The Market Today
Geopolitical Drama While U.S. Markets Await News on Tax Reform, Fed Chair
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Quiet Calendar Ahead, Markets Await News on Tax Reform and Fed Chair: After a fairly quiet week in which the most significant headlines were progress on tax reform and speculation on the next Fed Chair, this week is scheduled to be equally quiet. A few economic reports will get investors’ attention, including Wednesday’s reports on durable goods orders and new home sales, Thursday’s data on external trade, and Friday’s first look at 3Q GDP growth. The economy is expected to have grown 2.5% after economists cut their forecasts 0.2 to 0.3% in response to hurricanes Harvey and Irma. Most important to the markets, however, will be any news on the tax reform process and leaks regarding the President’s preference for Fed Chair. The White House has indicated that a decision will be announced prior to November 3.
As for this morning’s economic news, the Chicago Fed National Activity Index rebounded from -0.37 to +0.17. The three-month average for the CFNAI, as it is generally evaluated, remains negative. However, it is not negative enough to warrant concern.
Overnight Activity – Global Politics Pushed to the Forefront for Investors Ahead of Thursday’s ECB Meeting: Politics remained a major driving force behind global markets Monday. The U.S. Senate’s passage of a budget resolution late Thursday evening, the next step in the lengthy tax reform process, sent yields climbing and stocks to another set of record highs on Friday. Kicking off Monday, Japanese equities rallied and pushed the Nikkei 225 up 1.11% to a new record close. The surge followed reports of a sweeping victory for current PM Abe’s LDP party in lower-house elections. The results are expected to provide Abe with the power to continue his massive stimulus program, one aspect of which is the current easy monetary policies at the BoJ. The Nikkei has gained in each daily trading session of October (15 consecutive). In Europe, the political drama unfolding in Spain remains front and center. Spain’s IBEX 35 index is down 0.53% Monday despite gains elsewhere across Europe and the Euro is weaker against most major currencies. Over the weekend, Spanish PM Rajoy called for the dissolution of Catalonia’s regional government and possible elections within six months. The Catalan Parliament is set to meet Thursday to craft its response. Also on Thursday, the ECB’s latest decision will be heavily followed considering it’s expected to include tweaks to the central bank’s QE program. This morning, European yields are lower across the board which has helped hold down Treasury Yields. The Treasury curve is less than 1 bp lower across all maturities.
ICYMI – October 20, 2017 Weekly Market Recap: Treasury yields rose last week as equities strengthened, the push for tax reform took another step forward, and markets sharpened their focus on the race for the next Fed Chair. Yields jumped last Monday following weekend remarks from Fed Chair Yellen that continued to push her belief that inflation weakness will prove transitory and result in the need for continued gradual rate hikes. Equities strengthened throughout the remainder of the week which added to the weekly pressure for yields. The Dow and S&P hit a new all-time high close in all five sessions while the Nasdaq added three more tick marks to its record close tally. The economic data was heavily focused on the housing industry and painted a mixed picture for activity. Housing starts and building permits remained weak while existing home sales and homebuilder confidence improved. There were multiple reports throughout the week that indicated various White House preferences for who could potentially replace Yellen as Fed Chair in February. Each report created a perceptible shift in markets. But it was the Senate’s passage of a budget resolution on Thursday evening that earned the biggest move in yields on Friday. The budget passage was the next step Republicans needed to take to attempt to reform the tax code through reconciliation. Click here for the full recap.