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Data support case for rate hike

All eyes on the Fed: Federal Reserve chairwoman Janet Yellen

Week ending November 27, 2015

All eyes are on the Fed so the slew of US economic data that came out last week takes on considerable importance with respect to whether the Fed raises short-term interest rates or not.

Third-quarter GDP was revised to +2.1 per cent from a prior +1.5 per cent. These upward revisions are encouraging to markets although in this instance the revision comes from a build-up in inventories which, depending on future sales data, could dampen orders in the future.

US consumer confidence fell to the lowest level in a year as Americans grew less optimistic about the labour market outlook; however, this did not dampen their purchase plans. The age group most worried about their jobs are in the under-35 age group.

Jobless claims fell to the lowest level in a month which bodes well for the very important non-farm payrolls number to be announced this week and increases the likelihood of a December Fed funds rate hike. Consensus estimates for non-farm payrolls are for an increase of 190- to 200,000 new jobs following a huge October increase of 271,000 jobs.

Durable goods orders rose 81 per cent month on month on a jump in commercial aircraft orders. Computers, electronics and machinery also rose month on month whilst vehicles and parts fell. (Durable goods are those items expected to last more than three years and this indicator is an important leading indicator of future economic growth.)

Purchases of new homes rebounded in October from a 14-month low and order backlogs reached an eight-year high, indicating a pick-up in residential construction. Existing home sales fell from the second-highest level since 2007, not because of soft demand but rather than as a result of low inventory. As a likely consequence, prices of existing home sales rose 5.8 per cent year on year.

The holiday season sales kicked off last week as well. Brick-and-mortar sales were lower year on year at $12.1 billion. Malls were busy but spending was conservative. Online spending grew 14 per cent on Cyber Monday, on track to set a record.

The market and these indicators are telling us that the US economy is growing at a healthy but non-inflationary rate. Subject to any surprises, the US economic outlook is sufficiently good to prompt the Fed to raise rates later this month. The probability has increased to 75 per cent which leads me to posture still that the hike could be a very modest eighth of a per cent rather than the quarter point suggested.

Robert Pires is chief executive officer of Bermuda Investment Advisory Services and can be contacted at rpires@bias.bm.