AMERIPRISE FINANCIAL, INC.
The Federal Reserve continued its policy evolution toward a less accommodative stance last week. Beginning in September, the Fed first indicated its intention to slow the pace of its bond buying program. That was followed in November by the decision to commence so-called tapering, to be completed by the middle of 2022. Last week, the Fed accelerated the pace of tapering, to be completed now by March. At the same time, it indicated the possibility of three quarter-point interest rate hikes next year, compared to one following the previous release of its economic projections in September, and none following its June meeting.
The Fed is responding to a spike in inflationary pressure that it no longer describes as transitory. It raised its 2022 inflation forecast for the core PCE deflator to 2.7 percent from 2.2 percent in September. At the same time, the labor market has strengthened recently, pushing the unemployment rate down to 4.2 percent in November. In response, the Fed brought forward by a year, into 2022, when it believes the unemployment rate will fall to 3.5 percent. As a result, the Fed now sees the fed funds rate ending 2022 at 0.9 percent, up from 0.3 percent in September. In 2023 it now sees the fed funds rate at 1.6 percent, versus 1.0 in September. And in 2024, it sees a rate of 2.1 percent compared to 1.8 in September. Importantly, it did not change its outlook for fed funds in the longer run, beyond 2024, leaving it at 2.5 percent. Overall, the Fed now anticipates tightening policy somewhat faster, but no higher, than previously. Markets, however, remain skeptical that the Fed will ultimately raise the fed funds rate much beyond 1.5 percent.
Market Response to the Fed's Outlook Was Muted; The Bank of England Raises Rates
The market response to the Fed's revised outlook was muted. Stocks rallied initially, ending the day on Wednesday sharply higher. But those gains dissipated over the course of Thursday and Friday to end the week almost exactly where they stood before the decision was released. The VIX index edged lower to 22 from 23. The yield on the ten-year Treasury note fell slightly, from 1.44 prior to the Wednesday's decision, to close on Friday at 1.40 percent. The yield on the more sensitive two-year note slipped three basis points to 0.63 percent. And the DXY dollar index was unchanged.
The Bank of England went one step further than the Fed last week, actually raising its benchmark rate from 0.1 to 0.25 percent, taking markets by surprise, one day after learning that UK consumer prices rose at a faster than expected 5.1 percent pace in November. In contrast, the European Central Bank left rates unchanged and said it expects they will remain unchanged next year. It did, however, announce the winding down of its pandemic emergency bond buying program by March, offset in part by an increase in the size of its previous program.
Intensifying Covid Infections Create Economic Uncertainty
For the week, U.S. equities fell almost 2 percent. It was the fourth weekly decline in the past six, leaving stocks virtually unchanged since the beginning of November. While most of the focus last week was on the Fed, there was a lot of attention on the economic calendar, as well as on the spread of the Omicron covid variant. Producer prices in November climbed 9.6 percent, suggesting that prices at the consumer level are likely to remain under upward pressure. November retail sales disappointed, but the previously strong October report was revised upward. And spending this holiday season overall is expected to be robust. Initial jobless claims edged higher, but remained at a low level, while continuing claims continued their descent toward pre-pandemic totals. Housing starts surged higher, easily exceeding forecasts, while both industrial production and flash PMIs fell modestly short of expectations, but remained at solid levels of activity. In the short week ahead, we will see November personal income and spending, PCE deflator, new and existing home sales, durable goods orders, leading indicators and consumer confidence. And the President's Build Back Better bill appears to be in trouble following reports that West Virginia Senator Manchin will vote no.
The intensifying pace of new Covid infections is creating increasing economic uncertainty. Especially in Europe, new restrictions are being imposed on travel. And the Netherlands has imposed a new lockdown. President Biden will speak on the issue on Tuesday, as officials warn of hospital systems becoming overwhelmed. The World Health Organization said over the weekend the Omicron variant has now been found in 89 countries and the rate of infections is doubling every one and a half to three days.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Investing involves risk including the risk of loss of principal.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors' fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.
The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The U.S. Dollar Index (DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" (value) when compared to other currencies.
