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.
Equity markets slumped last week as the Federal Reserve raised interest rates by a widely expected 50 bps, bringing the reference rate to a 4.25%-to-4.5% range. The latest rate hike marks a step down after four consecutive 75 bp moves, extending the sharpest tightening since the 1980s. The median estimate for fed funds now ends 2023 at 5.0%-to-5.25%, implying a further 75 bps of rate hikes from here, so the Fed may not be done yet. The end appears to be near, however, and it will likely come in 25bps incremental hikes from here on out. The pace of the rate hikes is no longer crucial, and the focus has shifted to the peak rate and the duration of the restrictive rate policy.
In this regard, CPI inflation released last week appeared to confirm that US inflation has peaked. Markets initially reacted very positively. However, this welcome development was followed by central bank messaging from the US and abroad that challenged the markets’ belief of rate cuts at some point in 2023. That will likely be a significant debate throughout 2023 - how central bank messaging will translate into actions as global economies weaken. It seems probable that if central banks follow through on their recent comments, 2023 will face similar challenges that defined 2022.
As the year wraps up, we want to wish everyone a happy holiday season and all the best for 2023. This week the focus will be on housing activity indicators, personal income and spending, durable goods orders, and the core PCE inflation report on Friday. Thankfully there are no major speaking engagements from Fed officials this week - mercy perhaps after this past week’s central bank-driven market turmoil.
Data deck for December 17 - December 23: