Stocks and The Risk of Faster Fed Tapering

The stock market should be supported this week by President Biden's announcement of the next Fed Chair -- regardless of whether it will be Powell or Brainard.  Both are highly capable, and the decision would remove some uncertainty.  Also, the market tends to do well in the Thanksgiving week.

But, stocks are likely to turn cautious, if not turn down, over the first half of December on fears the Fed will decide to increase the speed of tapering at the December 14-15 FOMC Meeting.  Fed Vice Chair Clarida raised the possibility in last week's speech, making one wonder whether Biden asked both Chair candidates to do something to bring down inflation.  If that were the case, there may not be much new information regarding tapering in this week's release of the October FOMC Meeting Minutes.

The November Employment and CPI Reports (due December 3 and 10, respectively) -- risk exacerbating the market's fear of faster tapering.  The data may have to be particularly soft to persuade the Fed to stick to its announced $15 Bn per month tapering path.  This will not likely be the case.

Early evidence does point to a smaller m/m increase in Nonfarm Payrolls in November than October's +531k.  But, the pace will likely remain above trend, as the Insured Unemployment Rate so far suggests another decline in the Civilian Unemployment Rate.  If Average Hourly Earnings prints above 0.3% m/m, as it has in the past 7 months, the Fed could feel the need to respond to growth-related inflation pressures stemming from a too-tight labor market (unemployment rate below NAIRU as discussed  in last week's blog).

Both Total and Core CPI risk printing high.  Retail gasoline prices rose in November, with seasonals exacerbating the increase again.   Also, there is a risk the higher Used Car wholesale prices in September and October will show up in retail Used Car Prices in the November CPI. 

A pullback in the stock market could be short lived, however, for several reasons.  /1/ Economic growth should remain solid next year, even with a faster pace of tapering.  In part, growth could be boosted by an easing of the chip shortage and other supply disruptions.  /2/ Q421 corporate earnings, due in January, should be strong.  The Atlanta Fed model's latest estimate is +8.2% (q/q, saar) for Q421 Real GDP Growth.  /3/ Inflation may ease.  Supply-related price hikes over the past several months, such as for motor vehicles, could reverse.  Also, oil prices may fall further.  Their decline could help hold down a slew of goods and services prices.

While the increased risk of faster Fed tapering may have contributed to last week's drop in oil prices, there are fundamental reasons for the latter to continue to stay low, as well.   /1/ US Domestic oil drilling and production have begun to move up sharply.  (Perhaps the Biden Administration has quietly signaled a positive message to the industry?)  The October Industrial Production data show a 9.3% m/m jump in oil and gas drilling.   And, the Baker-Hughes Oil Rig Count rose in November after plateauing in October.  Both pieces of evidence are in line with the International Energy Agency's prediction that Non-OPEC oil production will finally make a noticeable move up in Q421, with US production accounting for a good deal of the increase.  /2/ The partial shutdowns in Europe and China also should temper increases in demand for oil in the immediate future.