrial Average futures are down 362 points and are trading 1.1% below fair value.
In other word on this December morn: "Bah humbug!"
-- Patrick J. O'Hare, Briefing.com |
