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A Fed rate hike in the works?

New York Fed President William Dudley said that he supports another rate hike this year if the economy “evolves as he expects.”  He also thinks it’s reasonable for the Fed to start selling part of its $4.5 trillion portfolio, which it accumulated through several quantitative easing programs.

Dudley has an optimistic economic outlook, to say the least.  Consider the auto sector, which sold 18 million units in 2016 and is our largest export industry.

In June, buyers financed 97.6% of their purchase prices, and auto debt per capita is now $4,200, up 40% from its post-crisis low of $3,000 in 2010.  There is now an estimated $1 trillion in subprime auto debt.

Sales were down 2% year-over-year the first six months of 2017, the worst since 2014.Traffic at dealerships fell to a five-year low in June.  The average auto loan now stands at a record 69.3 months.  The average financing to buy a car or truck hit $30,945 in June, up $631 from May.  The average monthly payment is now well above $500.

Further, major auto makers reported four consecutive months of year-over-year sales declines, and General Motors lowered its 2017 US new vehicle sales forecast.  In June, GM offered a record $4,361 cash incentive per vehicle, up 7% from a year ago.  The results: a 5% year-over-year sales decline and 46% higher inventories than a year ago.  Ford saw a 5% year-over-year sale decline in June.

The US ran a trade deficit of about $500 billion last year and the same in 2015.  The US last had a trade surplus in 1975.

President Trump wants to reduce the deficit with a “cheaper dollar,” much like China manipulated lower the value of the renminbi over the years.

A cheaper dollar makes US goods cheaper for foreign buyers, and it makes foreign goods more expensive to US buyers.  A Fed rate hike would strengthen the dollar, not weaken it.  A cheaper dollar would be positive for the gold and silver markets.

Some analysts predict that the Fed will not hike in September.  A few even see more quantitative easing before another hike.  Speculators are pricing in just a 29% chance of another rate increase by year-end.

I’m in the “not likely group” for another hike this year.  Still, the Fed may be part of the Dump Trump program, which is a good possibility.  The Fed is as establishment as they come.

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