In a decidedly hawkish statement, the Fed doubled taper plans. Additionally, they plan to hike interest rates three times in 2022 and three more in 2023. Jerome Powell clearly articulated concern over inflation and his desire to normalize monetary policy quicker than anticipated a few months ago. If you are worried about stock prices have no fear. Jerome Powell made it clear in his press conference that financial stability is as important as fighting inflation. The term “financial stability” is Fed-speak for stable to rising asset prices.

Stocks jumped despite the fact the Fed doubled taper plans which will remove liquidity from markets more rapidly than expected. It’s always wise to digest market reactions over the course of one or two days versus focusing on the initial reaction. That said, the initial reaction was quite the barn burner.

What To Watch Today

Economy

8:30 a.m. ET: Initial jobless claims, week ended December 10 (200,000 expected, 184,000 last week)
8:30 a.m. ET: Continuing claims, December 4 (1.943 million expected, 1,992,000 last week)
8:30 a.m. ET: Housing starts, month-over-month, November (3.1% expected, -0.7% October)
8:30 a.m. ET: Building permits, month-over-month, November (0.5% expected, 4.0% October)
8:30 a.m. ET: Philadelphia Fed Business Outlook, December (29.6 expected, 39.0 prior)
9:15 a.m. ET: Industrial Production, month-over-month, November (0.6% expected, 1.6% October)
9:15 a.m. ET: Capacity Utilization, month-over-month, November (76.8% expected, 76.4% October)
9:15 a.m. ET: Manufacturing (SIC) Production, month-over-month, November (0.7% expected, 1.2% October)

Earnings

Pre-market

Adobe (ADBE) to report adjusted earnings of $3.19 on revenue of $4.09 billion

Post-market

4:05 p.m. ET: Rivian (RIVN) to report adjusted earnings loss of $5.08 on revenue of $990,571
FedEx (FDX) to report adjusted earnings of $4.26 on revenue of $22.39 billion

The Fed is Fretting Over Inflation

The Fed took a decidedly more aggressive stance against inflation. At Wednesday’s FOMC meeting, the Fed doubled the pace of tapering to $30 billion a month. QE will now end in March instead of June as the Fed originally expected. More importantly, they forecast three rate interest rate hikes in 2022, three more in 2023, and one in 2024. The Fed now expects 2.6% inflation in 2022, which is .4% more than when they last met. The redlined version below highlights changes to the last FOMC statement. The new statement upgrades its assessment of the employment situation while offering more concern about inflation. The graph below the statement plots the Fed’s members’ projections for Fed Funds. The green line over the gray line shows the Fed’s projection for rate hikes is more aggressive than markets imply.

Retail Sales

November Retail Sales fell short of expectations, increasing 0.3% versus expectations of 0.8%, and last month’s reading of 1.8%. As noted in prior commentaries, changing consumer habits due to Covid and shortages, along with seasonal adjustments that may further skew data, makes assessing this data extremely difficult. The table below from Brett Freeze shows the monthly data and year-over-year changes (yellow) broken out by sector.

Can The Santa Rally Start Now

After a rough couple of days to start the week, and with the Fed behind us, the seasonal Santa rally looks set to start as money managers put cash to work for year-end window dressing. With fear levels fairly elevated, plenty of cash from recent mutual fund distributions, and buy signals intact, we will look to add exposure to portfolios over the next couple of days.

As noted by @themarketear yesterday ahead of the Fed double taper.

“There has been a lot of selling and de-risking, we basically outlined how “under risked” people were going into this Fed meeting. Below is McElligott’s take on the same topic:”

Total SPX options $Delta has now come off last Thursday’s $562B (99.2%ile) down to today’s $88.2B (41.7%ile);
The epicenter of the recent Fed / Rates –driven thematic Equities storm Nasdaq / QQQ options shows net $Delta there from $20.4B last Thursday (99.2%ile) down to -$5.6B this morning (12.6%ile);
IWM where a HUGE portion of the hedging has been, houses a monster -$17.7B of short $Delta (0.3%ile), with -$7.6B of that rolling-off for expiry on Friday which will need to be dealt with;
Our models show US Equities Vol Control having de-allocated / sold ~$78B over the past 1m and ~$112B over the past 3m,
While CTA Trend has sold $64B of Global Eq futs / $26B of US Eq futs over the past 1m; and
Street PB data showing Equities HFs at low single-digit percentile ranks for both Nets- and Grosses- on 1Y lookback”. The crowd is “under risked” and Santa kick starts around this time.

Perspective Matters On Yesterday’s High Fliers

Many of the meme/go-go stocks that rose to astonishing heights earlier this year are getting smashed. While the losses are startling, the graph below, courtesy of the New York Times, shows two such stocks and puts the recent losses and prior gains into proper context. As it shows, Peleton, despite giving up 450% of its gains over the last two years, is on par with the market. Zoom is still holding on to 200% gains for the previous two years, well above the market’s performance.