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Week's Highlights: October 2 - 6, 2017

Monday, October 9, 2017

Global equities extended their gains to start October. Major US indexes and the MSCI All Country World Index all hit record highs. The week's bullish bias began the prior week, sparked by the latest US tax reform outline. Further impetus came from the US House passing a “slash-government-spending” budget in anticipation of less tax revenue. Markets appreciated progress even with a long road still to travel.

However, US equities struggled on Friday. The September jobs report showed the first monthly loss of jobs in seven years, tainted by hurricanes Harvey and Irma’s consequences. It also revealed a 0.5% rise in average hourly earnings, the first notable increase in months. The positive correlation between wages and inflation tends to solidify the likelihood of Fed further interest rate hikes.

“Safe haven” assets’ prices (e.g., bonds) fell. The US, Europe and China all released data showing continued solid economic growth. That data, US wage gains and hopes for tax reform each helped lower bond prices, pushing the benchmark 10-year US Treasury yield to 2.37% from 2.34% a week earlier.

Profit taking and reappearance of oversupply worries led to a drop in oil prices last week after a four-week win streak. West Texas Intermediate (WTI) ended at $49.29 from the prior week’s $51.67. Brent closed at $55.55, down from $57.45. The Baker Hughes US rig count showed two US rigs taken offline.

Volatility hit a new all-time low. The CBOE VIX closed at 9.2 (9.19 to two decimals) on Thursday, taking out 1993’s record of 9.31. However, the VIX finished at 9.6 after Friday’s market pullback, up slightly from 9.5 a week ago.

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Domestically

Stronger-than-expected trends in manufacturing, services and a September auto sales jump were encouraging economic data to spur equities. The Institute for Supply Management (ISM) manufacturing index rose to 60.8, highest reading since September 2004. The nonmanufacturing (the “services” part) reading came in at 59.8, highest since August 2005. Coupled with tax reform hopes, stocks set serial record highs. The S&P 500 had an eight-day winning streak, its longest since 2013, before dropping on Friday.

Hurricanes Harvey and Irma combined to halt a seven-year streak of positive jobs reports. September registered a loss of thirty-three thousand jobs. Unemployment rate dipped a 4.2% rate, a 16-year low – but due to a temporarily smaller labor force. Average hourly earnings rose to an annual rate of 2.9%. Economists warn that storm-related data distortions may persist for a month or so before the storms’ impacts are cleansed from the underlying data. Examples are the unexpected spike in auto sales from consumers replacing storm-damaged vehicles and the loss of 105,000 jobs in restaurants/bars, which had seen 20,000+ monthly gains recently. Earlier in the week, ADP private payrolls reported job growth of 135,000 jobs beating estimates for 125,000.

The bottom line for now is that underlying economic trends appear to remain healthy. The impact from recent hurricanes was the primary driver in the weak employment report.

September’s year-over-year wage growth came in at 2.9%, the fastest pace since 2009 and higher than the last two years’ 2.6%. The hurricanes’ effect may come into play here also – losing lower paying restaurant jobs may help increase the average. Still, wage growth and inflation are positively correlated. Tepid wage growth in recent months cast a degree of doubt about the Fed’s hiking interest rates timing. However, market belief in a third rate hike this year is stronger. The fed funds futures market places the chances of a December rate hike at 93.1%, up from last week's 77.9%.

The House of Representatives took the first step toward passing a tax overhaul by approving a fiscal-year 2018 budget blueprint. Congress needs to pass a budget before a tax bill can be adopted under Senate budget reconciliation procedures. That process needs only 51 votes, rather than the 60 needed to end a filibuster. The House’s action ups the odds that tax reform could be enacted early in 2018.

President Trump in the news:

  • Bloomberg News reported the president’s aides have narrowed the list of Federal Reserve chair candidates to four (perhaps five) people. Trump has reportedly spoken with current chair Yellen about re-upping, though she is not expected to be reappointed. Sitting Fed governor Jerome Powell, former governor Kevin Warsh and National Economic Council director Gary Cohn have all reportedly spoken with the president about the position, while Stanford University economist John Taylor has apparently not been interviewed but is said to be under consideration. All are known quantities to the markets, with Warsh and Taylor seen as the most hawkish of the group.
  • In a move likely to draw criticism from European allies, Trump is expected to decertify that the Iran nuclear deal is in our security interests. The president must certify the agreement, designed to restrain Iran’s nuclear ambitions, every 90 days. If he fails to certify that as so, Congress then has 60 days to decide whether to re-impose sanctions on Iran. It is possible that the pact will ultimately hold together if Congress does not apply sanctions.
  • An offhand comment by President Trump about wiping out Puerto Rico’s $73-billion debt sent the island’s general obligation bonds skidding in price. Trading near 44 cents on the dollar before the comments, the bonds fell to around 30 cents before stabilizing again. The White House later indicated that it does not intend to get involved in Puerto Rico’s restructuring.

Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.
 
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