Rate Hike in Sight: US Manufacturing, Inflation Rise Despite Strong Dollar

Kristian Rouz – US manufacturing advanced in October for the first time in three months, propelling the US dollar to a seven-month high as investors placed bets on a December hike in borrowing costs over the upbeat economic performance. The broader picture is still dominated by mixed data though with overall US industrial production contracting: many overseas markets see the US-made goods as too expensive, meaning the economy is putting more reliance on the domestic market.

US manufacturing output gained 0.4% in October, surpassing the previous expectations of a 0.1% rise after a 0.1% slide the previous month, according to a report by the Federal Reserve. Overall industrial production slumped 0.2%, however, after a similar decline the previous month, undermining hopes for an economic acceleration in the fourth quarter.

The dollar’s strength led to a mixed bag of US industrial data, while the wave of devaluations accompanying a weaker growth across the globe rendered US manufacturers less competitive globally.

The US economy is becoming increasingly isolated in terms of international trade, and many enterprises rely increasingly on the domestic US market.

US companies produced more construction materials and automobile engines in October, providing the contribution to the rise in factory output. Both types of goods meet robust demand domestically. Durable goods, electricals, home appliances also saw a rise in production supported by rife consumer demand at home due to the ongoing growth in salaries, allowing households to increase spending.

Meanwhile, enterprises exposed to international headwinds, like mining, reported a slump in output. Electric and petrol utilities’ performance also sagged as crude oil resumed its slide due to the lingering oversupply concerns. US mining output, including crude oil extraction, slid 1.5% in October as cheap commodities have forced producers to take measures supporting the prices, whilst utilities sagged 2.5% overall: petrol prices are on a losing streak again despite the coming winter.

“It was a warm month nationally. There wasn’t as much need to heat homes and that weighs on utility output,” Brett Ryan of the New York branch of Deutsche Bank Securities said.

Still, the chances that the US Fed will hike borrowing costs in December are higher now: a separate report by the US Department of Labor indicated inflation has accelerated. The Consumer Prices index (CPI) advanced 0.2% in October, erasing the previous month’s drop of 0.2%. The annualized CPI rose 0.2% after stalling in September. The US job market further improved in October, suggesting the Fed have every right to bump up rates without damaging economic growth.

Meanwhile, the US dollar hit its seven-months high, heading for parity with the euro on the Fed hike expectations, as observed by Goldman Sachs recently and further supported by additional stimulus speculation in the common currency area. Market participants are likely to sell the greenback after the 15-16 December Fed policy meeting regardless of the outcome, but right now dollar-denominated assets are in high demand. On Wall Street, investors give a 70% chance to a possible rate rise compared to a 68% chance the day before, according to data compiled by CME Group.

An annualized broader index for US inflation accelerated to 1.9% in October, which is close to the Fed’s 2% target.

The US Fed can safely raise borrowing costs, easing the dollar appreciation concerns somewhat. Still, US manufacturing has not yet fully adjusted to the reality where international markets are increasingly unavailable for US goods and services.