Weekly global market focus
Markets await Fed chair announcement
T-note yields continue to see upward pressure
S&P 500 rallies to new high with help from surge in FANG stocks
Core PCE deflator expected to be steady at +1.3% y/y
Weekly global market focus — The U.S. markets this week will focus on (1) President Trump’s expected announcement sometime this week of his pick for the new Fed Chair, with various media reports saying Fed Governor Jerome Powell is the likely pick, (2) the expected release of the detailed House tax reform bill on Wednesday, (3) a possible announcement today of the first indictment by Special Counsel Robert Mueller’s investigation, (4) the Tue/Wed FOMC meeting, which is expected to result in an unchanged monetary policy, (5) another big earnings week with 138 of the S&P 500 companies scheduled to report, (6) a busy economic calendar capped by Friday’s Oct payroll report, which is expected to show a strong +310,000 increase on a recovery from hurricane disruptions, and (7) anticipation of President Trump’s 11-day Asian trip, which starts this Friday.
In Europe, the focus is mainly on whether the situation in Catalonia will start to calm down after the Spanish government last Friday used Article 155 of the Spanish constitution to take full political control of Catalonia. The Bank of England at its meeting on Thursday is widely expected to raise its policy rate by +25 bp to 0.50% in response to inflation, thereby reversing the post-Brexit rate cut it implemented in Aug 2016.
In Asia, the Bank of Japan at its 2-day meeting on Mon-Tue is expected to leave its monetary policy unchanged. The markets will be watching for any signs that the Japanese stock market is due for at least a pause after the Nikkei index in the past 1-3/4 months has soared by +14% to a 21-1/4 year high. Japanese stocks have soared mainly on (1) the -6% sell-off in the yen versus the dollar seen since early-Sep and (2) Prime Minister Abe’s strong election win and the renewed mandate for Abenomics, the key plank of which is an easy BOJ monetary policy.
In China, the markets will be watching for any new government initiatives after the Party Congress concluded last week. In particular, the markets will be watching to see if the Chinese government resumes its deleveraging campaign and/or starts to push interest rates higher. The markets will continue to pay close attention to the +22 bp surge in the Chinese 10-year government bond yield seen in the past month to last Friday’s 3-year high of 3.84%.
Markets await Fed chair announcement — The markets are eagerly awaiting President Trump’s announcement of his pick for the next Fed chair, which is expected sometime this week. There have been numerous media reports saying that Mr. Trump favors Fed Governor Powell, although administration sources warn that a decision is not final until the public announcement has been made.
The markets are favoring a Powell or Yellen pick as a continuation of the Fed’s current go-slow policy, whereas the choice of John Taylor would be somewhat of a wild card since it is not known whether Mr. Taylor would push for a quicker rise in interest rates. Mr. Trump could throw the markets a bit of a curve ball if he appoints Mr. Taylor to the vacant position of Fed vice chairperson, where Mr. Taylor would still be in a position to push for higher rates. The betting odds at PredictIt.org for the next Fed chair are now 82% for Powell, 10% for Taylor, 10% for Yellen, 4% for Warsh, and 1% for Cohn.
T-note yields continue to see upward pressure — The 10-year T-note yield last Friday touched a 7-1/2 month high of 2.476% on the strong GDP report, but then fell back on media reports that Powell is favored for the Fed chair position, finally closing the day down -5 bp to 2.41%. Since posting a 1-year low of 2.01% in early-Sep, the 10-year T-note yield has soared by +40 bp to 2.41% due to (1) the +29 bp jump in expectations for overall Fed tightening by end-2018, (2) the +24 bp jump in the 10-year breakeven inflation expectations rate to 1.89%, which has been caused in part by the sharp rally in Dec WTI crude oil prices to a new 6-1/2 month high, and (3) uncertainty about whether John Taylor might be appointed as the new Fed chair.
S&P 500 rallies to new high with help from surge in FANG stocks — The S&P 500 index last Friday rallied to another new record high largely due to a surge in tech stocks on favorable earnings reports with Alphabet closing up +4%, Microsoft up +6%, and Amazon.com up +13%. Stocks were also boosted by (1) increased hopes for tax cuts, (2) the strong U.S. Q3 GDP report of +3.0%, and (3) reports that Fed Governor Powell is favored by President Trump as the next Fed chair.
This will be another busy earnings week with 138 of the S&P 500 companies scheduled to report. Notable reports include Mastercard on Tuesday; Facebook on Wednesday; and Apple and Starbucks on Thursday. The market consensus for Q3 SPX earnings growth is now +6.7% y/y, up from +4.7% a week ago, according to Thomson Reuters I/B/E/S. Earnings growth in Q3 of+6.7% would be down from +10.1% in Q2, but the consensus is for earnings growth to improve to +12.5% in Q4 and +11.0% in Q1. On a calendar year basis, the consensus is for SPX earnings growth of +11.3% in 2017 and +11.4% in 2018.
Core PCE deflator expected to be steady at +1.3% y/y — Today’s Sep personal spending report is expected to show a strong increase of +0.9%, mainly due to the sharp increase in spending on household goods and vehicles in the wake of the Aug/Sep hurricanes. On the inflation front, the consensus is for today’s Sep PCE deflator to strengthen to +1.6% y/y from Aug’s +1.4% y/y, but for the Sep core PCE deflator to be unchanged from Aug’s +1.3%. The Fed continues to view inflation weakness as transitory and even a weaker-than-expected deflator report today is not likely to deter the Fed from raising interest rates in December.