Federal Reserve New Year's Resolution: Confuse & Confound
Equity markets were spooked on Wednesday of last week as the dot plot was shifted from rate hikes beginning in the 2nd half of 2022 to perhaps March. This pointed to a possible mistake in Fed policy with regard to dealing with inflation. The market had largely expected a rate hike in June, which means that a March hike would indicate worse inflation than advertised by the Fed. The minutes sent interest rates higher as the 10-year Treasury yield moved higher by 25 basis points last week.
This week, we get the inflation data which could further cast doubt onto the Fed's rate policy. The market is expecting a moderately lower CPI print for December relative to November. If the number comes in higher, expect markets to react negatively to the news. A lower number could mean that inflation may be slowing, which would be well-received. Jobs data disappointed last week, which also added to Fed policy doubts. While the private payrolls (ADP) showed considerable job hiring activity, the government's report disappointed by more than half. Retail Sales released on Friday will give us a clue as to the extend of holiday shopping done in the month of December.
A rotation began last week that will be pivotal to watch going forward. Higher interest rates have made "growth" / momentum stocks look vulnerable. Technology stocks sold off more than 5% last week, while other sectors - Energy, Financials, & Consumer Defensive, were positive overall. This rotation has been long-expected, but delayed as the Fed remained dovish in 2021. The market is adjusting to the fact that the easy money train that the Fed has promoted for more than 2 years has left the station and more difficult, fundamental-driven investing lies ahead.