Markets retreated last week, potentially baking in the assumption that the Federal Reserve Board (FRB) will likely increase rates in December. What led to these assumptions?
Baking in a Fed Rate Increase
Markets broadly retreated after six straight weeks of gains. The broad sell off was initiated by stronger than expected jobs data that increased the likelihood of a FRB rate increase in December. Also raising the odds of a fed increase, Core Consumer Prices (Core CPI) increased 1.9% year over year. As we move into next year, inflationary pressures will increase the need for FRB action.
Consumer confidence rose to 93.1 in November, which should lend itself to strong retail sales for the 4th quarter. To the contrary, retail sales grew slightly, only 0.1% in October. Autos sales were a drag after a strong September: when removed, retails sales were actually up 0.2%.
Eurozone economic activity was over-shadowed (rightfully so) by terrorist activity in Paris late last week. The European Central Bank (ECB) president, Mario Draghi, indicated that they are going to evaluate the current level of stimulus at their December 3rd meeting. This statement has led many to assume that more stimulus is coming and the recent attack will likely strengthen this viewpoint.
Japan’s GDP contracted at an annualized rate of 0.8%. Japanese stocks have been performing well, but mostly contributable to international factors as well as stimulus, which should continue.
China’s industrial production came in at 5.6% for October. While impressive by US standards, this represents continued slowing. China’s easing economy has caused a global commodity shift in prices. Many commodity prices will likely remain subdued until China commodity consumption returns.
2016 should show strengthening of year over year profits, as well as inflation. Jobless numbers should continue to move lower as our economy reaches the hypothetical “full employment” level. All of these factors point to an environment ready for rate hikes.
While the FRB may appear ready to start increasing rates, their behavior says they are very apprehensive of doing so. They waiver based on international contributors that should continue to show weakness (China). As the likelihood increases, caution should remain, due to weak global factors.
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