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December FED Hike – what now?

Mixed signals keep on coming from the FED regarding a rate hike.  More economists and market participants are now convinced of a December rate hike.  Chances of a hike did go up thanks to the recent strong jobs report.  However, let’s examine things in more detail before jumping to this conclusion.

First, to keep inflation at such a low level, oil prices would need to continue falling in price significantly in 2016 and 2017.  I am of the view, that this is not likely to occur.  Therefore, we should see a rise in inflation.  This would argue for a rate rise.

Second, it is critical to see what the Bank of England did on November 5th.  They took a dovish stance and did not raise rates.  In our October 14th article, we stated that the data in England is mixed with real external risks still present (China and emerging markets), thus the rate rise would not occur.  The US faces similar risks.

Third, even though the unemployment report in October was strong, it was not consistent across the board in all sectors of the economy.  In addition, the 3-month average is still less than the previous period.  Thus, I view this report as a mixed signal but leaning towards a strong report.

Fourth, the unemployment rate stands at 4.9% which is considered the long-run average.  However, looser unemployment measures (U5 and U6 which take into account the unemployed not looking, etc.) show that there is still some slack in the economy.

Forecast

Chances for a December hike have increased, but I am not convinced yet.  I expect a delay until 2016 or a small hike of 0.25% in December.  Therefore, it is critical to see what the December Jobs Report has to say.