The Market Today
Busy Week Ahead: New Fed Chair, Tax Reform, Catalonia, FOMC Meeting, October Jobs
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Heavy U.S. Economic Calendar Combined with Key Economic Events/Announcements: This week brings a busy economic calendar along with three political news items, all creating the potential for significant market volatility. The political events include the President’s announcement on his preference for the next Fed Chair, the next steps in the tax reform process, and the continued uncertainty around the Catalonian drive for independence.
Rumors Swirl that President Leaning Toward Powell: As for the Fed Chair, rumors from the politico say he is leaning toward appointing current Fed Governor Jerome Powell, one of the more dovish candidates (remember – the President now likes a weak Dollar) and someone who likely aligns with the President on regulatory policy better than current Chair Yellen. The markets are likely to embrace such an announcement given their dependence on easy monetary policy.
Tax Reform Goes to Ways and Means Committee: After the House passed the Senate budget last, the next step in the process is the tax-plan write-up from the House Ways and Means Committee. The details of that will likely be leaked throughout the week with special attention on the state and local tax deduction (several Republicans have indicated their support is conditional upon this deduction being kept). While tax reform still brings a long process ahead, Washington is moving faster on this than we are accustomed.
Spanish Government Invokes Article 155 to Suppress Catalan Independence Movement: In Catalonia, the Parliament voted last Friday to move forward with independence from Spain. However, the Spanish government came in over the weekend nullifying Parliament’s vote and demanded the deposition of all members of the government and local police chief. They dissolved Parliament and called for new elections on December 21. There remains a great deal of uncertainty, and the implications for Eurozone stability unnerved markets last week. However, pollsters expect the move for independence to be voted down by a majority of Catalans in the December 21 regional election – begging the question, Why didn’t the pro-Spain populous just vote in the first referendum (they boycotted the vote) and save the markets from all of this drama.
FOMC Announcement and October Jobs Data This Week’s Eco Focus: This week will bring a plethora of important reports including personal income, spending, PCE inflation, ECI wage growth, the ISM reports, construction spending, and vehicle sales. The most important two events will be Wednesday’s FOMC announcement (expected to not hike but pave the way for a third hike in December) and Friday’s October labor data. After 1.475 million people could not work due to weather in September (the second largest tally on record), the data is expected to bounce back in October. Payrolls are expected to have increased 310k (which is frankly a conservative estimate) and the average hourly earnings are expected to pull back from 2.9% YoY to 2.7%.
This Morning’s Calendar – Savings Rate Drops to Lowest Since 2007 as September Spending Outpaced Income: Kicking the calendar off this morning, personal income rose 0.4% in September (as-expected) with personal spending rising a better-than-expected 1.0% (adding a small boost to the first 3Q GDP revision). While nominal personal income growth of +0.4% looks encouraging, incomes were flat on a real basis. Moreover, as spending outpaced income, the savings rate fell from 3.6% to 3.1% – the lowest of this cycle and the lowest since 2007. All of the PCE inflation data released this morning for the month of September came in as-expected. The PCE deflator rose 0.4% MoM bringing the YoY rate up from 1.4% to 1.6%. Core PCE rose just 0.1% MoM but was enough to bring the YoY rate up from 1.298% to 1.328%. Small victories.
Overnight Activity – Dollar Takes a Breather, Global Yields Mostly Lower as Peripheral European Countries Outperform: Global equities are off to a slow start Monday while sovereign yields have moved lower in most regions. The Dollar is weaker as the Euro has found support after tumbling in late-week selling last week following the ECB’s latest monetary policy decision. The lack of enthusiasm in the global equity trade has U.S. futures floundering in overnight trading with contracts on the Dow and S&P both lower by at least 0.2%. Before this morning’s U.S. inflation data, Treasury yields were less than 1 bps changed with the 2-year yield 0.8 bps higher at 1.60% while the 10-year yield shed 0.4 bps to 2.40%. German yields were higher, but only modestly so. The big moves in sovereign yields were seen in peripheral Europe. The Italian 10-year yield dropped 6.6 bps and the curve flattened following Friday’s rating upgrade (to BBB) by S&P. Spain’s 10-year yield fell 7.5 bps after weekend polls and pro-unity rallies indicated the secessionist movement in Catalonia may be becoming less popular. Currently, Spain’s national government has dissolved the current Catalan government and scheduled elections for late December. Peripheral yields in general may have also been impacted by weaker than softer regional inflation readings in Germany. This morning’s U.S. data was mostly as expected and has had little impact on U.S. assets. The 2-year yield is unchanged on the day while the 10-year yield is 1.1 bps lower.
ICYMI – October 27, 2017, Weekly Market Recap: Positive global growth indicators pushed Treasury yields higher last Tuesday and Wednesday. Across the Atlantic, France’s Composite PMI was stronger than expected thanks to improvement in both the manufacturing and services sector while results in Germany were softer but remained at strong levels. On Wednesday, German business confidence was reported at an all-time high for October and the advance release of the U.K.’s 3Q GDP showed the economy expanded at a faster-than-expected pace. Hours later, September’s durable goods data in the U.S. topped estimates and pushed yields to their highs of the week. Thursday’s ECB decision to extend QE at a reduced monthly rate (cut to 30B Euros from 60B Euros beginning in January) through at least September barely moved U.S. yields but sent European yields and the common currency tumbling. Obviously, the announcement was at least slightly more dovish than expected. The House adopted the Senate’s budget in the next step towards revising the U.S. tax code and the economy expanded at a faster-than-expected 3.0% pace in the third quarter; both events nudged yields higher. However, the positive GDP result early Friday morning was quickly overshadowed as the dissolution of the Catalan parliament by Spain’s national government and a report that President Trump prefers Jerome Powell as the next Fed Chair sent yields to a lower close. Click here to view the full recap.