The flash services PMI is based on approximately 85 to 90 percent of total PMI responses each month. It is designed to provide an accurate advance indication of the final PMI data. As flash services PMIs are among the first economic indicators for each month, providing evidence of changing economic conditions ahead of comparable government statistics, they can have a significant effect on currency markets.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
The Fed is responding to a spike in inflationary pressure that it no longer describes as transitory. It raised its 2022 inflation forecast for the core PCE deflator to 2.7 percent from 2.2 percent in September. At the same time, the labor market has strengthened recently, pushing the unemployment rate down to 4.2 percent in November. In response, the Fed brought forward by a year, into 2022, when it believes the unemployment rate will fall to 3.5 percent. As a result, the Fed now sees the fed funds rate ending 2022 at 0.9 percent, up from 0.3 percent in September. In 2023 it now sees the fed funds rate at 1.6 percent, versus 1.0 in September. And in 2024, it sees a rate of 2.1 percent compared to 1.8 in September. Importantly, it did not change its outlook for fed funds in the longer run, beyond 2024, leaving it at 2.5 percent. Overall, the Fed now anticipates tightening policy somewhat faster, but no higher, than previously. Markets, however, remain skeptical that the Fed will ultimately raise the fed funds rate much beyond 1.5 percent.
Market Response to the Fed's Outlook Was Muted; The Bank of England Raises Rates
The market response to the Fed's revised outlook was muted. Stocks rallied initially, ending the day on Wednesday sharply higher. But those gains dissipated over the course of Thursday and Friday to end the week almost exactly where they stood before the decision was released. The VIX index edged lower to 22 from 23. The yield on the ten-year Treasury note fell slightly, from 1.44 prior to the Wednesday's decision, to close on Friday at 1.40 percent. The yield on the more sensitive two-year note slipped three basis points to 0.63 percent. And the DXY dollar index was unchanged.
The Bank of England went one step further than the Fed last week, actually raising its benchmark rate from 0.1 to 0.25 percent, taking markets by surprise, one day after learning that UK consumer prices rose at a faster than expected 5.1 percent pace in November. In contrast, the European Central Bank left rates unchanged and said it expects they will remain unchanged next year. It did, however, announce the winding down of its pandemic emergency bond buying program by March, offset in part by an increase in the size of its previous program.
Intensifying Covid Infections Create Economic Uncertainty
For the week, U.S. equities fell almost 2 percent. It was the fourth weekly decline in the past six, leaving stocks virtually unchanged since the beginning of November. While most of the focus last week was on the Fed, there was a lot of attention on the economic calendar, as well as on the spread of the Omicron covid variant. Producer prices in November climbed 9.6 percent, suggesting that prices at the consumer level are likely to remain under upward pressure. November retail sales disappointed, but the previously strong October report was revised upward. And spending this holiday season overall is expected to be robust. Initial jobless claims edged higher, but remained at a low level, while continuing claims continued their descent toward pre-pandemic totals. Housing starts surged higher, easily exceeding forecasts, while both industrial production and flash PMIs fell modestly short of expectations, but remained at solid levels of activity. In the short week ahead, we will see November personal income and spending, PCE deflator, new and existing home sales, durable goods orders, leading indicators and consumer confidence. And the President's Build Back Better bill appears to be in trouble following reports that West Virginia Senator Manchin will vote no.
The intensifying pace of new Covid infections is creating increasing economic uncertainty. Especially in Europe, new restrictions are being imposed on travel. And the Netherlands has imposed a new lockdown. President Biden will speak on the issue on Tuesday, as officials warn of hospital systems becoming overwhelmed. The World Health Organization said over the weekend the Omicron variant has now been found in 89 countries and the rate of infections is doubling every one and a half to three days.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Investing involves risk including the risk of loss of principal.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors' fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.
The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The U.S. Dollar Index (DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" (value) when compared to other currencies.
The flash services PMI is based on approximately 85 to 90 percent of total PMI responses each month. It is designed to provide an accurate advance indication of the final PMI data. As flash services PMIs are among the first economic indicators for each month, providing evidence of changing economic conditions ahead of comparable government statistics, they can have a significant effect on currency markets.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Ameriprise Financial Inc. published this content on 20 December 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 December 2021 21:39:19 UTC.
