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December Rate Hike: A Done Deal?

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Thursday, October 12, 2017

For those market participants not yet convinced the Fed is serious about raising rates again before the end of the year — particularly at its December meeting — this morning’s Producer Price Index (PPI) numbers for September ought to finish you off. With a lofty +0.4% PPI read (as expected, but still lofty), double the August figure of +0.2% and also +0.4% ex-food and energy, this is the type of inflation metric the Fed had long been seeking. It’s here now.

PPI ex-energy year over year (core) reached +2.2% in this latest read; trade year over year was +2.1%. These are signs of solid and maintainable inflation now clear and present within the domestic economy. As the Fed minutes from the committee’s last meeting (released just yesterday) attest, our monetary safekeepers were unconvinced inflation had made enough of an impression within the economy to justify another rate hike this year.

And while the Federal Open Market Committee (FOMC) does meet in November, currently analysts are looking at only a very slim chance of a hike next month; however, prior to this morning’s PPI read, estimates were roughly 80% that the FOMC would raise another quarter-percent in December.

The Consumer Price Index (CPI), to be released before the opening bell tomorrow, is an even more important number regarding the FOMC’s likelihood to bump up rates. And if we do see a raise in December, it may have an immediate, positive effect on U.S. banks, including the biggest players on Wall Street, which are in the process of reporting today, tomorrow and into next week.

JPMorgan Chase (JPM - Free Report) beat on both top and bottom lines: $1.76 per share on $26.2 billion in quarterly revenues bested the $1.67 and $25.7 billion expected, respectively. This marks at least the fifth straight quarter of earnings beats, with the trailing 4-quarter average positive surprise was north of 14%. These figures are particularly impressive considering the challenging quarter just passed, with investment banking fees -1%, equity market revenues -4% and fixed income -27%.

Citigroup (C - Free Report) also topped estimates for both earnings and revenues: $1.42 per share surpassed the $1.32 expected, and $18.2 billion on the top line improved on the $17.7 billion in the Zacks consensus. Citi has also beaten earnings estimates for at least five straight quarters, with the trailing 4-quarter average above 6%. Net income of 8% year over year was a highlight of Citi’s solid Q3 results.

Finally, Initial Jobless Claims fell back within their long-term range of 225-250K,15,000 claims lower from the downwardly adjusted previous week, to 243K. What’s remarkable about this is that the labor market has endured 2 massive hurricanes in recent weeks, and we never saw jobless claims peak above 300K. This illustrates a real resilience in the U.S. jobs market, nationwide. Continuing claims also fell, to 1.89 million from 1.92 million the previous week — another good sign.

At first glance, it would not appear Puerto Rico — devastated by Hurricane Maria two weeks ago — job losses are tallied here. Also, massive wildfires throughout inland California are causing loss of life and millions of dollars in damage. Although these fires have not struck populous hubs like Los Angeles or San Francisco, iconic regions like wine country in Napa Valley have been decimated. To whatever extent jobs are going up in smoke along with everything else there — the wildfires show no end in sight through the rest of this week — we may see this pass-through in next week’s jobless claims.

Mark Vickery
Senior Editor

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