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Still Expecting Year-End Fed Hike

| October 17, 2016
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MPCA Weekly Market Update

Stocks lost ground for a second straight week as earnings season began with mixed results and a decrease in Chinese exports stoked fresh concerns about slowing global growth. Alcoa, batting in its traditional lead-off spot in the S&P 500 reporting season lineup, came up short of expectations and dragged markets sharply lower on Tuesday. The energy sector was volatile as West Texas Intermediate (“WTI”) crude oil traded back above $50 per barrel amid speculation about production cuts. A strong dollar and rising long-term interest rates added to downward pressure on equity prices.

This weekly commentary would not be complete without checking in on the Fed. The minutes of the September meeting of the FOMC, the US Federal Reserve’s rate setting committee, show that several officials felt a rate hike is needed “fairly soon” and that a reasonable argument could be made for either an increase at that (September) meeting or after receiving additional information on the labor market or inflation. The FOMC next meets in November, a few days before the presidential election. Most observers expect the committee to wait until the December meeting to hike rates so as to maintain the appearance of political neutrality.

Data from China had a depressive effect on global equities. Chinese exports declined 10% in September, and imports fell as well, down 1.9% from the prior month. Weak global demand is blamed for the poor showing. Offsetting the trade gloom somewhat was the first rise in Chinese producer prices in nearly five years, reported Friday. Producer prices rose 0.1% year over year in September, ending a price slump that began in January 2012.

The news flow was not all bad last week. US retail sales rose 0.6% in September,while August sales figures were revised to -0.2% from an initial 0.3%. Combined with solid employment figures, this reinforces the idea that the Fed will hike rates before the end of the year. To illustrate the strength of the labor market, US weekly jobless claims this week held at their lowest level since 1973, when the economy and population were significantly smaller than today.

Is OPEC really serious about lowering output? For all the talk of production caps, or cuts, in recent weeks, the reality is that OPEC has never pumped more oil than it did last month. According to the International Energy Agency, OPEC produced 33.64 million barrels of oil per day in September. Note that world production peaked a year ago, at 97.2 million barrels per day, in September 2015. Over the past year, OPEC production has risen 900,000 barrels per day.

Across the pond, the Eurozone economy appears to be taking Brexit in stride, and data released this week were mostly upbeat. German exports climbed 5.4% in August, the biggest rise since 2010. Investor confidence in Germany improved as well, with the ZEW index rising to 6.2 in October from 0.5 in September. Finally, Eurozone industrial production beat expectations, jumping 1.6% in August.

THE WEEK AHEAD

  • Tuesday: The United Kingdom reports retail sales and consumer price data 
  • Tuesday: US CPI data is released 
  • Wednesday: China reports Q3 GDP
  • Wednesday:The final Presidential debate
  • Wednesday: The Bank of Canada’s rate setting committee meets 
  • Thursday: The European Central Bank’s Governing Council meets

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