As America’s presidential election at last limps across the finish line, there’s been a lot going on in the economy while the circus was in town. No one really expected a surprise interest rate hike from the Fed in November, which would have certainly sent the markets into a panicked freefall just days before the election. Nevertheless, indicators after last week’s meeting, coming on the heels of a stronger than expected jobs report, did imply the Fed was still on track for an interest rate hike in December.
Meanwhile, businesses are pointing to the divisiveness of the current election as the reason sales of big ticket items are lower. Apparently the bread and circuses of the current election cycle are prompting consumers to put off expensive purchases and businesses to delay hiring and major investments. The election is becoming a feature of the forward risk environment for many companies. Humans, for all the amazing features of our big brains, are still easily distracted.
The Jobs Report
The October jobs report showed the economy creating an additional 161,000 jobs and the September job numbers were revised upward to 191,000, driving the unemployment rate under five percent. The best news wasn’t the number of jobs created; it was the average hourly wage increase of just under three percent, higher than the rate of inflation. For the first time in decades, American workers actually got a real raise, even when wages are adjusted for the cost of living. When it comes to ammunition to justify a rate hike, this jobs report was just the cover the Federal Reserve needed.
An Interest Rate Hike is Coming
Most Fed watchers agree that the stars have aligned for a December interest rate hike. Stocks have steadily lost ground since late October, pricing in the likelihood that markets will see a rate increase before the end of the year. The only thing that could derail an interest rate hike is, as you might guess, a surprise outcome in the election. In a bizarre twist, this could mean a stock market surge at the end of the year regardless of who wins.
Rest of the World Takes Advantage
For the rest of the world, the Fed raising interest rates is just fine with them. In the crazy environment of the globally connected economy, the weakest currency is the most competitive in the worldwide manufacturing jobs market. It should come as no surprise then that our “allies” in Europe are considering extending quantitative easing (QE) at the very time the U.S. Federal Reserve is talking about hiking rates. That would// weaken the euro compared to the dollar and allow Europe to tip the balance of global trade in their direction./
The combination of an interest rate hike and continued QE in Europe will push commodity prices lower. That’s already happening in oil, and once the volatility of the election is past we could see gold prices move lower because of price pressure from the dollar. A rate hike is actually good news for gold buyers as it lowers their point of entry. At the first whiff of any broad reversal in the stock market, regardless of the cause, the Fed will certainly slash interest rates and start up the QE machine to juice the economy. When that happens, gold prices will skyrocket higher.
With the U.S. already working at a competitive disadvantage because of our strong currency, expect the Federal Reserve to overreact to any weakness in the economy. If that sudden weakness is introduced because of the election, we could not only see the Fed take the December rate hike off the table but move quickly to try and stimulate the economy, which will be great news for gold and oil prices.