It may be a holiday weekend, but 24/7 Wall St. wanted to give investors, business owners, and consumers insight into what to expect as 2016 ends and 2017 gets closer. The first order of business will be a Federal Reserve interest rate hike in December.
Unless new data suddenly sours, you can bet with close to certainty that Janet Yellen and her voting members of the Federal Open Market Committee will finally deliver on that long overdue rate hike at their December 14 meeting.
Since the end of the presidential election, the stock market has rallied to all-time highs for over 2,200 on the S&P 500 and over 19,000 on the DJIA. This is even after the pundits had warned repeatedly of a Trump stock market correction. They did actually get one, for about 2 or 3 hours, before the markets screamed to new highs. That’s reason number 2.
And what about all that talk of a Trump economic recession? Now it seems that most business owners are much more positive about growth prospects, regardless of which side of the political aisle they are on. That’s reason number 3.
Did Treasury yields rise enough that they just forced the Fed into hiking? The 10-year Treasury note yield has risen from 1.79% at the end of October to 2.35% as of Thanksgiving — and let’s just say that a 0.55% rally in yields is not exactly normal over three weeks. That’s reason number 4.
Over half of the 20+ Fed head speeches last week had a bias toward tightening. If you get this many Fed heads talking about rate hikes, maybe they finally mean it. Reason number 5.
Economic data has been stronger than expected for the later parts of October and even more so for November. Consider the following points (reasons 6 to 13):
- Consumer sentiment was revised even higher and the strength was tied directly to post-election enthusiasm following the Trump victory. After reviewing past sentiment readings from 2012, 2008 and 2004 let’s just say that this is far from the norm.
- Inflation is in no way close to 2.5%, but the Fed is starting to get more cover around the 2.0% mark.
- Manufacturing data from Markit/PMI is showing strength in the U.S. and even strength in Europe.
- Jobless claims have bounced from a cycle low but remain indicative of a full-employment economy.
- Durable goods figures were so strong that the monthly gyrations and aberrations were hard to ignore.
- A national index from the Chicago Fed was still slightly negative but saw improvements. Regional Fed reports for November were not as bad as prior reports either.
- Fannie Mae suggested what to expect for growth in 2017 on the heels of Donald Trump’s victory.
- Retail sales were starting to escalate even ahead of the election.
While this is an outside reading and not an official Federal Reserve estimate, the Atlanta Fed’s GDPNow tool was targeting fourth quarter GDP growth of 3.6% on November 23 and that was unchanged from November 17. Call this reason 14. The GDPNow report said:
The contributions of real equipment investment and real inventory investment to fourth-quarter growth increased from 0.32 percentage points to 0.38 percentage points and 0.50 percentage points to 0.56 percentage points, respectively, after this morning’s advance durable manufacturing report from the U.S. Census Bureau. The forecast of fourth-quarter real residential investment growth declined from 10.8 percent to 7.1 percent after yesterday’s existing-home sales release from the National Association of Realtors and this morning’s releases on new single-family home sales, prices, and construction costs from the Census Bureau.
It is important to understand that there are two sides to every coin. In short, any negative data or interruptions could change Janet Yellen’s mind yet again on the need to hike rates.
The economic data has not been universally positive since the election ended. And we have a Fed that has used close to a dozen non-mandate reasons for why they can’t or won’t hike interest rates. Interestingly enough, the conflict of interest of driving down the value of its $4+ trillion bonds and notes on its own balance sheet has not been addressed. Nor has the notion that if the Fed raises interest rates it increase the cost of carry and debt servicing on the Federal government when we are within a hair of $20 trillion in debt.
Some of these negatives would be as follows:
- Industrial Production and capacity utilization looked weak, but that was a pre-election October reading.
- Inflation at the wholesale level (PPI) may already be tilting back down, although that was a reading for all of October.
- Despite higher wages overall, it seems more than half of America did not get a pay raise.
- Employment may be full, but job openings were lower ahead of the election.
The CME’s FedWatch tool now signals a 93.5% chance of a rate hike coming at the December 14 FOMC meeting. That would take the target rate to a range of 0.50% to 0.75% from the current 0.25% to 0.50% which has been in place since December 2015. Reason number 15.
The FedWatch Tool is not perfect, just like Fed Funds, but these are strong signals. More support can be seen in the following numbers:
- A range of 0.75% to 1.00% could be seen at the Feb.1, 2017 meeting (just 7.3% odds) and the March 15, 2017 meeting (21.1% odds).
- Those odds were up to 42.5% that Fed Funds will be 0.75% to 1.00% at the June 14, 2017 FOMC meeting.