No surprise — rate increase in November unlikely

In politics, there’s the “October surprise” — a revelation timed a few weeks before an election in an effort to influence the outcome.
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In politics, there’s the “October surprise” — a revelation timed a few weeks before an election in an effort to influence the outcome.

Candidates don’t like to get surprised that way. In the financial world, stock markets don’t care for surprises, either.

That’s one good reason the Federal Reserve is unlikely to raise interest rates at its Nov. 1-2 meeting, a week before the presidential vote, even though to do so would blunt Republican candidate Donald Trump’s assertion that the central bank is keeping rates low to help his Democratic rival, Hillary Clinton, win the election.

"I don't think they would hike purely for political reasons," Boris Rjavinski, senior fixed income strategist at Wells Fargo Securities, told USA Today.

"To move in November they will need to see much stronger-than-expected data between now and the Nov. 2 meeting. They would also need to prepare the markets for a November hike, as the market is not prepared for one, and the Fed does not like to surprise the market with its moves."

Last week’s schedule of economic reports was thin, but the ones that were released pointed to an economy that continues to improve, but is growing manageably amid limited inflation.

Retail sales rose 0.6 percent in September, which was their best showing in three months, Bloomberg reported.

“The combination of solid job growth, while slowing, modest pickup in wages and pretty good measures of household net worth should continue to push consumer spending up over the next year,” David Berson, chief economist at Nationwide Insurance in Columbus, Ohio, told Bloomberg.

Reuters said car and truck purchases rose in September, as did discretionary spending, and producer prices rose the most since December of 2014.

"Overall, the details of the report are more positive than what the modest print on core sales suggests," Brittany Baumann, an economist at TD Securities in Toronto, told Reuters.

"Together with healthy levels of consumer sentiment and continued improvement in labor market conditions, [Friday’s] report is enough to keep a December Fed rate hike firmly on the table."

Meanwhile, the Labor Department said the producer price index rose 0.3 percent in September. Excluding food and energy prices, the increase was 0.2 percent. The Wall Street Journal said both increases exceeded forecasts.

The figures are “consistent with the notion that price pressures are beginning to accumulate and suggest that the consumer-price readings may continue to be firm going forward,” Stephen Stanley, economist at Amherst Pierpont Securities, told the Journal.

Consumers, however, appear to be becoming uneasy. The University of Michigan said its Consumer Sentiment Index slipped early this month to its lowest level since last September. The reading was the second-lowest in two years.

“The early October loss was concentrated among households with incomes below $75,000, whose index fell to its lowest level since August of 2014,” Richard Curtin, chief economist for the university’s Surveys of Consumers, said in a statement.

“In contrast, confidence among upper-income households remained unchanged in early October from last month, and more importantly, at a level that was nearly identical to its average in the prior 24 months.”

Curtin said the “most concerning figure” was a drop in the Expectations Index, which he said fell to its lowest level in two years.

“It is likely that the uncertainty surrounding the presidential election had a negative impact, especially among lower-income consumers, and without that added uncertainty the confidence measures may not have weakened,” he added.

More and deeper reports are coming this week, including the Consumer Price Index (economists are forecasting an increase of 0.3 percent) and core CPI for September today, housing starts and building permits for the same month on Wednesday and home resales on Friday.

Market Watch said the reports probably won’t surprise people and won’t likely hasten a Fed rate increase, in part because consumers have been watching their spending — stretching their dollars by shopping around, which limits price inflation.

“From a consumer’s perspective, we are paying less to buy the stuff we need,” Ryan Sweet, senior director of real-time economics at Moody’s Analytics, told MarketWatch.

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