The Market Today
Corporate Tax Rate to Be Phased in? Wage Growth Gaining
by Craig Dismuke, Dudley Carter
Today’s Calendar – Firming Wage Growth Adds to Recent Momentum in Economic Data: The recent economic data has bolstered the Fed’s aggressive future policy path, from last week’s strong GDP report to the continued strength in the labor data. This morning’s 3Q Employment Cost Index is no different, with employment costs rising 0.7% QoQ, the second highest quarterly reading of this cycle for arguably the most reliable measure of wage inflation. The YoY rate is now up to 2.5%, also the second highest of the cycle. Both wages and benefits, the two primary components of employment costs, saw solid quarterly gains. Wages and benefits are now both up 2.5% YoY, the first time both components have been above 2.5% YoY since 2013 when Core PCE spiked up to 1.7% YoY six months later. It is a bit early to call an inflexion point for wage growth, but this result will certainly embolden the Fed to hike again before year-end.
At 8:00 a.m. CT, the S&P CoreLogic Home Price Index is expected to show home prices up from 5.81% to 5.93% YoY. At 9:00 a.m., the Conference Board will release its October consumer confidence report which is also expected to increase. In Washington, the FOMC is beginning its two-day meeting today with an announcement scheduled for tomorrow at 1:00 p.m. CT (no post-meeting presser).
Overnight Activity – BoJ Remains Easy Policy Stance, Eurozone Inflation Slows: U.S. equity futures firmed early and Treasury yields clawed back a portion of yesterday’s drop despite mixed activity elsewhere. Equities were mixed across Asia with Japan’s Nikkei flat and China’s CSI 300 down less than 0.1%. The BoJ announced it was keeping its stance on monetary policy unchanged, an expected outcome considering policymakers there continue to fall well short of meeting their inflation mandate. The central bank lowered its inflation forecast for 2017 and 2018, again, but said it still expects inflation to rise to near the 2% target by fiscal 2020. In China, government PMIs indicated growth continued in October but at slower pace than in September. Data was also in focus in Europe where the first estimate of 3Q GDP growth in the Eurozone topped estimates at 2.5% YoY and unemployment fell to a new expansion low of 8.9%. However, core inflation retreated to 0.9% in October. Stronger growth and a healthy labor market failing to boost inflation has become a not so uncommon economic trifecta these days, one that continues to frustrate global central bankers. Spanish stocks were an upside outlier, rising 1% after a more than 2% gain yesterday. Weekend events showed the idea of an independent Catalonia may be losing favor with a majority of residents. Consistent with the slightly higher yields in Europe, the 2-year and 10-year Treasury yields rose less than 1 bp to 1.58% and 2.38%, respectively.
Yesterday’s Trading Activity – Markets Flinch at Possible Phase-In of Corporate Rate Cut: Monday’s news cycle was dominated by the indictments of several individuals previously involved in President Trump’s campaign or administration in one capacity or another. The charges were brought about as a result of FBI Special Counsel Mueller’s probe into Russia’s interference in the 2016 presidential election. And while the latest twists and turns in that investigation have potential implications for the administration and its agenda, it was a buried headline on tax reform that appeared to create Monday’s pivot point for U.S. assets. At 10:19 a.m. CT, a headline hit the wires that suggested the 15% corporate tax rate cut (from 35% to 20%) could be phased in through 2022 as opposed to being fully effective upon enactment. That was also the exact time that U.S. stocks and Treasury yields made their sharpest move. The S&P tumbled as much as 0.5% following the report before recovering to end down 0.3%. The Dow performed slightly worse while the Nasdaq was essentially unchanged. The 10-year yield’s slide slowly continued throughout the day and ended down 3.8 bps at 2.37%. The 2-year yield dropped 1.4 bps to 1.57%. The Dollar, which was already weaker on a recovery in the Euro, extended its daily decline and finished near its daily lows. Tax reform remains one of the biggest current market stories, and any leaks about details on the progress have the potential to create such volatility.