We start the last month of the year with stocks on record highs, and asset prices broadly having one of the better years on record.
The economy is tracking above 3% growth for the quarter. The Fed is in an easing cycle. Businesses and consumers are anticipating a pro-growth, deregulation agenda from the incoming Trump administration.
And the VIX (downside insurance for investment managers), looks like no fear …
Despite the many shock risks in the world, the VIX appears to be signaling relative calm.
With that, the bigger influence on how stocks close the year, and open the New Year, will likely come from the December 18th Fed meeting.
We come into the month with the market pricing in a little better than a coin flips chance of a 25 basis point cut this month (following the 50 bps cut in September and 25 bps cut in November).
But we have a number of Fed members speaking this week, including Jerome Powell on Wednesday. And we should expect some signaling.
It appears to have started with Fed Governor Chris Waller.
Waller had some prepared remarks at the American Institute for Economic Research today, with the not so subtle title: “Cut or Skip?”
So, without even getting into the text, clearly the Fed wants to prepare markets for the possibility of a skip, a “no rate cut” this month.
What would justify a skip.
They’ll see jobs data this week. They’ll see CPI and PPI next week. All unlikely to justify holding rates at a level the Fed acknowledges to be well in restrictive territory.
And they’ll see this next week …
We should expect to see a boom in this small business optimism index starting with the next report, which comes on December 10th.
And with that, as we discussed in my November 14th note (here), the pro-growth Trump agenda did indeed influence the Fed’s policymaking back in 2016 (just a month after the election). They assumed a hotter price pressure environment was coming, enough to proactively hike rates in an economy that had averaged only slightly above 1% PCE inflation that year.
Also in that December 2016 meeting, the Fed revised UP inflation forecasts, saying “some of the participants” incorporated the “assumption of a change in fiscal policy” into their projections.
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