The market lost a negligible amount of ground last week. Federal Reserve posturing along with firming oil prices led the market headlines for the week.
There was an interplay between both oil and Federal Reserve Board (FRB) minutes. Oil firmed over the week; on the surface it was related to hopes of an OPEC freeze. Below the surface it was linked to the strength/weakness of the dollar. The FRB minutes showed that they are still data dependent and while a rate hike is not off the table for September, December is a far more likely candidate. This weakened the dollar across the week.
Why is oil linked to the strength of the dollar?
Well, oil is priced internationally in dollars. So when we have a weak dollar, oil prices increase to market levels, keeping its value unchanged.
US Data
Building permits missed, but housing starts did not. Industrial production grew at nearly twice the expected rate. The core consumer price index (CPI), a proxy for inflation rose 2.2% year over year, .1% less than last month. The FRB goal is inflation at 2%. The reason for the lack of concern is that headline inflation remains well with in containment. Crude inventories experienced a draw down when surpluses were expected. Lastly, jobless claims beat expectations. For the most part, these mainly positive factors were over-looked in anticipation and then response to FRB minutes… Which didn’t change much[1].
International Data
Most global economic organizations have been cutting GDP estimates for the UK since the ‘leave’ decision was made. Well British citizens must know something the rest of the world has yet to learn. Retail sales over the last year grew by 5.9%, with 1.4% coming in the last month alone. Average earnings grew by 2.4% and the unemployment rate remained steady at 4.9%[2]! Definitely sounds like a country in turmoil… All that said, article 50 will likely be triggered in April starting the 2-year clock to Brexit. While there doesn’t appear to be any pain at the moment, the UK may look back longingly to this kind of data.
Conclusion
Why December for a rate hike? Well, there are 3 more meetings to take place between now and the end of year. The September meeting; many feel there is not enough data on scheduled to be released before this meeting. The November meeting; this takes place just before the election and we have seen the FRB shy away from action right before major events. The December meeting; their last chance to get a rate hike in during 2016, where they claimed they were going to raise rates as many as 4 times in last Decembers meeting… how did that work out?
While December is their last chance, it would not be their best chance. To be clear, a rate hike is likely not warranted. If they are hell bent on it happening, September offers a better case. Last December they increased rates and added to the drag during the 1st quarter of the year, a perpetually weak quarter during this expansionary cycle. A likely result that would be repeated by hiking this December.
If a rate hike were to happen in September, it may be all but washed out by the strength of the 4th quarter, a perpetually strong quarter in US economic activity.
November is out, just do not even think about it…
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[1] www.investing.com – Economic calendar
[2] www.investing.com – economic calendar