Signs of an economic pick up within the US economy generally supported demand for stocks and the U.S. dollar as treasuries continued to selloff last week. Ten-year yields touched a recent high of 2.40% at the time of this write-up. Two-year yields reached 1.51%, climbing to its highest level since 2008. Both the Dow and S&P rose for a fourth straight week. The greenback rallied, with USD/JPY breaking 113 and hitting its highest level in three months.
A spike in September U.S. wages fueled the optimism and perception that inflation may be picking up, giving more ammunition for the Fed to hike rates. The probability of a year-end rate hike jumped to 77% compared to 70% a week ago. While September payrolls fell by 33k, market participants largely attributed the decline to the hurricanes. The unemployment rate dropped to a 16-year low of 4.2%. Earlier in the week, ISM manufacturing and nonmanufacturing numbers released hit multi-year highs.
Optimism on the street was further exacerbated with the newfound potential of tax reforms. The House passed a $4.1 trillion budget blueprint last Thursday – the first step toward enacting tax reform.
Increased political tensions with North Korea partly offset the optimism on Friday, as a Russia news agency reported that further test missiles may occur on or around Tuesday, October 10, 2017, on the anniversary of the founding of the ruling Korean Workers Party.
Earlier in the week, the Senate approved Randal Quarles, a former Treasury official, and banking lawyer, to the Federal Reserve’s Board of Governors. Quarles is considered a proponent of financial deregulation and will oversee a review of banking regulation as Vice Chairman for Supervision. While Quarles may not have an immediate influence on monetary policy, he is expected to favor hiking rates more rapidly. His appointment marks the first for President Trump though he has yet to fill two more spots on the Fed’s board.
Up ahead this week:
There is a good chance that the dollar rally and treasury selloff will continue, on the back of the positive economic data from last week coupled with wage growth rising. The market keenly awaits the Federal Reserve’s minutes to be released on Wednesday.
While the US markets will be relatively quiet on Monday given the Columbus Day observance, key domestic economic data for the week include PPI and jobless claims (Thursday), retail sales and consumer price index on Friday.
Fed speakers scheduled to speak: Neel Kashkari (Tuesday), Rob Kaplan and Charles Evans (Wednesday), Jerome Powell and Raphael Bostic (Thursday), Eric Rosengren, Evans, Kaplan and Powell (Friday).
Overseas all eyes will be on Japanese economic sentiment (Tuesday), German trade data, UK manufacturing and industrial production, Australian inflation expectations (Thursday), French inflation data, EUR industrial production, Japanese foreign investments and Chinese trade data (Friday).
The ECB’s president, Mario Draghi is scheduled to speak on Thursday.
