U.S. equities finished higher again on Friday as another batch of soft economic data further bolstered hopes that the Federal Reserve will be forced to delay its first rate hike since 2006 into the middle of 2016.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 went up 0.5%, the Nasdaq Composite grew 0.3% and the Russell 2000 ended the day 20 basis points lower. The dollar was stronger, while gold fell 0.8% and crude oil gained 1.8% to close at $47.21 a barrel.
The theme of the week has been how the slowdown in recent economic data will influence the thinking of Fed officials heading into their October and December policy meetings. So far, retail sales missed expectations on Wednesday. And on Friday, industrial production and job openings were weak.
This comes in the context of what’s expected to be a soft third-quarter earnings season: According to Factset, S&P 500 earnings are expected to decline 4.6% for the quarter, potentially the first back-to-back earnings decline since 2009.
Big earnings reports to watch next week include Yahoo! Inc (NASDAQ:YHOO), Verizon Communications Inc. (NYSE:VZ), Morgan Stanley (NYSE:MS), The Coca-Cola Co (NYSE:KO), Caterpillar Inc. (NYSE:CAT) and American Airlines Group (NASDAQ:AAL).
The IPO market has also been weak, a showdown over the debt ceiling looms, and the bond market has been under some pressure as well.
Fed Governor Lael Brainard (winner of the fictional award for the Fed official with the coolest name) noted earlier in the week that all the nervousness about higher interest rates has already delivered a tightening of financial conditions tantamount to two rate hikes. She argues that the Fed should be in watch-and-see mode instead of pushing ahead with policy normalization.
This viewpoint was bolstered by Friday’s economic data.
Industrial production fell for the second month in September; dropping 0.2%, led by a 1.3% drop in construction supplies and a 2% drop in mining activity. As shown above, activity has been in a year-long decline. Activity in oil and gas well drilling has collapsed below the 2009 lows.
Separately, job openings fell to 5.37 million from 5.67 million in July. The quit rate, seen as an indication of household confidence in the labor market, remains stubbornly low at 1.9%. This is colloquially known as the “Take this job and shove it!” sub-index.
Deutsche Bank economist Joseph LaVorgna admits the data is not cooperating with the Fed’s desire to lift rates, especially with inflation remaining below their 2% target. Adding to the pressure has been a batch of weak regional Fed manufacturing activity surveys.
All of this suggests the Fed policy statement on Oct. 28 will be dovish — talking up the downside risks to the economy — and therefore take the chance of a rate hike in December off the table.
As a result, the recent outperformance of inflation-sensitive assets like commodities and precious metals, as well as energy, materials and industrial stocks, should continue.
The U.S. dollar should keep weakening from here. And emerging market stocks, which will benefit both from higher commodity prices and a lower dollar, are likely to continue rising out of their seven-month downtrend pattern.
Edge subscribers have exposure to this via the iShares Emerging Markets (NYSEARCA:EEM) as well as the ProShares UltraGold (NYSEARCA:UGL) ETFs.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
