While the market was inundated with market news and economic data last week, this upcoming week will be a pivotal one:
- President Trump is expected to announce his nomination for Fed Chair; his pick will have obvious implications on the path and velocity of interest rates hikes.
- Congress is expected to share its tax reform legislation, which will have an impact on equities and the USD.
- Notwithstanding the FOMC meeting, two other Central Banks will also hold meetings.
- About 120 of the S&P 500 are expected to announce earnings (including tech giants Apple and Facebook).
- Highly anticipated October payroll data is to be released on Friday.
All to say that the market may see volatility it has not encountered for some time over this coming week…
Treasury volatility as measured by the Bank of America Merrill Lynch’s MOVE Index, which considers price swings in the U.S. Treasury market, is close to highs not seen since May. Further 10-year treasury yields hit levels not seen in five months over the week. At the time of this writing, they were trading at 2.426%.
First, a quick review regarding last week’s activity, which included: key economic data, a slew of corporate earnings, some activity on Capitol Hill, an ECB meeting and the market grappling with the front-running candidates for FOMC chair.
Third quarter domestic GDP data came in much stronger expected on Friday, around 3% compared to the market’s expectation of 2.7%. The number is largely driven by consumer spending, this in part surprised to the upside, given the two hurricanes that recently hit the heavily populated states of Texas and Florida. It is also the first time in three years where GDP posted ~3% growth for two consecutive quarters.
Strong corporate earnings largely fueled equity markets particularly in the tech sector where Amazon and Alphabet Inc. (Google’s parent company) both reflected strong profits, sending the Nasdaq 1000 to enjoy its biggest gain in about a year with the S&P 500 hitting record highs. Similarly, positive earnings abroad helped boost foreign stock markets. The Nikkei 225 average reached highs not seen in over two decades.
The House of Representatives passed a budget resolution, paving the way for a tax overhaul, including potential cuts by year-end. The USD rallied to levels not seen since July, on the back of the news.
As expected, the European Central Bank, extended its asset purchases at EUR30 billion a month to September 2018. The bank also stated that interest rates would remain at their current levels, even beyond the end of its purchase program. Some participants expect the bank to start tightening rates by mid-2019 followed by a gradual reduction of the balance sheet in 2020. Inflation for the region continues to remain low and below the ECB’s target, while unemployment is expected to tick lower and the prospects of higher wages may in time generate a pickup inflation.
President Trump is expected to announce the next chairperson of the Fed by November 3rd. He is considering the following nominees: Janet Yellen, current FOMC chair; John Taylor, Stanford University economist and former Treasury official; Jerome Powell, a current Fed governor; and Kevin Warsh, a former Fed governor.
Powell is considered the most likely pick, according to a recent market survey. Although, it was reported that Republican Senators largely favor Taylor, which at the time gave a boost to the USD. Taylor is expected to raise interest rates at a faster pace than the current chair, Yellen.
This Week, It’s All About The Banks, The Central Banks….
- Three central banks have policy meetings this week. The Bank of Japan kicks things off on Tuesday. While no rate change is expected, the market will keenly await any clues to policy changes in the post-meeting press conference. It is rumored that the BoJ may slightly cut its expectation for inflation from 1.1% for the fiscal year ending in March 2018. Recent data indicated that inflation remained unchanged in September.
- The Fed will have its two-day meeting, concluding on Wednesday. It is largely expected that the Fed will keep rates status quo and will hike once more at its December meeting. Last week’s economic data, including GDP growth, gives the Fed more reason to hike. In terms of Fed officials taking the stage this week, William Dudley and Raphael Bostic will speak on Thursday followed by Neel Kashkari on Friday.
- The Bank of England will wrap up the central bank circuit with its rate announcement on Thursday. Strong economic third quarter data last week gives the BoE more of an incentive to hike rates for the first time in a decade.
- In terms of U.S. economic data: core personal consumption data (Monday), ISM Manufacturing and Prices (Wednesday), construction spending, EIA crude oil stockpile change, jobless claims (Thursday), nonfarm payrolls (Friday), unemployment rate, trade balance and PMI data.
- Overseas key releases include: German retail sales (Monday), Euro economic sentiment, Japanese unemployment rate, GBP consumer confidence (Tuesday), French CPI, Euro GDP, CAD GDP, NZD unemployment, Japanese foreign investment data (Wednesday), German unemployment (Thursday), AUD retail sales (Friday), China service PMI, CAD trade PMI data.
