Daily Markets: Will There Be a Taper Tantrum?

Today’s Big Picture

Asian markets closed mixed today as Taiwan’s TAIEX along with Japan’s Nikkei 225 and Korea’s KOSPI Composite rose 0.05%, 0.10%, and 0.35%, respectively while China’s Shanghai Composite fell 0.38% and Hong Kong’s Hang Seng declined 0.91%. Major European markets are up in midday trading while U.S. futures are pointing to a soft open.

Before U.S. equity markets open for trading today, several pieces of economic data will be released. The one that is likely to capture investor attention is the November Retail Sales report, which is expected to rise 1.7% MoM excluding auto retail sales. On a year over year basis, which is also our preferred way of assessing the data, November Retail Sales are expected to climb 16.3%, up modestly vs. October’s 15.9% YoY increase.

As the rush of that report fades, however, attention will shift for what will be the main event today - the outcome of the Fed’s latest monetary policy meeting, at which it is widely expected to announce a faster pace for its bond tapering compared to its original plan shared in early November. The question, of course, is how much faster? Some survey findings suggest the Fed could double its initial pace, which translates into $30 billion a month, a cadence that could mean ending the program as soon as March. The two other items that investors and economists alike will be reviewing are the Fed’s latest economic dot plot, which will showcase not only the Fed’s latest GDP forecast but also hints as to what is likely to happen on the interest rate hike front in 2022. Current expectations call for two such hikes - this afternoon we’ll see if that remains unchanged or if it’s looking more like three. If the latter is the case, we could see the recent market pressure continue as that likelihood is digested.

Data Download

Coronavirus

Yesterday the World Health Organization (WHO) warned the new Covid-19 omicron variant is spreading faster than any previous strain, and it is probably present in most countries of the world. In its weekly epidemiological update, the WHO said more data was needed to better understand the extent to which omicron may evade immunity derived from either vaccines or previous infection.

Google (GOOG) announced it will institute a three day per week return to office policy “at some point” in 2022. The company went further, tying lack of adherence to company vaccination policy to disciplinary actions including loss of pay and potentially loss of job.

In a response to the increasing spread of the omicron variant, Apple (AAPL) has announced it will reinstate its in-store mask mandate for customers as well as limit occupancy at several locations nationwide.

International Economy

Industrial Production in China rose more than the expected 3.6% YoY, instead accelerating to 3.8% in November from October’s 3.5% pace. The nation’s unemployment rate rose to 5% in November from 4.9% in October. Retail Sales slowed more than expected to 3.9% YoY growth in November versus expectations to decline slightly from October’s 4.9% YoY pace to 4.6%. Home prices slowed to 3.0% YoY growth in November from 3.4% in October.

The UK’s headline inflation rate clocked in at +5.1% YoY in November, hotter than the expected reading of 4.7% YoY and well ahead of October’s 4.2% pace. The same was true for the UK‘s core inflation that came in at +4.0% for November versus expectations for an increase to 3.7% from October’s 3.4%.

Domestic Economy

Tuesday’s Producer Price Index (PPI) for November came in even higher than the expected 9.2% YoY, instead rising to a new record high of 9.6%, up from October’s 8.6%. Core PPI (which excludes food, energy, and trade services) was also higher than the expected 7.2% YoY, also rising to a new record high 7.7% YoY from October’s 6.9%. Over 60% of the increase was driven by a 1.2% price increase for final demand goods with good inflation up 15% YoY, mostly driven by energy. Warehouse prices saw a significant decline following the enormous run up over the pandemic period, which could indicate that logistics pressures are easing. Trucking prices continue to rise rapidly.

The NFIB Small Business Optimism Index rose slightly to 98.4 points in November, up from the 7-month low of 98.2 in October. Expectations for business conditions deteriorated over the next six months with that sub-index falling to the lowest level in 9 years. The main concerns continue to be inflation and supply chain disruptions with 38% of respondents reporting either the cost or the quality of labor as their biggest problem. The percentage of respondents reporting inflation as their biggest problem has surged in recent months and rose another two percentage points to 18% in November. The only other time this high of a percentage saw inflation as their biggest issue was in 2008.

Congressional Democrats passed a debt ceiling increase overnight, with a vote of 221-209, and sent it to President Biden for signing early this morning. He is expected to sign it just hours before the Treasury forecast that it would run out of funds to pay the government’s bills. The Senate approved the measure 50-49 late yesterday afternoon.

