Last week the Federal Reserve Board (FRB) left rates unchanged… What does that have to do with oil, you ask? Everything…

Federal Reserve Inaction

The FRB meeting last week came and went without a rate change. Some felt (myself included) that the best timing for the FRB would have been September. A rate hike is still likely to occur before year end. With only one month before the next meeting, December is a likely target for the FRB’s first hike.

They have left the language open to imply that they will be swayed by international activity. It appears however that the 2 main drivers will remain the same. The job market has seen great improvements, so what about 2% inflation? It has actually been losing momentum. Annualized consumer price increases (CPI) only grew by 0.2% through August[1]. With inflation softening it makes perfect sense for the FRB to hold off on a rate hike.

Pump the brakes though… Core CPI, which subtracts FUEL and food, grew by 1.8% over the last year through August. When taking what has occurred with oil prices out of the equation inflation is actually dangerously close to the FRB’s 2% mandate. This is the quite pressure that is leading many to believe that rates need to start going up.

Recent data continues to support the case for a rate increase, See the following US data from last week[2]:

• Retails Sales (August) – 0.2%
• Retail Sales (July revised) – 0.7%
• Core CPI (August, YoY) – 1.8%
• Housing starts (August) – 1.126M

Strong housing starts points to a strong labor market, which leads to additional spending. Strong spending leads to strong retail sales, which can lead to productivity capacities, which can lead to inflation. If this then that… I know…

Eurozone

Industrial production came in strong at a 0.6% increase for July. German current conditions survey improved. Eurozone trade balances expanded to 31.4B, a record. Year over Year CPI increased by 0.1%, however core CPI grew by 0.9 (through August)[3], which is a great improvement from earlier in the year when they were in negative territory.

Greece

While part of the Eurozone, the news out of Greece this weekend warrants its own heading. Greece has re-elected Prime Minister Tsipras the man who brokered the current debt deal with the Eurozone. This vote of confidence could spell monetary accord in the future between Greece and the Eurozone… Here is to hoping!

Japan 

S&P downgraded the debt rating for Japan to A+[4]. The outlook for debt in comparison to their GDP is discouraging in the view of S&P. The strengthening of the dollar in comparison to the Yen has been a help to the Japanese economy, but not enough to improve the long term outlook. 

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[1] www.mfs.com – week in review

[2] www.investing.com – economic calendar

[3] www.investing.com – economic calendar

[4] www.mfs.com – week in review