The only thing the markets seem to care about right now is whether the Fed will raise rates this week or in December. At SNW, we will be watching our Bloomberg screens for this news, don’t get us wrong.
However, we believe economic fundamentals will eventually rule the day—they always do. Last Thursday gave us two more disappointing data points in the way of lower industrial production and retail sales. Not only were these numbers lower than expectations, but, as the charts below illustrate, they both have been slowing since 2010/2011. These are long-standing trends showing little evidence of a turn to the upside. Industrial production growth is even negative year-over-year since 2015, and retail sales are trending slower and lower.
It’s hard to get decent economic growth and targeted inflation if consumers are buying less and factories are producing fewer goods. The CPI came out last Friday at 1.1%—beating low expectations, but hardly nearing targets. We wonder what real impact the next small rate increase by the Fed will have on fundamentals, yet we recognize its real potential impact on market volatility.
The markets are watching and pricing in a 20% chance of a Fed hike this week. We continue to watch the less dramatic fundamentals, also.
Industrial Production Year-Over-Year–Negative for the Last Few Quarters
Retail Sales Year Over Year–Continued Slowing
Source: Bloomberg, Financial Times, Wall Street Journal