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As noted several times, the Federal Reserve has added another variable into its monetary policy making process…international growth, specifically China. Until September all were fixated on the unemployment statistics as this was the FOMC’s stated variable.
While we can discuss the validity of the 5.1% unemployment rate (i.e. the implications of a 40 year low in the labor participation rate), many had expected a change in monetary policy with the jobless rate this low.
In years past I have expressed my doubts about the Chinese growth rate, the impact of its 2009 stimulus that added massive layers of unutilized infrastructure and non-performing loans. It appears within the last three months all have adopted this view but amplified into apocalyptic proportions. I think these fears are over stated
Yes global growth—led by China, Brazil and Russia—may slow to the lowest level since 2001 for the exception of 2009, growth in the advanced economies—led by the US—should be fairly steady in 2016.
I can weekly argue based upon reports from firms that closely analyze China, Chinese growth may have stabilized and is poised for a moderate rebound.
The FOMC has consistently stated any change in monetary policy is data dependent. Moreover the Committee has emphasized growth in the domestic economy is moderate.
Most, including me, believe a change in monetary policy will not occur until 2016. I think however the potential surprise may be growth exceeding on the upside with China gravitating to the second page versus the front page.
Will the rise in oil now become front page news, an increase the result of the greatest reduction in capital expenditures in history, perhaps amplified by geopolitical concerns?
During the past six months I have consistently stated production will fall because of these massive cuts, production that may decline more than anyone may be expecting that decimates spare capacity.
Now, what about supply disruptions, the result of Middle East anarchy and severe economic distress of all of OPEC nations?
Last week oil had its best gains since August and is now over $50 for the first time since July. I don’t believe any geopolitical risks are yet embedded into prices. If risks do become imbedded I can easily foresee $60-$70 oil.
Wishful thinking of one who is long oil? Historically Middle East tension increases prices. As widely accepted, the Middle East is in anarchy, bordering on chaos. If history is of guide, prices should be 20% to 25% higher.
What will happen this week? Today’s trading should be slow because of Columbus Day as the bond market and banks are closed. Approximately 35 S & P 500 companies post results.
The economic calendar is robust as retail sales, inflation data, manufacturing statistics, sentiment surveys and the Beige Book are released.
Last night the foreign markets were mixed. London was down 0.52%, Paris down 0.29% and Frankfurt up 0.28%. China was up 3.28%. Japan was closed for a holiday and Hang Sang up 1.21%
The Dow should open quiet ahead of a moderately robust earnings week and trading that may be slow given Columbus Day. The bond market is closed because of Columbus Day.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.