The Fed looked toward a December hike as a more varied picture emerged; Catalonia chose to pause; China prepared for its 5-year People's Congress
"There isn't a single country in the world that can achieve an open economy with strict foreign exchange controls"
U.S. growth and the Fed: December song After the minutes of the September 19-20 meeting were released last week, financial markets behaved as if a December rate hike is all but inevitable, with the fed funds futures market pricing in over 80% odds.1
But some data, both hard and anecdotal, reflect a more nuanced picture. Consumer prices for September, ex food and energy, rose 0.1%. making for a 1.7% gain year-over-year – below both the consensus view and the Fed’s oft-repeated 2% target. The monthly Job Openings and Labor Trends (JOLTS) report showed the closely-watched “quits rate”, reflecting workers leaving current employment for their next jobs, at 2.1%, a decline from levels in the past four months – a possible indicator of reduced worker optimism.
Two items not yet reflected in government data: General Motors reportedly plans to temporarily close its Detroit-Hamtramck plant for about six weeks in mid-November and to dial back production levels 20% when production resumes. Second, consumer groups and electric utilities are reporting increases in the number of households experiencing shutoffs due to unpaid bills. This past summer, for example, Texas saw over 900k homes disconnected, at least temporarily, before payment terms were re-established. Clearly, the stakes are high in some parts of the economy when it comes to continued economic growth.
Catalonia: Spanish prisoner Catalan President Carles Puigdemont declined to declare independence from the rest of Spain during his address last week to the region’s parliament – while still standing behind the results of the recent referendum. The result so far: continued pressure from Madrid to either back down decisively or to accept direct rule. Spanish debt markets reacted mildly to the speech, with spreads to 5-year German Bunds actually dropping 5 basis points to 0.59%.
China backs open trade In the run-up to this week’s 19th National Congress, People’s Bank of China (PBoC) Governor Zhou Xiaochuan’s call for economic reform, made in an interview with a leading Chinese financial magazine, was broadly in line with the prevailing ruling opinion, advocating, among other points, the wider adoption of an open economy. He identified three drivers needed to accomplish this goal: greater foreign trade and investment, a more market-oriented foreign exchange rate mechanism, and the relaxation of capital controls. How many of these will be adopted during the Congress will become clearer over the coming week.