Markets Fall as Banks Decrease Quantitative Easing and Fed Tapering Rate Increases
Market Recap week ending 12/17/2021
US equity markets fell across the board as global centralbanks moved to decrease their quantitative easing initiatives. In the US, the Federal Reserve announced thatit would double the pace of its taper to $30 billion a month and conclude its assetpurchase program by the end of March 2022. The Fed kept its policy rate in place but revealed their dot plot thatforecasts three rate increases in 2022. The Bank of England surprised the market with a 15 basis point increasein their policy rate. The EuropeanCentral Bank laid out its plan to taper, but its asset purchasing plan willremain in place until at least 2023. TheBank of Japan, as expected, did nothing to its policy rate but did announce aplan to reduce its amount of “emergency” purchases. The differences in global central bank policywill be a significant theme to watch in the coming year and will undoubtedlyinfluence multiple asset classes.
Concerns over the economic recovery due to the rapid spreadof the Omicron variant continued to impact markets. A South African study indicated that Omicronspread 70% faster than the Delta variant, but the illness was less severe, andhospitalization rates were much lower. Therewas also news that the Chinese developed Sinovac vaccine appeared to be ineffectiveagainst the Omicron variant. The CDC announced that it preferred the Pfizer andModerna vaccine over Johnson and Johnson’s vaccine because of higher efficacyrates and fewer adverse effects. Thecorporate world also took notice of the variant, with several companiesdelaying the timing of employees coming back to the office. Economic data released over the week wasmixed.
The S&P 500 lost 1.9% as investors took profits in MegaCap growth stocks. The Dow shed 1.7%,the NASDAQ led declines with a loss of 3.7%, and the Russell 2000 gave up1.7%. Interestingly, yields fell acrossthe US yield curve in a flattening trade. The 2-year note yield fell two basis points to 0.64%, while the 10-yearyield fell nine basis points to close at 1.40%. The lower yield moves came on the heels of a less hawkish tone from FedChairman Jerome Powell. Oil prices fell1% to close at $70.93 despite a larger than expected draw on inventories and avery bullish call from Goldman Sachs. Gold prices increased $20.20 or 1.1%, closing at $1805 an Oz. Cryptocurrencies continued to be volatile-Bitcoin fell by $725 to close at $46,852.
Economic data was highlighted by the Producer Price Index,which came across higher on both the headline and Core. Headline PPI came in at 0.8% versusexpectations of 0.5% and was up 9.6% year-over-year. The Core PPI came in at 0.7% versus theconsensus estimate of 0.4% and was up 7.7% year-over-year. Retail Sales for November missed the markcoming in at just 0.3%; the street was looking for 1%. The miss in sales may be due to demand beingpulled forward due to perceived supply constraints. November housing data was better thanexpected. Housing Starts came in at1679K versus the estimate of 1560K, and Building Permits came in at 1712kversus 1620K. Initial Claims move up abit in the prior week to 206K economists were looking for 192k. Continuing Claims improved, coming in at1.845 million, down from the last week’s reading of 1.999 million.