Tucker Financial Weekly Market Review: December 16, 2022

Market focus this week was on the FOMC meeting and the economic calendar. Neither the FOMC statement or CPI report delivered a meaningful violation of the narrative, but Powell’s hawkish press conference and FOMC projections highlighted increased inflation projections in 2023 sent a charge of anxiety into markets. U.S. and developed international equity markets finished down approximately 2% while emerging markets fell 3%. Bond markets benefited from falling yields with the 2yr UST dropping to 4.17% and 10yr UST to 3.48% but credit spreads widened marginally to 454 bps.

• The 8th and final FOMC policy announcement of the year delivered a 50-bps rate hike as expected but was accompanied by a hawkish Powell press conference and SEPs.

• The Fed projected higher inflation in 2023 and 2024, lower GDP growth, and rising unemployment. The dot plot showed higher median Fed funds forecasts in 2023 of 5.1% and 2024 of 4.1%. Market reactions were muted but remain at odds with formal Fed forecasts.

• A second consecutive cooling U.S. CPI reading for November came with fairly broad-based price deceleration with energy, used vehicles, airfares, and medical care services declining and the pace of shelter inflation beginning to slow down.

• One of the Fed’s preferred indicators, the 3m/10yr yield curve spread is sitting over 80 bps inverted, a clear signal that monetary policy is well into restrictive territory.

• The ECB hiked by 50 bps to 2.5% and announced the start of quantitative tightening while Lagarde underscored an expectation of a shallow and short recession. The BoE also hiked an expected 50bps to 3.5%.

• The global GDP weighted policy rate was 4.14% prior to last week, at the 58th percentile of all year-end rates since 1960. However, the 2.3% increase in 2022 beat 1973 and 1980 as the fastest annual hiking pace on record.

• The 2023 economic and earnings outlook feels incrementally less encouraging with the possible onset or anticipation of recession both very much in play. Equity market challenges include expected downward guidance in earnings along with potential multiple compression.

• 4Q GDP Nowcasts from St. Louis and Atlanta Feds are both projecting positive growth but differing forecasts with St. Louis modeling 0.72% and Atlanta modeling 2.8%.

• Japan rolled out a 5-year military buildup plan, their largest spend since WWII, elevating them to the third largest military spender behind China and the U.S. Macro considerations are becoming increasingly clear with the geopolitical backdrops of Russia/Ukraine, China, and the middle east.

• The reopening (albeit chaotic) of China’s pandemic restrictions is making more sense given the batch of economic data last week (retail sales, industrial production, fixed asset investment, urban unemployment) all missing expectations.

• Congress passed a CR to keep government funded through December 23rd with a negotiated omnibus spending package reportedly in sight to avoid a government shutdown.

• Legislation was introduced to ban TikTok fully in the U.S. while many state and all federal employees already have bans in place or in process.

• November YoY headline (7.1%a vs 7.3%e) and core CPI (6.0%a vs 6.1%e) alongside MoM headline (0.1%a vs 0.3%e) and core (0.2%a vs 0.4%e) all came in below forecast.

• December’s U.S. PMI (C, M, S) of 44.6, 46.2, 44.4 came in below consensus across all three measures. Japan’s PMIs of 50.0, 48.8, 51.7 came in above consensus. Eurozone PMIs of 48.8, 47.8, 49.1 were also higher than forecast.

• Retail Sales for November was softer than forecast (-0.6% vs -0.2%) but within the consensus range of -1.1% to 0.4%. YoY retail sales growth is up 6.5%.

• November Industrial Production fell 0.2%, on the low end of the range and spot forecast of 0.1%.

• November NFIB Small Business Optimism Index registered 91.9 vs consensus estimate of 90.8.