Reports indicate President Biden and Senator Joe Manchin (D-WV) are "deadlocked" regarding Build Back Better Act talks over disagreements of the length of programs. Given the holiday calendar, this likely means any vote will be delayed until 2022.

Commerce Secretary Gina Raimondo said she is committed to the administration’s goal of universal broadband by 2030, but cautioned that distributing the $65 billion associated with President Biden’s trillion dollar infrastructure package could take years. Broadband Now projects as many as 42 million people lack access to high-speed internet

Later today we will get Retail Sales for November, Import & Export Prices, NY Empire State Manufacturing Index, Business Inventories, NAHB Housing Market Index, and most importantly the Federal Reserve’s monetary policy decisions.

Markets

Inflation concerns and what it could prompt the Fed to do exiting today’s monetary policy meeting hit the high-flyers again today as the major U.S. equity indices closed in the red for a second consecutive day. The tech-heavy Nasdaq Composite was the hardest hit, falling 1.1%, the small cap Russell 2000 dropped 1.0%, the S&P 500 lost 0.8%, and the Dow fell 0.3%. Also weighing on stocks was the continued spread of the omicron variant and renewed restrictive efforts to contain it. Overall Treasury yields were higher and the dollar rose 0.3%. WTI crude fell more than 1% to close at $70.37.

Cryptocurrencies have been taking it on the chin as the likelihood of reduced market liquidity grows. Bitcoin has fallen more than 30% from its all-time high of nearly $69,000 in November. Even the $0.16 to $0.21 price pop in Dogecoin faded overnight to $0.18. The 31% jump occurred immediately after Elon Musk’s announcement that Tesla (TSLA) will consider accepting Dogecoin for payment on some merchandise items (not cars though).

Stocks to Watch

Following a few days without quarterly earnings, we’re back on that horse this morning with quarterly results due from ABM Industries (ABM), REV Group (REVG), and Toro (TTC).

REE Automotive (REE) entered a new partnership with Hitachi America to accelerate the adoption of electric vehicles across the entire EV value chain. The two companies plan to develop advanced digital solutions for REE customers by co-creating a highly scalable Data-as-a-Service and Analytics-as-a-Service platform.

Shares of semiconductor test handling equipment supplier company Cohu (COHU) moved up in after-hours trading last night following the company issuing revised mid-term financial targets. That target now calls for annual revenue of $1 billion and non-GAAP EPS of $4.00.

Aurora Cannabis (ACB) and 22nd Century Group (XXII) inked a three-way non-exclusive agreement to license biosynthesis intellectual property to Cronos Group (CRON). The deal covers the research and development of the biosynthesis of cannabinoids.

Following the recent spin-off of Saks.com from Macy’s (M), reports suggest Neiman Marcus is considering splitting itself into three companies - its brick and mortar business, the online division, and spinning off Bergdorf Goodman.

The Biden administration is evaluating imposing tougher sanctions on Chinese chipmaker Semiconductor Manufacturing International Corp. (SMICY). Last December the company was added to the Pentagon’s blacklist of alleged Chinese military companies.

Discover Financial Services (DFS) reported November credit card delinquency rate of 1.60% up from October’s 1.55% but well ahead of the 1.42% level registered for both July and August. 

Before the December 20 market open, Werewolf Therapeutics (HOWL) will be added to the Nasdaq Biotechnology Index.

IPOs

Near-term the IPO calendar is pretty thin and readers looking to dig more into it should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

Heico (HEI), Lennar (LEN), Nordson (NDSN), and Trip.com (TCOM) are slated to report their quarterly results. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar. 

On the Horizon

• December 16: Housing Starts, Building Permits, Philly Fed Manufacturing, jobless claims, Industrial Production, Markit Manufacturing PMI (Flash)
• December 22: GDP (Q3) final estimate, Chicago Fed National Activity Index, Existing Home Sales
• December 23: Durable Goods, Personal Income & Spending, PCE Price Index, weekly jobless claims, New Home Sales, Michigan Consumer Sentiment

Thought for the Day

As many start to get in the holiday mood, “Christmas doesn’t come from a store. Maybe Christmas perhaps means a little bit more.” ~ The Grinch

Disclosures

• Tesla (TSLA) is a constituent of the Tematica BITA Cleaner Living Index
• Tesla (TSLA) is a constituent of the Tematica BITA Cleaner Living Sustainability Screened Index
• Discover Financial Services (DFS) is a constituent of the Tematica Research Thematic Dividend All-Stars Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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