The Market Today
Small Business Optimism Soars, Stocks Set New Records, as Tax Reform Progresses
by Craig Dismuke, Dudley Carter
Today’s Calendar: FOMC Meets, Small Business Confidence Soars on Sales Expectations: The Gallup poll isn’t the only thing expecting better sales this holiday season. This morning’s NFIB Small Business Optimism Survey for the month of November jumped 3.7 points to 107.5 (exp. 104.0) on a big increase in sales expectations, up 13 points MoM. Plans to hire also rose 6 points although compensation plans fell 4 points. On a positive note, the number of small business leaders citing jobs as being hard-to-fill fell 5 points. The index is now at its third highest level on record, only surpassed by two reports back in 1983.
Producer price inflation for the month of November remained tame, although slightly firmer than expected on a MoM basis. Headline prices rose 0.4% (exp. +0.3%) while core prices rose 0.3% (exp. +0.2%). This brought the YoY rates to 3.1% (exp. 2.9%) and 2.4% (exp. 2.4%), respectively. The recent increase in producer prices has been the result of firming commodity prices and in spite of services prices easing. One factor affecting both headline and core measures was the 4.6% increase in energy costs, the largest such increase since 2015.
Also today, the FOMC begins its two-day meeting with a policy announcement scheduled for tomorrow. There is consensus that they will hike for the third time this year but there is ample disagreement regarding their forward-looking projections. Some argue the infamous Dot Plot will show higher dots based on 1) the increasing likelihood of tax cuts, 2) an abnormally low unemployment rate, and 3) recent firming in the inflation data. On the opposite side, some expect the dots to remain largely unchanged citing 1) the FOMC’s reluctance to base policy on tax law that has yet to cross the finish line, 2) continued weakness in wage growth despite the low unemployment rate, and 3) core inflation that has firmed up but which remains stuck below the Fed’s 2% target.
Overnight Activity – European Yields Help Lift Treasury Yields as U.K. Inflation Crosses 3.1%: In a divergence from Monday’s trend of Asian markets leading the overnight session, the scales were tipped in favor of European markets on Tuesday. The Stoxx Europe 600 is up 0.3% mid-day Tuesday and at its highest level in more than a month after most Asian markets faltered. European equities have been on a slow and steady recovery since being pummeled by sharp selling activity during early November. The strength in Europe has helped lift U.S. futures for a fifth session in an indication that the recent rebound by U.S. stocks may continue Wednesday; futures are higher by less than 0.2%. As European equities strengthened, yields in the region drifted modestly higher. Adding to the upward pressure was a faster-than-expected November headline CPI print in the U.K. Despite an in line core result, the headline index rose 3.1% from a year ago, the fastest in more than five years. In addition to making a decision on monetary policy on Thursday, the BoE will now also have to write a letter to government officials to explain why they are missing their mandate by more than 1%. The bond bearish shifts in Europe have influenced Treasury yields but with different implications for the shape of the curve. While most European curves are steeper on higher yields, the 2-Year Treasury yield is up 1.6 bps to 1.84% while the 10-year yield has risen only 0.4 bps to 2.39%. Oil prices are up again on Tuesday in a follow through from yesterday’s moves following the shuttering of a critical pipeline in the U.K. (more below).
Yesterday’s Trading Activity – Treasury Yields Inched Higher as Stocks Climbed to New Records: Stocks finished near their highs of the day and gains of 0.23% and 0.32% for the Dow and S&P were enough to cement new record highs. The Nasdaq was the day’s top performer with a 0.51% gain but remained below its last record set in late November. The tech-heavy index has been beat up over the last week or two. Within the S&P, telecom and information tech companies were the top performers and nine of the eleven sectors added value to start the week. Energy companies gained enough to finish in third place as prices rose across the energy-commodity complex. Crude prices led the way as both WTI and Brent finished near multi-year peaks on news of the closure of the key Forties Pipeline System in the North Sea (between the U.K. and mainland Europe). Financials finished in last place despite Treasury yields inching up. The 2-year yield led a rise across the curve by adding 2.4 bps to 1.82%. The 5-year yield rose 1.7 bps to 2.16% and the 10-year yield increased an even smaller 1.3 bps to 2.39%.
Treasury Acknowledges Increase in Debt from Tax policies, Says Better Growth Will Make Up for It – Policy experts speculate that a tax law can make it through Conference, perhaps before Christmas. Treasury released a statement yesterday acknowledging that the current proposals would likely add an additional $1 trillion to the debt above current projections over the next 10 years. However, the statement also said they expect 2.9% GDP growth over the next 10 years which would effectively cancel the increase in the debt. Explaining how they get from the currently projected 2.2% to 2.9% growth, the Statement says, “Treasury expects approximately half of this 0.7% increase in growth to come from changes to corporate taxation. We expect the other half to come from changes to pass-through taxation and individual tax reform, as well as from a combination of regulatory reform, infrastructure development, and welfare reform.”
Unjumbling the October JOLTS Report Shows Continued Employment Strength: The October JOLTS Report was mixed with a directionally disappointing change in the level of openings that was offset somewhat by a faster pace of hiring and a fewer number of firings. Openings dropped to 5.996MM in October from a revised higher 6.177MM in September. The monthly decline was the largest since May and the absolute value of openings was the smallest since the same month. To be sure, total openings remains at a solid level. The decline in overall vacancies was spread across most private sectors with construction and leisure and hospitality the only two groups to report meaningfully more open positions. The net result was the openings rate easing to 3.9% from its cycle high of 4.0%. Hiring rose 232k which was enough to take the hires rate up to 3.8%, matching the best level of the expansion. Total quits were unchanged in October but layoffs experienced a healthy monthly drop. Overall, a positive report for the employment picture.