A Warm Pineapple for Wall Street

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During the Colonial period in the US, an invitation into another person's home was an important social and cultural experience. After all, while there were concert halls, opera houses and fine restaurants in Europe, there wasn't as much available to entertain a burgeoning America. It was not uncommon for Americans to use pineapples, a luxury item at the time, as a symbol of welcome and hospitality. In other words, to put out the "welcome mat" or the sign of the pineapple on door fronts, lamp posts and entry ways was a show of warmth, respect and cheerful greetings.

Last week both the Dow Jones Industrial Average and the S&P 500 Index rose more than 3%, shrugging off the recent terror attacks in France and embracing the idea that the Fed will likely raise rates in December—displaying a change as welcome and warm as a pineapple on the doorstep.

Other economic indicators helped to further support the case for a December rate hike. The October Consumer Price Index (CPI) rose 0.2% for the month, an improvement over September's growth rate, which was zero. The core CPI also rose 0.2%, in line with expectations, and, more importantly, was up 1.9% year over year. While core CPI is not the Fed's preferred inflation metric (it's the core PCE price index), it's worth noting that this measure is close to the Fed's target of 2%. In other words, the inflation data has gotten “less bad” for monetary policy hawks, helping to clear a path to a Fed rate hike in December.

Also last week, the release of October's FOMC meeting minutes seemed to support abating global concerns, particularly regarding China. Specifically referring to the surge in market volatility that peaked in August amid emerging-market unease, the minutes reported that the "US financial system appeared to absorb the shocks without systemic strains." The minutes also showed that the FOMC believes global risks have decreased, noting that "most participants saw the downside risks arising from economic and financial developments abroad as having diminished."

Furthermore, there is some data to suggest that the strong US dollar isn't tamping manufacturing gains as much as some might expect. In last week's industrial production print for the month of October, the manufacturing component rose a solid 0.4 %—beating expectations and ending previous declines. Also, for the October ISM Manufacturing Index, new orders experienced solid improvement—up nearly two points to 52.9—leaving the index comfortably above the critical 50 level, which delineates contraction from growth.

But that doesn't mean that the Fed will definitely raise rates in December. This FOMC has made it clear that its decision will be data dependent—and there's certainly more data to be had between now and the December meeting. However, it seems sentiment has turned and investors are ready to view a rate hike as a sign of confidence in the US economy. Let's hope we continue to see pineapples on doorsteps and sidewalks on Wall Street.

Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

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© Allianz Global Investors

© Allianz Global Investors

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