U.S. economic data released in the middle of November was mixed. However, the Federal Reserve gave a clear signal in the minutes of the October 27-28 FOMC meeting that there is a good chance they will begin raising the fed funds rate on December 16. According to the CME Group, the fed funds futures market places a 73.6 percent chance of a December 16 rate hike as of today.
One of the criteria that the Fed is using to assess the timing of the first fed funds rate hike since July 2006 is inflation. We see in the October consumer price index signs of normalizing inflation. Headline CPI was up by 0.2 percent in October, and also shows a meager 0.2 percent increase over the prior 12 months. Core inflation, less food and energy, was also up 0.2 percent for the month, but has now increased by 1.9 percent over the previous 12 months.
The strong dollar, high storage volumes and greater-than-expected global production are still weighing on oil prices. Indeed, the current $40.20 price for WTI crude is within striking distance of the late-August low of $38.50 per barrel. While we may yet see even lower oil prices, the potential for a persistent downside drag to inflation from lower oil prices is significantly reduced compared to this time last year. Therefore, we expect overall inflation indicators to renormalize, supported by ongoing gains in core inflation. Housing starts for October were soft, dipping by 11 percent to a 1.060 million unit rate with a reset in multifamily. Permits increased by 4.1 percent to a 1.150 million unit rate. The National Association of Homebuilders confidence index fell in November to 62.
Industrial production dipped by 0.2 percent in October, after a similar 0.2 percent decline in September. Manufacturing output was up by 0.4 percent, however utility output showed a weather-related drop of 2.5 percent. Mortgage apps for purchase increased though November 13.
The Conference Board’s Leading Economic Index increased by 0.6 percent in October, with 9 out of 10 components up for the month. Leading the positives were interest rate spread, stock prices and building permits. The only negative component was the ISM new orders index. The coincident index gained 0.2 percent in October and the lagging index was also up by 0.2 percent for the month.
The Federal Reserve’s other key criterion for a fed funds rate increase is improvement in the labor market. In the unemployment insurance claims numbers we see very strong numbers. Initial claims for the week ending November 14 decreased by 5,000 to hit 271,000. Continuing claims for the week ending November 7 dipped by 2,000 to hit 2,175,000.
We will not issue a CEW next week.
Have a Happy Thanksgiving!
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-20-2015.