Congress passes CR to defer government shutdown threat until Dec 22
U.S. unemployment report expected to support view of tight labor market with contained wage gains
U.S. consumer sentiment expected to remain strong
May faces Brexit deadline ahead of next week’s EU Summit
Congress passes CR to defer government shutdown threat until Dec 22 — The House and Senate late Thursday both approved a continuing resolution (CR) lasting through Dec 22. That vote averted the possibility of a U.S. government shutdown on Friday night at midnight when the current CR expires.
The question now is whether Republicans and Democrats will be able to reach a spending deal to avert a shutdown on Dec 22. The two sides still need to agree on top-line spending levels for both defense and non-defense in order to produce a spending bill for the remainder of the 2018 fiscal year. There are a host of other issues that are tied to the spending bill including Democratic demands for a Dreamer solution.
Meanwhile, Republican leaders continue to work on the tax reform bill as negotiators deal with complex issues such as the alternative minimum tax, overseas corporate taxation, the taxation of pass-through entities, and a host of other issues. It remains to be seen whether Republicans will be able to produce a common bill that can pass the House and the Senate before their year-end goal.
We continue to expect Republicans to pass a tax reform bill since the House and Senate are mostly down to technicalities and since passage of the bill is critical for the Republican party’s future. The latest betting odds are 70% for a corporate tax cut by year-end and 89% for a cut by March 31, 2018, according to PredictIt.org.
U.S. unemployment report expected to support view of tight labor market with contained wage gains — The market consensus is for today’s Nov payroll report to show a solid increase of +197,000, which would be stronger than the 12-month trend increase of +167,000. There may be some extra job gains in November as the labor market continues to recover from the Aug/Sep hurricanes that produced a weak payroll report of only +18,000 in September and a partial +261,000 recovery in October. This past Wednesday’s Nov ADP report of +190,000 supported ideas for a solid payroll report today.
Meanwhile, the consensus is for today’s Nov unemployment rate to be unchanged at 4.1%. The unemployment rate in October fell to a 16-3/4 year low of 4.1%, providing another indication of the tight U.S. labor market. The U.S. unemployment rate is already below the Fed’s forecast for a Q4-2017 unemployment rate of 4.3% and has matched the Fed’s forecast for a 4.1% unemployment rate in 2018/2019.
The markets will be carefully watching today’s wage report to see if the Fed’s forecast comes true for wages to rise due to the tight labor market. The market consensus is for today’s Nov average hourly earnings report to strengthen to +2.7% y/y from Oct’s report of +2.4%. Today’s expected report of +2.7%, however, would still be below the recent 8-1/2 year high of +2.9% y/y. Any upside breakout in wages could quickly spook the markets since it would suggest that the Fed in 2018 would be under pressure to raise rates faster than currently expected.
U.S. consumer sentiment expected to remain strong — The market consensus is for today’s preliminary-Dec University of Michigan U.S. consumer sentiment index to show a +0.5 point increase to 99.0, regaining part of November’s Nov -2.2 point decline to 98.5. U.S. consumer sentiment in any case remains very strong at just -2.2 points below the 14-year high of 100.7 seen in October. The Conference Board’s consumer confidence index is in even better shape since it posted a 17-year high in November.
U.S. consumer sentiment is being supported by (1) the strong labor market and rising income, (2) strength in household wealth from the record high in the stock market and from steadily rising home prices, and (3) expectations for an individual tax cut. Negative factors for consumer sentiment center on Washington political uncertainty and geopolitical risks such as North Korea.
May faces Brexit deadline ahead of next week’s EU Summit — UK Prime Minister May is desperately trying to reach an agreement on the Northern Ireland border issue before the EU Summit next Thursday/Friday. That is the last divorce issue that is holding up an agreement by the EU to move on to EU-UK trade talks.
The question of Northern Ireland’s borders has become the most difficult Brexit issue so far. Ms. May is trying to get a deal by Friday morning so she can go to Brussels to formally present the deal and get a sign-off from EU officials.
The EU claims that the deadline for a deal is Sunday because EU officials begin meeting on Monday to prepare for the summit. However, the reality is that the EU would likely accept a deal right up until the summit itself.
If there isn’t a deal at next week’s summit to move on to trade issues, then the markets and businesses in the UK may start to panic since the odds will increase that the UK will crash out of the EU without a trade deal. A trade deal must be reached by late 2018 in order to provide time for the deal to be approved by national governments before the UK is automatically ejected from the EU in March 2019.
Sterling on Thursday recovered from a 1-1/2 week low to close the day +0.60% on optimism that a deal can be reached on the Brexit divorce issues before next week’s EU Summit. However, the UK FTSE stock index fell by -0.37%. The 10-year UK gilt yield on Thursday closed up +2.5 bp at 1.252%, but remained near the lower end of the Oct/Nov trading range.