The Market Today
Awaiting Tax Plan and FOMC Announcements
by Craig Dismuke, Dudley Carter
Today’s Calendar – FOMC Prepping for December Under Cloud of a Leadership Change: The FOMC’s November meeting concludes today and expectations are that the Committee will hold off on raising rates (Fed Funds Futures currently project a 0.0% chance of a hike today) but will lay the groundwork for a December hike. While they are likely to avoid appearing too committed, the economic assessment should be more upbeat given the recent run of data. Moreover, the President’s pick to replace Yellen next February is expected to be announced on Thursday which is a cloud, of sorts, over any decision today. If the choice is current Governor Powell, he may prove to be even more dovish than Yellen has been lately given his interest in letting the economy run hotter in the short- to medium-term. Either way, today’s 1:00 p.m. CT Statement is likely to reflect confidence but not signal outright a December hike. If there is a risk for a surprise, it would be that the Committee does not upgrade their economic assessment in any way and references the stubbornly low rate of inflation.
ADP Report, Less Affected by Hurricanes, Points to Rebound in October Payrolls: The October ADP Employment report showed 235k private payrolls added in a rebound month from September’s hurricane-affected report. September’s report was revised down from +135k to +110k and October’s +235k beat economists’ projections by 35k. Going into Friday’s BLS report, economists project 310k total nonfarm payrolls were added, a projection that is arguably conservative.
At 9:00 a.m. CT, the October ISM Manufacturing Index is expected to pullback (60.8 to 59.5) from September’s hurricane-inflated reading. Also at 9:00 a.m., September’s construction spending data is expected to show weaker monthly activity, also likely the result of the hurricanes shuttering activity in parts of the South during the month.
Tax Reform Update: After announcing yesterday that the House would delay announcement of the tax plan by its self-imposed deadline of today, reports last night indicated that they now plan to release the details today.
Overnight Activity – Sovereign Yields Mixed as Equities Begin November Like Every Other Month This Year: Global markets began November with a dose of optimism. The Nikkei opened the show with a +1.9% performance followed by the Eurozone, where the Euro Stoxx 50 is up 0.9% thus far. German stocks are leading the way, up 1.9% while the U.K.’s FTSE is lagging, up just 0.2%. The optimism has U.S. futures up, pointing to the S&P rising five points from yesterday’s close and the Dow pushing to a new record-high. The President’s pending Fed Chair announcement is likely boosting trader optimism along with Tuesday’s report out of China that manufacturing activity was continuing at a decent pace. Oil prices are at their highest levels since March (WTI over $55/barrel overnight). Primary metals prices are running higher, all helping to boost overall commodity prices to their highest levels since March. As for the impact to bond yields, Japan’s 10-year is down 0.7 bp to 0.05%, Germany’s 10-year is up 1.8 bps to 0.38%, and the 10-year Treasury yield is up 0.5 bp to 2.39%.
Yesterday’s Trading Activity – Stocks End October on Positive Note, Treasury Flattens on Higher Yields: Stocks seemed unfazed by an action-packed calendar for the remainder of the week and rebounded Tuesday to close out their best month since February. The Nasdaq outperformed the Dow and S&P to finish October at a new record high. The Nasdaq’s 0.43% daily gain pushed its monthly improvement to 3.57%. The Dow was the best performer in October with its 4.34% monthly gain. The S&P trailed but still moved 2.17% higher for the month. Tuesday’s action in the Treasury market left the curve flatter on higher yields. Shorter yields rose steadily throughout the day and finished near their highs of the day. The 2-year yield rose 2.6 bps to an even 1.60% following stronger-than-expected economic data (more below). The 10-year yield added just 1.1 bps to 2.38%. For October, the 2-year yield rose 11.5 bps, the 5-year yield added 8.1 bps, and the 10-year yield increased 4.6 bps. The sharper monthly adjustment to shorter yields occurred on the back of growing expectations that the Fed will hike in December. Longer yields moved less in October as another weak inflation report and speculation that Jerome Powell may be the next Fed Chair offset upward pressure from additional steps towards U.S. tax reform and indicators global growth may be picking up. The spread between 2s and 10s ended at 78 bps, just a couple of basis points shy of its flattest level since 2007. The Dollar also has its best month since February, thanks in large part to a dovish decision by the ECB that dented the Euro. Oil prices wrapped up October on a positive note with U.S. WTI closing at its highest level in months while Brent finished at its strongest level since 2015. Global growth is picking up, an obvious positive on the demand side, while OPEC is discussing extending cuts past the current March expiration.
Consumer Confidence Hits Highest Level of Cycle: Consumer confidence rose to its highest level of this economic cycle according to the October Conference Board report. Confidence rose from 120.6 to 125.9 (exp. 121.5) on improved outlooks for both present and future conditions. Consumers’ perceptions of the labor market improved with the net jobs plentiful/jobs hard to get differential rising 4.1 points, consistent with an unemployment rate falling to 3.5%. Expectations for income were also improved with the net differential of those expecting an increase in income/expecting a decrease in income rising 1.0 point.