This past Friday jobs data was released, increasing the likelihood of a fed rate increase in September. That being said, there are reasons the fed should consider waiting…
Economic data indicates a slowing US economy:
The current moderate pace of economic growth may be softening. Many economic indicators came out reflecting more moderate growth. ISM Manufacturing PMI fell to 52.7 from 55.5. Trade Balance deficits expanded to -43.84B as a stronger US dollar increased imports and decreased exports. The labor market participation rate remained at a low of 62.6% and personal spending was up only 0.2% month over month[2]. We could see a strong spike in August with back to school season.
All told these statistics reflect an economic environment that is bracing for the impact of higher rates. Services were up for the month, but with manufacturing down, corporate America is expecting less spending on goods.
Jobs & Inflation support a September rate increase:
There has been constant debate over when the Federal Reserve Board (FRB) will raise interest rates. The FRB’s dual mandate of inflation of 2% and full employment made end of week data firm the thought of a September increase. Core personal consumption expenditures (PCE), the FRB’s preferred inflation metric, was up 1.3% year over year in July. This statistic removes volatile fuel and food expenses. Services PMI was up to 55.7 in July from 55.2. Initial jobless claims rose by 3,000 to 270,000 this past week. Nonfarm payrolls increased 215,000 in July and the unemployment rate remained at 5.3%[3].
The continued stability of the labor markets make a rate increase likely. The FRB continues to stress this is not a tightening of monetary policy but rather a normalization. Rates have been zero bound since December of 2008.
International
China’s imports and exports fell last month. This left their trade balance narrowing to 43.03B. They continue to feel the impacts of their volatile stock market and government measures to intervene in the selloff.
Japan’s rates narrowed last week. Also, a softer yen allowed companies investing abroad to do well, i.e. Toyota.
Eurozone manufacturing PMI came in at 52.4, up from 52.2 last month. The only major member reporting under 50 was France at 49.6, while Italy hit a high of 55.3. Services PMI strengthened to 54.0 from 53.8. The Greek manufacturing index fell to 30.2 from 46.9 in June[4]. The Greek markets re-opened this week to major losses. This was expected after 5 weeks of being closed.
In all, the accommodative stance of Japan and Europe has been improving their circumstances. At the same time causing a softening of production in the US. This has left trade balance and foreign profits for US companies suffering. The FRB increase will actually be a vote of confidence in the US economy. It is an indication that the economy is strong enough to stand on its own after 6 years of accommodative policy…
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[1] By Oggmus (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wiki Commons
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar
[4] www.investing.com – economic calendar