OANDA – Fed Reaction: Rate hikes are coming, Retail sales miss, Oil turns positive, Gold pares losses, Bitcoin rallies
US stocks turned positive after the Fed doubled the pace of tapering and forecasted three rate hikes in 2022 and another three increases in 2023. Financial markets were nervous the Fed was going to exercise caution with a doubling of the taper pace, which would have been a policy mistake. The yield curve is flattening as the short end of the curve pops. The dollar remains king and further dominance in the short-term should continue as emerging markets try to navigate their rate hikes as their COVID risks grow.
The Fed noted that “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation”. The Fed’s forecast for PCE inflation showed strong increases in 2022, which average around 2.6%.
An early holiday shopping season has the American consumer spending much less than expected in November. US retail sales rose only 0.3% in November, a big miss of the 0.8% consensus estimate and upwardly revised prior reading of 1.8%. Inflation at a 39-year high is clearly having an impact on the consumer and if the pricing pressures accelerate much higher, this might not be quite the strong finish to the year many were expecting.
Electronic and appliance merchants saw declines and that will probably continue going forward as Americans spend much more on groceries and energy prices. Supply shortage issues are not going away anytime soon and that will chip away at what was a very strong US consumer.
The Empire manufacturing survey showed the factory continues to grow robustly. Price increases remain substantial, and firms are still optimistic. The headline index rose to 31.9, well above the median estimate of 25. Businesses feel confident they can keep pricing power but that could quickly change if widespread pricing pressures continue.
Crude prices declined after initial lab results showed that two doses of the Sinovac COVID vaccine was ineffective in neutralizing the omicron variant. With much of the emerging world dependant on the protection the Chinese vaccines offer, the short-term crude demand outlook could take a massive hit if the spread worsens across China and the emerging world.
WTI crude pared earlier losses after the EIA crude oil inventory posted a larger-than-expected draw of 4.58 million barrels last week. Demand is not looking too bad as petroleum product demand rose to a record high, gasoline and distillates inventories delivered surprise draws, and as US exports jumped back above the 3 million bpd.
Omicron worries will keep oil prices heavy as even the virus continues to spread quickly across heavily vaccinated countries. The UK reported 78,610 more COVID cases, the most since the pandemic began.
Crude prices turned positive after the Fed confirmed their hawkish turn and signaled they are positioning themselves to tackle inflation in the second quarter. The Fed is hoping to only deliver a few rate hikes next year and that should still allow the economy to grow by 4% next year.
Gold prices got knocked down after the Fed signaled inflationary pressures will force them to finish tapering by mid-March and that next year they could deliver three rate hikes, with an additional three in 2023. The risk that the economy could fall into recession in 2023 does not seem so unreasonable.
Gold’s weakness could be near its end as the Fed will be on autopilot until the March policy meeting.
Bitcoin and Ethereum rallied after the Fed showed they are turning more aggressive with rate hikes and significantly increased their inflation forecasts. The playbook for the next several months is that risk appetite could remain in place if the Fed only has to deliver only a few rate hikes next year, which would be great news for cryptos.
Article By Edward Moya, OANDA