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Stock markets rallied after one of the last big unknowns this year became a lot clearer. The Federal Reserve completed its hawkish pivot by signalling it will double the pace of its tapering and raise rates three times next year. It removes uncertainty about the policy outlook and helps ease concerns that inflation would get out of hand; yesterday’s retail sales figures were weaker and suggested inflation might be a factor. 


The market seemed to breathe a sigh of relief as the uncertainty around the policy outlook for 2022 has to a large extent been removed (for now – markets are never that forward looking). The S&P 500 jumped 1.6% and the Nasdaq rallied more than 2% to halt the decline this week in the wake of Friday’s all-time high for the broad market. Stock markets in Europe followed suit in early trade with +1% gains for the main bourses, led by a 35 gain for tech stocks on the Stoxx 600. The FTSE 100 rallied over 1.1% to 7,268 to halt a run of 6 straight down days. DAX and Stoxx 50 both up 1.7% in early trade.


The Fed’s dot plot now shows policymakers think they will raise rates three times next year, with the average rate seen at 0.9% by end 2022 up from 0.3% in September. This brings the Fed only roughly in line with what the market was already pricing. Now fully retired, the Fed dropped the word “transitory” as regards inflation. Powell was bullish: “The economy no longer needs increasing amounts of policy support.” He also said the big risk now is that inflation is more persistent, warned of entrenching higher inflation expectations. PCE inflation for 2021 is revised up to 5.3% from the 4.2% expected in September; core PCE up to 4.4% from 3.7%. Still, though, the projections for 2022 are not that high – PCE inflation is seen moderating to 2.6% (core 2.7%) next year. Though this is higher than the level predicted in September, it may yet be on the low side.


Market attention now shifts to the Bank of England and European Central Bank meetings today. After yesterday’s hot inflation print for the UK, markets now see a roughly evens chance that the Monetary Policy Committee will hike rates today. The BoE is in a tough spot of its own making. Inaction bias as the IMF puts it may prevail despite RPI inflation at the highest in 30 years and a labour market with record vacancies.  


The ECB is a lot less likely to do anything, instead, they will signal readiness to retain as much flexibility as possible. It’s expected they will confirm an end to the emergency PEPP bond buying programme by March 2022 whilst simultaneously announcing a temporary increase to the APP programme. This would be a recalibration of sorts and forward guidance on asset purchases will likely make it very clear there are no plans to hike rates next year. Europe is in lockdown – the ECB is going to remain ultra dovish.


Elsewhere, oil rallied as US stockpiles decline by the most since September. WTI is back above $71, Brent above $74 after the EIA reported inventories declined by 4.58m barrels last week, much larger than anticipated. Rates are steady with the US 10yr holding around 1.45%, gold is up close to $1,790, Bitcoin holding around the $48k level.


Chart: The bid coming through for cable has seen it hit the highest in two weeks ahead of the BoE today. Dollar weakness post-Fed is playing a big part with the pound essentially flat against the euro, but nevertheless confirms thesis of seller fatigue following another big rejection at 1.3170 area yesterday.


GBPUSD Chart 16.12.2021

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