US Close: Stocks mixed post Fed and US data, BOE Hikes, ECB tweaks policy, Turkey cuts again

US stocks traded mixed as Wall Street abandoned mega-cap tech stocks as investors continue to digest the hawkish FOMC dot plots and another round of US data.  The growth outlook still remains upbeat for next year and that some traders rotating back into cyclicals. Energy stocks outperformed given the strong rebound in crude prices, while financials remained attractive despite the flattening of the curve as trading volumes seem likely to remain elevated next year.

US data                          

After the FOMC, it is hard to get excited about this round of economic data, but so far it mostly supports the Fed’s hawkish course. Initial jobless claims rose but still are very close to decade lows.  The labor market remains very tight and that will likely remain the case throughout this omicron variant surge.

The housing market refuses to cool after both housing starts and building permits posted significant increases in November.  Now that millennials are buying up properties, home prices could continue to skyrocket.  Housing starts surged to 1.679 million units, while building permits rose to 1.712 million homes.  Industrial and manufacturing data for November also showed that the US economic recovery remains healthy.  Industrial production rose 0.5%, while manufacturing activity increased 0.7% last month.

The flash PMIs and the Philly Fed survey did not impress at all.  The Philly Fed came in very low, but the bright spot was that pricing pressures eased.  December prices paid fell from 80.0 to 66.1 and prices received dropped from 62.9 to 50.4.

The first look at December manufacturing activity unexpectedly dipped from 58.3 to 57.8, while Services dropped from 58.0 to 57.8.  Both key readings were still easily in expansionary territory, but omicron uncertainty over the next month or two could see these readings significantly soften.

UK

After holding off on rate hikes in November, the BOE understood that the current inflationary environment warranted action. The BOE raised interest rates by 15 basis points to 0.25%, becoming the first major central bank to raise during the pandemic.  The bank did maintain their corporate bond target at 20 billion pounds and the Gilt purchase target at 875 billion pounds.

The Fed’s hawkish turn made this an easy meeting for the BOE.  Some traders were surprised that the BOE could raise interest rates as the omicron variant is delivering a tidal wave of COVID cases. The BOE expects inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, which could support the argument for another rate hike in February.

ECB

The ECB amended its QE bond buying program as they increased the regular Asset purchase program as the PEPP program ends.  The ECB will keep its APP going as long as necessary which many traders interpreted as a dovish surprise.  The ECB will remain flexible given the omicron variant impact to the outlook, but the growth potential for next year limits any downward pressure that emerges over the coming months.

Turkey

Turkey’s central bank cut the one-week repo rate by 100bps to 14.00%. The Turkish central bank is claiming this will be the end of rate cuts now that the currency crisis has weakened the lira beyond 15 per dollar.  Currency traders will wait to hear what President Erdogan’s thoughts are about the CBRT ending rate cuts after a fourth straight reduction.

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