The Market Today
Tax Reform and Spending Bill Will Keep Washington in Focus, Friday’s Payroll Data Expected to Show Solid Earnings Rebound
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Slow Start to an Important Friday Finish: The pace of reports this week is a jog compared to last week’s sprint, but Friday’s finish will be just as important as any economic data point from last week. The slow start begins with a single report released later this morning that is expected to show total factory orders fell slightly in October after a solid 1.4% gain in September. That report will also include revisions to initial estimates for durable and capital goods. Early estimates showed a large decline in durable goods orders because of weaker activity in the volatile transportation sector, and mixed business indicators with better shipments but weaker orders.
Tuesday’s calendar begins with a look at the October trade balance. The advance goods trade report released last week showed a wider-than-expected deficit in flows. Also on Tuesday, the ISM will release its latest services sector index which is expected to show a slower, but still-strong pace of expansion in non-manufacturing activity.
Wednesday’s focus will be primarily on ADP’s private payroll data and secondarily on 3Q productivity and unit labor costs. ADP is expected to show 190k jobs were added in November and, after last week’s stronger-than-expected GDP revision, productivity is expected to be revised up and unit labor costs down.
Thursday should be quiet with weekly jobless claims activity and two midday reports on the consumer balance sheet. First, the Fed will release data showing the change in household net worth during the quarter before reporting how much new non-mortgage credit consumers took on in October. Net worth is likely to be up again thanks to the continued record-setting run for stocks and the persistent price appreciation in real estate assets; the two largest categories of appreciable assets held by consumers.
But Friday’s finish will be the most important. The BLS’s nonfarm payroll report for November is expected to show that 198k net jobs were added last month and the unemployment rate held at 4.1%. More importantly, however, are expectations for the average hourly earnings data. Earnings are expected to have gained 0.3% last month after flatlining in October which would boost the YoY growth rate up from a disappointing 2.4% to a mildly more attractive 2.7%.
Away from the data, Washington will remain in focus. Senate Republicans voted just before 1 a.m. CT Saturday morning to pass their version of a tax reform bill. With the House and Senate now both having successfully, and individually, agreed on changes to the current tax code, the process will send those versions to a conference committee. In committee, the differences will have to be ironed out so that one bill can be sent back to both chambers for a vote. Also on the radar in Washington will be what happens with a spending bill. Current spending is authorized under a continuing resolution which expires on Friday, alongside the debt ceiling. If no agreement is reached on a spending bill, the government will shut down upon expiration. While the debt ceiling will ultimately have to be settled, current estimates are that Treasury could make do until early Spring by using extraordinary measures.
Overnight Activity – Global Equities on the Rise as U.S. Tax Talks Advance, U.K. and EU Potentially Striking an Agreement: A couple of risk-positive developments over the weekend have global equities firmer and sovereign yields higher. Markets came apart Friday after news broke about Michael Flynn potentially testifying that the Trump campaign had directed his contacts with Russia (more below). And despite the apparent uncertainty that would create for the President’s Administration, the initial market damage was partially offset by indications that Senate Republicans had enough votes to pass their tax plan. Over the weekend, both of these topics took risk-friendly turns. The news outlet responsible for the Flynn report issued a correction saying that the contact Flynn would testify about was after the election which could have vastly different implications. And Republicans did pass their tax bill just before 1 a.m. CT on Saturday. As a result, Dow futures are up more than 250 points, or 1.1%, overnight. Contracts on the S&P and Nasdaq have risen a smaller 0.6% and 0.4%. Treasury yields are higher than Friday’s close but have backed off their intraday peaks with the 2-year yield plus 2.6 bps to 1.798%, another new high for the cycle. The 5-year yield is up 3.3 bps to 2.146%, its highest yield since April 2011. The 10-year yield added 3.2 bps but remains near the middle of its post-election range at 2.394%. Those moves mimic shifts in Europe where the Stoxx Europe 600 is up 1.0% midway through trading and yields across the region are firmer. In addition to the U.S. developments, sentiment in Europe is being supported by expectations that a lunch meeting today between U.K. PM May and representatives from the EU could result in an advancement of the negotiations. The Pound is the day’s best performing major currency.
ICYMI – December 1, 2017 Weekly Market Recap: Longer interest rates showed almost no response early to updated cycle-highs for new homes sales and consumer confidence. Also in the first 48 hours of trading last week, there were several Fedspeakers, including the likely next Fed Chair Jay Powell, but nothing was said that changed the perception that a majority of Fed officials would give the okay to a December hike. But a positive outlook from current Fed Chair Yellen and a stronger-than-expected 3Q GDP revision, both occurring Wednesday morning, primed the pump for the next two days; yields moved to their initial highs for the week just after these two events. In the final two days of trading, the market’s eyes were taken off the economy by Washington and Senate Republicans ramping up their push for tax reform. In the middle of those conversations and negotiations, news broke early Friday that former National Security Advisor Michael Flynn would testify that the Trump team directed his contact with Russia and markets came unhinged. The Dow dropped more than 350 points and the 10-Year Treasury yields dropped over 10 bps, all in a matter of minutes. Those moves did moderate as the day went on (and the news outlet issued a correction to the report over the weekend) but it ultimately left a feeling of nervousness behind as markets closed for the weekend. Click here to see a copy of the full recap.