The Week Ahead – The Christmas Stocking

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Marzipan, Gummibärchen, and the Lindt chocolate Santa are all classic German Christmas stocking stuffers for those who were well-behaved during the year. And of course, for those naughty, a lump of coal (or black licorice shaped coal!). I had the opportunity many years ago to visit the well-preserved medieval city of Rothenburg located in Bavaria, Germany. For those Christmas lovers, Rotherburg is also the headquarters of Käthe Wohlfahrt, a German company that sells Christmas decorations and operates a fully decorated Christmas store and Christmas museum all year long.

The Federal Reserve stuck to their guidance and raised rates for the third time this year. The federal funds rate, the rate that the Fed pays banks on their reserve balances, is now in a range from 1.25-1.50%. In her last press conference as Fed Chair, Janet Yellen noted that “most” Fed policymakers had included the probability of tax cuts into their forecasts which revised economic growth higher (2.5% for 2018 versus a prior estimate of 2.1%) while the unemployment rate was revised lower (3.9% versus 4.1%). Inflation expectations continue to be muted. Even with the positive economic growth projection and continued strong labor force, the median dot plots over the next two years did not change. The Fed is still targeting three rate hikes in 2018 and two rate hikes in 2019. Interestingly, the market is currently pricing in a 60% chance of the first rate hike to occur in March and a total of 1.8 hikes over the course of 2018. Looking at the balance sheet, the $10 billion reduction per month will be increased to $20 billion per month in the first quarter, $30 billion per month in the second quarter, $40 billion per month in the third quarter, and $50 billion per month in the fourth quarter. After that, the Fed is projecting to maintain the $50 billion monthly pace until the balance sheet is at their target size.

This coming week the third estimate for third quarter GDP will be released. The last revision saw a surprise increase to 3.3% from 3.0%. Additionally, we’ll get another update on inflation with a PCE reading. Investors will be watching Washington carefully as the Senate is expected to vote on the tax reform bill early this week followed by the vote in the House of Representatives. Some details have trickled out such as a 21% corporate tax rate, a 37% top individual rate, a $750,000 cap on mortgage interest deduction, and many other numbers. Another number to be aware of is 69. That’s the amount of record daily closes that the Dow Jones Industrial Average has had so far in 2017, tying 1995 for the most ever in a calendar year. Sending the market sweet thoughts of candy canes, peppermint pinwheels, and gumdrops as with nine trading days left in the year there’s a good chance that 2017 sets the record. Investors haven’t had to wait for the Santa rally this year as really, Christmas has been happening all year long.

Data deck for December 16 – December 22: