- Stocks mixed but finished off lows following uneventful Federal Reserve (Fed) meeting. Small caps underperformed (Russell 2000 -0.6%). S&P 500 Index +0.2%, Dow +0.3%, Nasdaq -0.2%.
- Q3 earnings remain positive; ~75% of firms’ profits > expectations.
- Energy topped sector list with help from corporate earnings; utilities, telecommunications lagged.
- No rate hike at FOMC meeting; expectations accelerating for a December hike.
- House GOP tax bill expected to impose one-time 12% repatriation tax on overseas profits; plan to phase out 20% proposed tax rate after 10 years.
Overnight & This Morning
- Domestic markets opened down slightly as Jerome Powell’s likely nomination as Fed chair and a potentially watered-down tax plan weigh on markets. Concerns escalated that Powell may not alter policy drastically, nor would the tax plan ignite growth as originally hoped.
- European equites edged lower as Bank of England (BOE) is expected to raise its benchmark interest rate for the first time in 10 years by 25 basis points (0.25%). STOXX Europe 600 flat, German DAX -0.2%, French CAC 40 -0.2%.
- Asian markets closed mixed; Japan’s Nikkei 225 (+0.5%) finished as the sole bright spot. Hang Seng -0.2%, Korea KOSPI -0.4%, Shanghai Composite -0.4%.
- 10-year Treasuries strengthening; yields moving lower 1 basis point to 2.36%.
- Commodities – WTI crude oil sliding lower (-0.2%) to $54.2/bbl., COMEX gold flat at $1276.6/oz. Industrial metals continue streak; nickel +7.1%, aluminum +2.2%, copper +1.7%.
- Today’s economic calendar is headlined by President Trump’s Fed chair announcement, the BOE’s interest rate announcement, and U.S. jobless claims.
- Catalonia does not pose a new euro-zone crisis as potential economic fallout for Spain and the broader continent are small, and financial markets are moving past it. Spanish government already called for a regional election on December 21. If the anti-independence parties win a majority, the situation will probably be defused. If separatists win, a compromise that offers more regional autonomy is likely. The Catalan separatists have not expressed interest in abandoning the euro. For background, the Catalonian region is responsible for ~20% of economic activity in Spain, whose gross domestic product (GDP) is expanding ~+3.0% these past two years.
- Global economy appears to have maintained momentum in Q3 with projections for growth of ~+3.5% and further momentum into year end and 2018.
- U.S. exceeded expectations with +3.0% in Q3, but inventories accounted for a good portion of output. Real Final Sales, which excludes inventories, grew at a more subdued +2.3% pace. U.S. tax changes could add up to +0.50% to GDP next year if enacted.
- Eurozone also beat expectations (+0.6% quarter over quarter). Output slipped a bit in France and Spain, Germany was steady, Italy exceeded forecasts. Business surveys remain optimistic; employment trends indicate upturn in Eurozone could continue.
- U.K. activity also picked up (+0.4%) as weak construction offset by strength in industrials, services. Consensus projects +1.5% GDP growth in 2017, +2.0% in 2018. Higher inflation concerns may be outweighed by uncertainty around Brexit negotiations, keeping the BOE from responding too aggressively to inflationary pressures. Firmer pound could also lessen pricing for Europe’s largest importer.
- China Q3 GDP could weaken to +6.0% year over year after surging at the end of summer. Slower trends in investment, property sales, and credit growth are evident. Weaker pace of growth in China should be gradual, the dampening effect on global GDP likely to be moderated by stronger growth in other emerging economies.
- Productivity may be better than the numbers indicate. The recent drag in productivity growth throughout advanced economies appears to be the direct opposite of the post WWII “golden age” whereby improvements in manufacturing and automation boosted output per hour. The transition to a services-led economic output model, dominated by technology and globalization, appears to be skewing traditional views of productivity. To be sure, gains in output per hour enhance not only growth in GDP and profitability, but also living standards through improved wages. It’s conceivable that productivity performance over the past several years has been understated given an inability by statisticians to better gauge the digital economy. Nevertheless, profitability in developed markets is on the upswing. MSCI EAFE EPS are projected to grow in excess of +25% over the next 12 months and the developed market index is currently trading 15.3 times those projections, according to Bloomberg data. This compares with similar EPS growth potential in emerging markets but a more attractive valuation of just 12.5 times forward EPS. For perspective, the S&P 500 currently trades at 18.2 times forward earnings projections.
- Catalonia is still in the news, but rhetoric has calmed. Spanish authorities ordered Catalan leaders to court earlier today on charges of sedition, which could carry up to 30 years in prison. A few showed up, but Catalan leader Carles Puigdemont did not, indicating that Spanish authorities are executing a political witch hunt. Support for independence stands at about 40% according to polls, but a majority of the 7.5 million residents of Catalonia do want the chance to vote in an official referendum. The way that Spain handles this situation will be important given that Catalonia makes up approximately one fifth of Spanish GDP. If Spain’s response is seen as too strong, it could bolster support for Catalonia’s secession. So far though, it doesn’t appear that this has happened, and it appears Catalonia will remain a political issue instead of a serious economic problem.
- The Fed’s latest meeting started on Halloween, but the outcome wasn’t scary for markets. As was widely expected, the Fed made no changes to monetary policy during its October 31-November 1 meeting, but a December rate hike is very much in play. Get more insights and analysis on the LPL Research blog.
- BOE rate hike is a sign of the times. Since the financial crisis, monetary policy has been a major driver of economies. The European Central Bank’s recent announcement that it will to cut bond purchases in half starting in January, the Fed’s balance sheet normalization plans, and this morning’s rate hike from the BOE indicate that policymakers’ confidence in the ability of global economies to better support themselves is growing. Rate hikes aren’t expected in Europe or Japan for some time, but as monetary policy support continues to wind down over the next couple of years, fundamentals are likely to reassert themselves, which could lead volatility higher from current low levels.
- What does policy normalization mean for EM performance? Expectations of Fed rate hikes have historically caused concern for investors in emerging markets equity and debt. Fed tightening, in theory, can lead to a stronger dollar, which may make it more difficult for countries with significant amounts of dollar denominated debt to pay their bills. QE has also pushed interest rates in developed nations to historic lows, which has pushed capital flows toward other assets, including emerging markets equity and debt. Does normalization mean that EM equity and debt prices could be impacted? So far the answer would appear to be no. Fed rate hikes haven’t caused widespread volatility in EM assets in recent years, and the slow pace of balance sheet normalization is likely to mean that any impact to EM assets will be gradual as well. The past twelve months have seen three Fed rate hikes (and expectations for one more in December), but the MSCI Emerging Markets Index has still managed to outperform the S&P 500, and Emerging Markets Debt (as measured by the JP Morgan Emerging Markets Bond Global Index) has also seen strong performance year to date.
- Thanksgiving and equities, both tend to be well received in November. The seasonal statistics suggest that U.S. equities are likely to move higher in November. Today on the LPL Research blog, we take a look at the seasonal patterns for not only the broad-based equity index, but also its sectors and industry groups and how they fare during this month.
- Challenger Job Cuts (Oct)
- Weekly Jobless Claims (Oct 28)
- Nonfarm Production and Unit Labor Costs (Q3)
- Bostic (Dove)
- Italy: Markit ADACI Manufacturing PMI (Oct)
- France: Markit France Manufacturing PMI (Oct)
- Germany: Markit Germany Manufacturing PMI (Oct)
- Germany: Unemployment Change (Oct)
- Eurozone: Markit Eurozone Manufacturing PMI (Oct)
- Bank of England: Bank Rate
- Japan: Consumer Confidence (Oct)
- China: Caixin China Services PMI (Oct)
- Change in Nonfarm, Private & Manufacturing Payrolls (Oct)
- Unemployment Rate (Oct)
- Average Hourly Earnings (Oct)
- Average Weekly Hours (Oct)
- Labor Force Participation & Underemployment Rates (Oct)
- Trade Balance (Sept)
- ISM Non-Manufacturing Index (Oct)
- Factory Orders (Sept)
- Durable Goods Orders (Sept)
- Cap Goods Shipments & Orders (Sept)
- Markit Services PMI (Oct)
- Kashkari* (Dove)
- UK: Markit UK Services PMI (Oct)
- ECB: Coeure