KEY DATA: IP: 0%; Manufacturing: +0.2%/ PPI: 0%; Goods: +0.4%; Services: -0.3%/ NAHB: flat

IN A NUTSHELL: “Inflation is slowly creeping upward and manufacturing is coming back, further reasons for the Fed to move in December.”

WHAT IT MEANS: Day after day, report after report, it is clear the economy is slowly picking up steam and inflation is on the rise and today’s numbers support that view. Industrial production was flat in October as utility production was down, likely because of weather issues. Meanwhile, manufacturing output picked up steam. Almost every component in the durable goods sector increased, something we rarely see. The vehicle and computer and electronic sectors led the way. Nondurables was weak, especially energy and apparel. Interestingly, mining activity rose. Maybe the energy sector is starting to stabilize.

Inflation has been running below the Fed’s target, but the data hint that the days of sub-2% price gains may be coming to an end. Yes the Producer Price Index was flat in October, but goods inflation, which had been the restraining force for quite a while, has turned positive. While there was a sharp decline in services inflation, it looks to be more of an oddity than a trend. This segment of the wholesale costs has led the way for a long time, so a periodic down tick should not be taken as a warning sign, at least not yet. Looking ahead, intermediate goods costs are rising and that portends additional pressures in the months to come.

The National Association of Home Builders reported that its Housing Market Index was flat through the first part of November. Still, the level remains high, nearly matching levels seen during the housing bubble. This sector appears to be growing solidly and the strength is pretty much across all regions.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday we saw that retail sales were strong and today that manufacturing production is picking up. When it comes to inflation, yesterday it was reported that import prices rose and today that wholesale goods prices increased. Estimates of fourth quarter GDP are coming in near the 3% range, which could make it two consecutive quarters of solid economic activity. With 10-year Treasury rates up over 70 basis points in four months, the markets are signaling the Fed that it is time to move. And if you listen to the Fed members’ speeches, the messages are coming in loud and clear that a rate hike in December is likely. There are still four weeks and another employment report before the next FOMC meeting, but barring a major meltdown in something, the funds rate is going up. What does that mean for the economy? Not much, unless it is finally the start of an extended period of rate increases. We thought that would be the case when the Fed finally moved last December, but alas, the gurus of monetary policy forgot to awaken from their winter slumber and did nothing. If Trump’s tax and spending plans are implemented, fiscal policy will shift from negative to strongly positive, accelerating growth. Given we are near or at full employment, inflation should continue to rise and that could put the Fed on a rate hike fast-path. Trump’s statement that he will not reappoint Yellen will not stop her from doing what she needs to do and that is likely give us at least two if not more rate hikes next year.