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FED hike may be negative for future fast growth expectations as market cools

The US Federal Reserve has made strong signals that they intend to start tightening the official borrowing rate this year, starting with March. Investors expect that the meeting on the 15-16 of March will see them raising the rate by 0.25, with at least 2 more hikes very likely throughout 2022. The FED has also expressed their willingness to add a 4th rate hike for the year if the fiscal situation does not take the charted course set by them. With inflation rising by 7% in December rate increases are seen as a necessity, regardless of the pandemic situation at hand.

Similarly, the Bank of Japan is also considering tapering measures and reduction in economic support, despite that inflation rates are not yet at the 2% level, which most countries consider a threshold for action. While a rate hike is not guaranteed this year, the government has nonetheless decided to end the corporate bond purchasing program, valued at ¥20tn ($176bn) by March. An exemption is set aside for smaller scale companies, which would be in effect by September of this year.

News of the US rate hikes have also rippled across European markets as most of the main benchmarks have recorded a decline in their value for Friday. The London FTSE100 index is down -29 points or -0.39%, the German DAX is -154 points or -0.97%, while the French CAC40 is -61 points or -0.85%. That said, the UK economy has expanded faster than previously expected and is not finally at levels before the first lock downs.

Another reason for the underwhelming market conditions is the newly released report on US retail sales, issued by the census bureau for December 2021, showing a drop of 1.9%.

Advance estimates of U.S. retail and food services sales for December 2021, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $626.8 billion, a decrease of 1.9 percent (±0.5 percent) from the previous month, but 16.9 percent (±0.9 percent) above December 2020. Total sales for the 12 months of 2021 were up 19.3 percent (±0.5 percent) from 2020. Total sales for the October 2021 through December 2021 period were up 17.1 percent (±0.7 percent) from the same period a year ago. The October 2021 to November 2021 percent change was revised from up 0.3 percent (±0.5 percent) to up 0.2 percent (±0.3 percent). Retail trade sales were down 2.1 percent (±0.4 percent) from November 2021, but up 14.4 percent (±0.7 percent) above last year. Gasoline stations were up 41.0 percent (±1.6 percent) from December 2020, while food services and drinking places were up 41.3 percent (±4.0 percent) from last year.