US stocks erased earlier losses and eked out a gain after the Fed Minutes showed policymakers were not any closer to signaling aggressive policy tightening. Risk aversion returned as geopolitical tensions remained the focal point as no confirmation happened with a de-escalation with Russia-Ukraine concerns. The Fed Minutes were less hawkish than many expected and that helped risk appetite return a little.
The Fed’s Minutes showed interest rate hikes are coming and that they are readying for a significant reduction in the size of the balance sheet. Investors that were worried that the Fed would be pressured to begin the balance sheet runoff fairly soon could breathe a sigh of relief. The Fed sees inflation pressures broadening deep into the year but they would not be rushed into making any decisions into a faster tightening pace.
Investors were pleasantly surprised with today’s retail sales report. After a couple months of disappointing reports, the January retail sales report strongly rebounded from the omicron wave in December and front-loaded holiday shopping. The retail sales headline increase of 3.8% in January was much better than the 2.0% consensus estimate and downwardly revised prior reading of -2.5%. The consumer appears to be strong despite the steady stream of pricing pressures and that could lead some at the Fed to justify a supersized rate hike at the March FOMC.
US factories showed some progress in getting their hands on supplies, but the chip shortage still persists. Production at factories in January increased by 1.4%, better than the consensus estimate 0.5%. Heating demand was notable and helped drive the index for utilities by 9.9%.
Inflation is not easing just yet for manufacturers and that should support the argument that inflation might not be peaking for a couple more months.
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