Fed may disappoint today, Retail Sales Slump, Oil softer post EIA report

After months of the Fed telling Congress to deliver more stimulus, it seems lawmakers will finally get something done this week.  US stocks are slightly higher as stimulus bets got boosted following declines in retail sales, flash PMIs and homebuilder confidence.  The next few hours should see stocks remain in wait-and-see mode to see if the Fed will only offer changes in forward guidance and not signal an immediate change in QE purchases or a move to buy at the long end of the curve.  Treasury yields are slightly higher so financial markets might start to be pricing in no action from the Fed.  The Fed is expected to tie their level of accommodation to employment and inflation, likely meaning interest rates won’t rise until the end of 2022.  Hopes for an increase in asset purchases seem unlikely and it seems like a coin flip if they will adopt Yield Curve Control this meeting.  

Retail Sales 

Spending in the fourth quarter is taking a big hit.  The November retail sales report confirms fears that the US consumer is weakening.  This doesn’t mean the holiday shopping season will be a bust, but that large parts of the economy remain fragile.  A weaker consumer should provide added pressure for Congress to wrap a relief bill this week.  

PMIs

The US flash PMI readings confirmed the obvious, restrictive measures in December are leading to much slower business activity.  The manufacturing and service sectors are still expanding but concerns are growing it will get much uglier over the next few months.  

Housing

The NAHB homebuilder survey showed builder confidence declined from record highs but is still robust.  The housing market remains the bright spot of the economy and the winter months undoubtedly were going to see demand peak.  COVID vaccine execution will take most of next year, so it is still possible housing will remain very strong throughout the first half of next year.  

Oil 

Crude prices pared losses after the EIA crude oil inventory report posted a larger-than-expected stockpile draw.  Crude oil inventories fell 3.1 million barrels more than the consensus estimate of a decline of 2.2 million barrels.  The big draw was attributed a sharp 1 million bpd drop with imports and an 800,000 rebound with exports.  

The report was not all bullish as gasoline demand continues to plummet, marking the fifth straight week of rising gasoline inventories.  US crude production declined for the first time since late October, but still remains over 11 million barrels a day.  

WTI crude remains stuck in the mid-to-high $40s and it doesn't seem that will change anytime soon.  

Gold

Gold prices pared most of its gains as investors pare back stimulus bets ahead of the Fed’s policy decision, which seems like a coin flip if they will provide guidance on asset purchases.  Gold initially rose on optimism that a stimulus deal could be reached today.  Senate Majority Leader McConnell noted they are making good progress on passing something by Friday. 

Complicating the short-term outlook for gold has been a wave of new traders preferring Bitcoin over precious metal as their bet against the dollar and unprecedented stimulus efforts from the US.  Stimulus bets normally support gold, but today’s relief bill optimism by Congress could allow the Fed to wait until the next policy meeting to adopt yield curve control.  

Gold’s path higher is still there, it just might take a while longer to get if the Fed doesn’t deliver today.  

Bitcoin 

The crypto world is celebrating Bitcoin’s break of the $20,000 level.  Today is vindication for many Bitcoin enthusiasts that remained undeterred following the tulip-mania collapse that occurred two years ago.  It goes without saying that the importance of breaking this key level on the last full trading week of the year could be considered very bullish for cryptocurrencies.  

If you are an asset manager and not trading cryptocurrencies and your fund is underperforming, you might have trouble raising capital.  Institutional money is scrambling for finding yield and right now Bitcoin is providing many opportunities.