U.S. markets were on the quiet side last week in holiday-shortened trading action, yet there were still developments from the Fed.
Reviewing last week, the S&P 500 added 1.53%, the Nasdaq 100 tacked on 0.68%, and the Dow Jones Industrial Average was higher by 1.78%.
Last week may have been holiday-shortened, but the most recent U.S. Federal Reserve policy meeting minutes offered an intriguing tone.
While we do not like to read too deeply into any one piece of Fed commentary, the recent meeting minutes showed that “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”
Stock market bulls cheered the news.
We do not know when “soon” is yet. However, the tone differs highly compared to the tough talk we have gotten accustomed to in recent months.
The next Fed meeting is on December 14th; the market expects a 50-basis-point hike, a relaxation from the previous four 75-basis-point hikes.
As of Monday morning, based on the CME FedWatch Tool, there was a 69.9% probability of a 50 basis point hike and a 30.1% probability of a 75 basis point hike.
Winter Energy Picture
Crude Oil: Pricing for January WTI Crude Oil fell by 4.78% last week, closing the week at $76.28 per barrel. This marked its third consecutive weekly decline.
Crude’s price decline happened despite the larger-than-expected drawdown in weekly inventory. Weak Chinese demand and increasing COVID-19 cases in China likely contributed to last week’s price decline.
Translating to the gas pump, we have the U.S. average regular gasoline price at $3.556 per gallon as of Monday morning, according to data from AAA.
Natural Gas Rises: Seemingly just in time for the winter home heating season, the price of natural gas has been rising.
A notably volatile commodity known for large and fast price swings, natural gas rose 11.44% for December last week. Talks of a supply squeeze and the EIA winter forecast contributed.
Heating Oil – Igloos? It could be an expensive winter for those folks using home heating oil. States in the Northeastern U.S., including New York, Pennsylvania, and New England, account for approximately 85% of total U.S. residential heating oil sales. And in some homes, temps are down to igloo level, according to one article.
U.S. retail home heating oil prices are averaging $5.434 per gallon at the time of writing. For folks unfamiliar with home heating oil, most residential tanks are 275 gallons, so a fill-up can run around $1,500. And that fill-up will only last a third to a half of the winter season, depending on usage.
Heating Alternatives: States like Maine are seeing a notable jump in the price of firewood as the White House is weighing a plan to increase the supply of emergency home heating oil.
It’s hard to say who will fare better this winter, those using natural gas or home heating oil. A safe bet is that we will all feel the pinch.
Holiday Shopping Season
Black Friday marks the start of the holiday shopping season. Heading into the big shopping day, the picture was a mixed one when it came to the strength of the consumer.
Remember, inflation puts a monkey wrench into consumer spending data. The National Retail Federation (NRF) forecasts a 6% to 8% annual increase in holiday sales for 2022. Since the Consumer Price Index’s last reading showed a 7.7% year-over-year rise, the projected increase of 6% to 8% in holiday sales could be interpreted as a negative number.
A clearer picture will emerge as final spending data rolls in for Black Friday and Cyber Monday.
Early indications of Black Friday sales data at the time of writing show a record $9.12 billion in online sales, translating to a 2.3% rise year-over-year. These numbers are preliminary and are subject to change.
The American consumer has indeed been resilient through a year of high inflation. However, the preliminary Buy-Now-Pay-Later data (BNPL) shows orders using the feature increasing by 78% and revenue rising by 81% versus the week prior.
Americans have gotten accustomed to certain pastime activities. Black Friday and Cyber Monday have become akin to national holidays. But with the steep cost of necessities and credit utilization already trending higher, how much more can the resilient American consumer sustain?
These credit card bills always come due in January.
Turning the Page
Although quiet, last week was constructive for U.S. equity indexes, given the Fed language and tone coming from the Fed minutes. Should interest rate increases slow, the underlying market and consumer sentiment could shift across the board.
This week, we will get another read on the labor markets courtesy of non-farm payroll jobs data. Analysts will be assessing consumer strength via the hourly wage growth metric. Consensus expectations are for a 0.3% increase month-over-month.
The employment data will be released on Friday morning and could provide a clearer picture of consumer strength during the holiday shopping season. We know the Fed will be watching heading into their mid-month meeting.