May 14, 2022
  • May 14, 2022

Weekly economic and financial commentary: The hawks in full control at the Fed

By on January 29, 2022 0

Summary

United States: moderate growth and more aggressive Fed

  • The economy has been on a roll in 2021 with generous fiscal policy and an accommodative Fed. Inflation and supply chains were the main obstacles. In light of a more hawkish stance at this week’s FOMC meeting, we now expect the Fed to hike rates by 125 basis points this year and a balance sheet reduction to be announced at the July 27 FOMC meeting.
  • That said, our updated forecast is more about base effects from the fourth quarter GDP report than a major shift in our outlook due to a more aggressive Fed. We will provide a more comprehensive forecast update in our US Monthly after we receive the January nonfarm payrolls release.
  • Next week: Construction spending (Tuesday), ISM Manuf. & Services (Tuesday/Thursday), Employment (Friday)

International: European economic growth is racing at the turn of the year

  • This week’s news from Europe offered further confirmation of an economic soft spot. The eurozone services PMI in January fell more than expected, while Germany saw its GDP contract in the fourth quarter. In the UK, manufacturing and services PMIs fell further in January. Elsewhere, the Bank of Canada kept its key rate stable this week, but signaled that rate hikes would come soon.
  • Next Week: Eurozone CPI (Wed), Brazil Selic Rate (Wed), BoE Policy Announcement (Thu)

Interest Rate Watch: Hawks in Full Control at the Fed

  • We expect the FOMC to raise its target range for the FFR by 125 basis points between March and the end of the year. We continue to expect the Committee to raise rates a further 75 basis points during 2023 with rate hikes of 25 basis points in the first, second and third quarters of the year.

Credit Market Outlook: Consumers Are Spending, Can It Last?

  • Major players in the credit card industry announced attractive Q4-21 results this week. But the recovery in credit card spending clashes with a time when consumer wallets feel a bit lighter, as inflation and shrinking stimulus eat into real income. Is such growth sustainable, or are consumers biting off more than they can chew when it comes to taking on credit card debt?

Topic of the week: Building back better still stuck in neutral

  • Just over a month ago, we released a report that claimed Democrats’ efforts to pass their Build Back Better plan had largely stalled. One month into 2022 and not much has changed.

Full report here.