Market Update: Thursday, September 28, 2017

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Market Recap

  • U.S. stocks higher on tax optimism. S&P 500 Index (+0.4%), within a small fraction of last week’s all-time high; small cap Russell 2000 Index (+1.9%), generally a bigger tax reform beneficiary, hit another new high.
  • Financials (+1.3%) topped sector ranks, technology (+1.1%), helped by semiconductor, internet stocks. Higher rates hurt defensive sectors.
  • Gains came amid below-average volume on NYSE, breadth positive (1.3:1).
  • Rates sharply higher. 10-year yield spiked 7 basis points (0.07%) to 2.30% on growth expectations. Higher rates, policy expectations boosted U.S. dollar.
  • WTI Crude oil above $52/bbl. on weekly inventory drawdown. COMEX gold fell on dollar strength, latest hawkish comments from Federal Reserve (Fed) officials.
  • Mixed economic data with durable goods generally better than expected (+1.7% month over month vs. 1% expected). Pending home sales (-2.6% month over month vs. -0.5% expected) missed.

Overnight & This Morning

  • U.S. stocks open slightly lower; yesterday’s bond market selloff continues. 10-year yield up to 2.33%. Focus remains filling in the blanks on the tax proposal.
  • Asia narrowly mixed; profit taking in China ahead of week-long holiday, Shanghai Composite -0.2%, Nikkei +0.5%.
  • Europe little changed in choppy trading amid lackluster economic data, corporate earnings. STOXX Europe 600 flat in late trading.
  • Hawkish tilt to Fed officials’ comments pushed December rate hike odds over 80% (more hawkishness from Esther George of Kansas City Fed expected this morning).
  • Crude oil maintaining strong momentum, up 0.7% this morning near $52.50/bbl.
  • Euro slightly higher vs. dollar. Political environment in Europe, quantitative easing tapering timetable remain in focus. USD/yen little changed.
  • Today’s key economic data: Jobless claims 272K vs. 270K consensus; hurricane-driven distortion still evident given month ago 235K level. Revised Q2 GDP revised slightly higher to +3.1% from previous +3%.

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Key Insights

  • Tax progress has been made but there still is a long way to go. We remain optimistic that a tax deal will get passed before mid-term election campaign season heats up next spring as yesterday’s “Big Six” plan released by key tax policy players represents progress. The proposal likely provided enough detail and displayed sufficient agreement across various factions of the Republican Party to improve odds that a 2018 budget resolution will be reached next month (how a simple majority vote on tax reform in the Senate under reconciliation can happen). Figuring out how to pay for the tax cuts remains a tall task when some groups with powerful lobbies will declare themselves losers. Buckle your seatbelts, it could be a long and bumpy ride.
  • Encouraging market signals. Regardless of the odds of a tax deal, or whether we get comprehensive tax reform as proposed or a simple tax cut, the market is signaling increasing optimism. Tax reform is considered positive for small cap stocks, the value style, financials, the U.S. dollar, and interest rates, all of which have staged strong rallies over the past several weeks.

Macro Notes

  • Small caps like tax reform. Small caps and micro caps had big days yesterday on the release of the potential tax reform. As we’ve noted before, they are much more sensitive to tax breaks, as they generally pay higher rates than larger companies. Getting to what happened, the Russell 2000 Index (small caps) gained 1.9% and closed at a new high for the fourth day in a row. In the process, it outperformed the S&P 500 by 1.5%, which was the largest one-day outperformance since November 2016 after the U.S. election. Micro caps did even better, as the Russell Microcap Index closed at its seventh all-time high over the past eight days and gained 2.2% for its largest one-day spike since November 2016.

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Thursday

Personal Consumption Core Price Index (PCE) (Q2)

Weekly Jobless Claims (9/23)

GDP (Q2)

Wholesale Inventories (Aug)

Kansas City Fed Manufacturing Activity Index (Sept)

George* (Hawk)

Fischer* (Dove)

Germany: Consumer Confidence (Oct)

Germany: CPI (Sept)

Eurozone: Consumer Confidence (Sept)

UK: Consumer Confidence (Sept)

Japan: Jobless Rate (Aug)

Japan: CPI (Aug)

Japan: Retail Sales (Aug)

China: Caixin China Manufacturing PMI (Sept)

 

Friday

Personal Income and Spending (Aug)

PCE Core Price Index (Aug)

Chicago PMI (Sept)

U of Mich. Consumer Sentiment (Sept)

Harker* (Hawk)

UK: GDP (Q2)

France: CPI (Sept)

France: PPI (Aug)

Germany: Unemployment Change (Sept)

UK: Current Account Balance (Q2)

UK: Money Supply (Aug)

Italy: CPI (Sept)

Eurozone: CPI (Sept)

Canada: GDP (July)

ECB: Draghi

BOE: Carney

IMF: Lagarde

Japan: Vehicle Production (Aug)

Japan: Housing Starts (Aug)

China: Manufacturing & Non-Manufacturing PMI (Sept)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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