Why positive economic indicators may point to an earlier rate hike

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The September Fed Meeting Statement. Market watchers will be paying close attention to Wednesday’s Fed statement for signs of the timing of a Fed rate hike. Our expectation at BlackRock is that there’s a good chance the Fed will change its language, i.e. adopt a less accommodative stance, in next week’s statement, meaning an earlier-than-expected rate hike could be on the horizon. Last week’s retail sales numbers provided more evidence that the U.S. economy should grow faster in the second half of the year. Outside of household spending, most economic measures – notably manufacturing and housing-related numbers – have been substantially stronger than expected. U.S. retail and food services

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Market Realist – The graph above shows the monthly per cent change and the per cent change from a year ago for U.S. retail (XRT) and food services. The increase in retail sales is a positive sign for U.S. consumer discretionary (XLY) spending in the coming months. With the positive jobs report and the decline in energy (XLE) prices, consumers would have more funds free for consumer discretionary spending in the future.

Market Realist – The graph above shows a summary of the U.S. housing (IYR) report for July. Existing home sales increased by 2.4%. Housing starts have increased sharply too.

ISM survey

Market Realist – The graph above shows the ISM manufacturing and service new orders for July. Manufacturing and service new orders are both at nine-year highs and indicate economic growth in the U.S.

The U.S. equity (SPY) and bond (BND) markets reacted negatively to the positive retail sales report due to fears of an earlier-than-expected rate hike as the economy steadily improves.

Read on to the next part of this series to see why an earlier-than-expected rate hike is likely and why you should prepare for it.

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