Market Update: Wednesday, October 4, 2017

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Market Recap

  • Stocks’ march higher continued; September auto sales the only notable data on the docket, which beat consensus. S&P 500 Index +0.2, Nasdaq +0.2, Dow +0.4%.
  • Telecommunications led on M&A activity, airlines buoyed industrials; utilities trailed.
  • Treasuries fell across the curve; 10-year note -2 basis points (-0.02%) to 2.32%.
  • CommoditiesCOMEX gold slid (-0.1%) to $1274/oz., WTI crude oil lower (-0.4%) to $50.37/bbl.; industrial metals mixed with copper +0.3%.
  • Fed Governor Powell emerging as potential successor to Yellen, with Treasury Secretary Mnuchin said to favor him. Also, his view that post-financial crisis bank rules should be more lax aligns with President Trump’s.

Overnight & This Morning 

  • U.S. stocks down slightly after setting 41st record high yesterday. ADP job report numbers came in weaker than expected.
  • Asian markets mostly higher, led by Hong Kong, tracking Tuesday’s modest gains in the U.S.; markets in China, South Korea, Taiwan closed for holidays.
  • Spain-Catalonia tensions weighing on European stocks. Spanish equity, bond markets leading decline.
  • Treasuries, dollar lower on dovish tilt of short list for next Fed Chair.
  • Commodities – oil (-0.6%) slide continues to ~$50/bbl. following bearish private inventory data, gold (+0.3%) inching higher to $1279/oz.

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Key Insights

  • Short list for the Fed. President Trump has received the short list from his advisers for the next Federal Reserve (Fed) chair, although he can always go outside the list. The short list suggests an accelerated timetable for appointing a new chair compared to expectations, which markets prefer to a drawn out process that creates added uncertainty. Current Fed Chair Janet Yellen’s term expires in January 2018, although her 14-year term as a member of the Fed Board won’t expire until 2024. Lead candidates include Kevin Warsh, Jerome Powell, Gary Cohn, and the reappointment of Janet Yellen. Trump will need to decide whether to choose a dovish chair who is more likely to support accommodative monetary policy, which will help secure his economic legacy, or a more hawkish chair, an approach that tends to be more in line with conventional Republican views. Markets are viewing the accelerated timing of the position as having more dovish implications, with gold climbing and the dollar falling overnight.

Macro Notes

  • Horse trading starts in earnest. As discussed in this week’s Weekly Market Commentary, there are many points of negotiation that give Republicans a shot at getting a tax deal done, either tax reform or a simple tax cut (there is some gray area between the two). One is the state and local deduction–the Big Six proposal called for eliminating the deduction and Republican leaders are already talking about caps rather than complete elimination to secure votes in high-tax states. Another is the highest personal rate–the Big Six proposed the third and highest rate at 35%; adding fourth rate in line with the current 39.6% rate is gaining traction (the Big Six deferred this decision to Congress). These are just two of what promises to be many rounds of give and take as policymakers engage in “sausage making” over the next several months and likely into 2018.
  • Another way to show low volatility. We’ve discussed many times how 2017 is one of the least volatile years ever. Well, here’s yet another way to show this. Yesterday, the CBOE Volatility Index (VIX) closed beneath the 10 level for the fourth day in a row–that’s the 26th time so far this year. To put that in perspective, from 1990 to 2016 it closed beneath the 10 level only nine times.
  • More win streaks. The S&P 500 gained again, closing higher for the sixth consecutive day while making its fourth new high in a row and 41st new high this year. Incredibly, for 16 consecutive trading sessions the S&P 500 has closed within 0.5% of the previous day’s close, which is the longest such streak since February 1969. The win streaks aren’t only in the U.S. though, as the STOXX Europe 600 has closed higher nine consecutive days as of yesterday, the longest win streak since nine in a row the summer of 2015.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

  • MBA Mortage Applications (Sept 29)
  • ADP Employment Report (Sept)
  • Markit Services PMI (Sept)
  • ISM Non-Manufacturing (Sept)
  • Yellen (Dove)
  • France: Markit France Services PMI (Sept)
  • Eurozone: Markit Eurozone Services PMI
  • UK Markit UK Services PMI (Sept)
  • Eurozone: Retail Sales (Aug)
  • Poland: Base Rate Announcement

Thursday

  • Cahllenger Job Cuts (Sept)
  • Weekly Jobless Claims (Sept 30)
  • Trade Balance (Aug)
  • Factory Orders (Aug)
  • Durable Goods Orders (Aug)
  • Cap Goods Shipments & Orders (Aug)
  • Williams (Dove)
  • Harker (Hawk)
  • George (Hawk)
  • ECB: Account of the Monetary Policy Meeting

Friday

  • Change in Nonfarm, Private, & Manufacturing Payrolls (Sept)
  • Unemployment Rate (Sept)
  • Average Hourly Earnings (Sept)
  • Average Weekly Hours (Sept)
  • Labor Force Participation & Underemployment Rates (Sept)
  • Wholesale Sales & Inventories (Aug)
  • Consumer Credit (Aug)
  • Bostic (Dove)
  • Dudley (Dove)
  • Kaplan (Hawk)
  • Bullard (Dove)
  • Germany: Factory Orders (Aug)
  • Italy: Retail Sales (Aug)
  • Japan: Leading Index (Aug)

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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