The Market Today
Elections Trump a Likely Quiet FOMC Decision
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
ISM Non-Manufacturing Index and Producer Prices: This week’s calendar is light on economic data with the biggest reports today and Friday, the ISM Non-Manufacturing Index and the October Producer Price Index. After the ISM Manufacturing index dropped more-than-expected last week, the services index will be key to keeping to expectations high. It is expected to pull back from 61.6 to 59.0 and remain in strong territory (9:00 a.m. CT).
FOMC Decision and Mid-Term Elections: In the absence of much economic news, the main events of the week will be Thursday’s FOMC Decision and tomorrow’s elections. We expect little news from the FOMC decision: no changes to the target rate range, very few changes to the Official Statement, and no decision on changing the IOER rate until December. The elections, however, are likely to bring more volatility. The polling data predicts that the Democrats will take the House and Republicans will retain the Senate. If so, the markets should not be excessively volatile. However, we remain reluctant to put too much weight on polling data based on recent results. If Democrats were to take control of both chambers, we would likely lower our forward interest rate projections by 10-20 basis point. Conversely, if Republicans take control of both, we would likely raise our rate projections 15-25 basis points.
Overnight – Last Week’s Market Momentum Cools Ahead of Busy Week in the U.S.: There are no discernible trends in global markets overnight after a synchronized rebound for global equities last week, which seemed to be a recovery from a sell-off the week before and a reaction to a positive tone on U.S.-China trade (more below). The MSCI Asia Pacific Index dropped more than 1% Monday as almost every major equity index in the region slipped to start the week. The broad regional index had risen in four straight sessions through last Friday on its way to a 4.8% weekly gain, its best since March 2016. Chinese President Xi gave a speech at the start of an International Expo event in his country, lauding the benefits of globalization but lacking any real lift for regional markets. In Europe, most national equity indices were stronger which had helped the Stoxx 600 0.2% higher. The index rose 3.3% last week amid the global improvement, the most in a week since December 2016. Yields in Europe had ticked higher, more so on the periphery, while Treasury yields had edged down from last Friday’s four-week high. The 2-year yield was unchanged at 2.90%, just shy of its cycle-high 2.91%, while the 10-year yield fell 0.8 bps to 3.21%. Oil prices were mixed as U.S. sanctions on Iran went back into place and U.S. futures were hovering around flat.
ICYMI – November 2, 2018 Weekly Market Recap: Coming off its worst month since September 2011, the S&P 500 snapped back to start November, despite a Friday falter. The economic data was mixed and, not surprisingly, the labor and consumer data stood head and shoulders above the rest. The ISM manufacturing index fell more than expected to a six-month low and construction spending data reiterated a softer trend for private residential outlays. The Fed’s preferred core consumer inflation measure rounded to 2.0% for a fifth month in a row and personal spending outpaced income growth for a seventh month, pushing the savings rate down to its lowest level since 2013. But consumer confidence hit a new 18-year high, thanks in large part to the increasingly strong U.S. labor market. Friday’s jobs report reinforced that fact as total payroll gains of 250k cleared estimates by 50k, the unemployment rate held at 3.7% (near its lowest since 1969), and prime-age participation rose to 82.3% (strongest since April 2010). Adding the exclamation point was a new cycle-high for hourly earnings growth. The 3.1% YoY rate did benefit by comparison to a weak October 2017, but the 3M/3M annualized change (also a cycle-high) and the wage component of the ECI report (earlier in the week, also a cycle-high) confirmed the positive wage trends. Trade was also a major focus. A Monday report said the White House was planning tariffs on the balance of Chinese imports if Presidents Trump and Xi didn’t make progress when they meet later in the month. However, a Thursday tweet from President Trump that “discussions are moving along nicely” was followed by a report that he had asked his team to draft a possible trade agreement with China. Click here to view the full recap.