The Tightening

The Fed made a soft pivot in their policy this week as they will continue to expand their balance sheet for a few more months and begin to raise interest rates 2-3x sometime early in 2022. However, they will likely change this policy again if inflation remains at these elevated levels so stay tuned on the pace of rate increases. Central banks around the world are already tightening their policies so the Fed is behind the pack in this regard.

The S&P 500 rallied in reaction to the Fed news and made a new high in an overnight session which was then rejected in the cash session causing a breakout failure. The selling continued into the Friday close and it looks like additional downside is in store for next week. In the chart below, it is reasonable to say that the S&P could revisit the low on 12/3 at 4492 or even down to the 61.8% FIB at 4435 (roughly 3-4% lower from the close).

I always find it is good to know how far the markets trade from their previous peak, so here we are:

Index ETFIndexLast HighChange
SPYS&P 50011/22-2.86%
IWMRussell 200011/8-11.96%
DIADow 11/8-3.28%

Interesting to see the indices have paired off from the last high but the under-performer is the Russell 2000 which is not far from going red on the year. Clearly, the indices have weakened in anticipation of the Fed’s policy change. And let’s not forget the last attempt to withdraw stimulus by Jerome Powell in Q3 of 2018 caused the junk bond markets to lock-up and double digit drawdowns in all of the major indices.

The economy is recovering but there are still headwinds with supply chains and the labor market and central banks have no choice but to stem the tide of inflation. How markets hold up in the coming weeks should set the tone for the first half of 2022.

Chart of the Week!


Economic & Central Banking Snippets 

Housing Starts
  • U.S. housing starts jumped in November, underscoring strong demand for homes. At a seasonally adjusted annual pace, builders started work on almost 1.7 million housing units last month but completed fewer than 1.3 million, the widest gap since 1984. The number of homes under construction rose to the highest level since 1973. The figures suggest that home builders are trying to bring more housing units to market but taking longer than normal to do so. (WSJ)
  • U.S. inflation climbed to a 39-year high in November, but prices didn’t change at the same rate for all goods and services. Gasoline and other energy sources, along with cars, have been the primary drivers of this year’s inflation burst. The November Producer Price Index ( PPI) rose 0.8% compared to October and is up 9.6% compared to last year.
PPI December 2021
  • This week we saw rate hikes from the Bank of England, Norges Bank in Norway, Banxico in Mexico, the Russian central bank and the central banks in Hungary and Chile. Meanwhile, the Fed has set out plans to accelerate the withdrawal of stimulus and signaled they expect to raise interest rates three times next year. The shifts show how central banks’ plans to phase out multitrillion-dollar stimulus policies and move toward higher interest rates are playing out at different speeds in the world’s big economies. (WSJ)
  • As the Federal Reserve looks at increasing interest rates at a faster pace to fight inflation, the International Monetary Fund (IMF) is warning about the economic risks if global borrowing costs rise too fast. The reason is debt. An IMF report found worldwide debt rose to a record $226 trillion in 2020 as a result of the response to the COVID-19 crisis and deep recession. That was 256% of global gross domestic product (GDP). The IMF pointed out countries could expand their debt last year in part because of low interest rates. (IMF/WSJ)
Global Debt

Macro Snippets

COVID in South Korea
  • Highly vaccinated South Korea can’t slow down Covid-19. More than 80% of the country has received two doses, but historic levels of infections, hospitalizations and deaths are prompting the country to reverse plans to reopen and instead take some of the most aggressive measures against the virus of any country in the world. (WSJ)
  • New York City just reported its highest-ever number of Covid-19 cases at more than 21,000. The rate of Covid-positive tests also doubled to about 8% in the city in just a matter of days. According to the CDC, 13% of all Covid cases reported last week were Omicron infections.
  • Apple has reportedly delayed its plans for employees to return to the office indefinitely. In an email to staff, CEO Tim Cook said the return-to-office date has “yet to be determined,” and that all employees would receive $1,000 that can be used for “work from home needs.”
  • FedEx: The company posted a 14% increase in revenue for its fiscal second quarter, as higher shipping rates helped offset rising costs from labor shortages.
  • Fertilizer prices have more than doubled over the past year. Frustrated U.S. farmers are now adjusting spring planting plans and warning about the potential for higher food prices. A global shortage of the chemical ingredients used to make fertilizer has sent prices soaring
Fertilizer Prices
Paul McCarthy of Kisco Capital, LLC

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.