Hurricanes’ Ripple Effect on the Economy
The distortions in the September report were not confined to just the number of jobs. Average hourly earnings as measured by the Labor Department jumped 0.5 percent in the month, and by 2.9 percent over the past year, matching last December’s gain as the highest in this economic recovery. This strength was apparently distorted by the surge in utility workers deployed in the storms’ aftermath. It is for this reason that many were downplaying the strength in wages as not heralding the long-awaited inflationary impulse from falling unemployment.
But, perhaps the strength in wages should not be dismissed entirely. It is worth noting that average hourly wages were revised higher for each of the previous two months, neither impacted by the hurricanes. The July gain rose from 0.3 to 0.5 percent, and August rose from 0.1 to 0.2 percent. But it might take a couple of months before the jobs data is free from these distortions, and given the degree of noise in the report the bond market’s muted reaction was understandable. The yield on the ten-year note rose just one basis point to 2.36 percent. But that was still its highest level since mid-July, and over the past four weeks the yield has now risen 31 basis points. The next read on inflation will come on Friday with the September Consumer Price Index report. Both the headline and core rates are expected to move somewhat higher. But this report will also be distorted by the hurricanes, especially the impact of higher energy prices on the headline rate. Expect it to be largely overlooked as a result.
Focus on the Fed
Despite the lack of clarity on the inflation front, investors are overwhelmingly expecting the Fed to raise rates another quarter point at its December meeting, to which the CME FedWatch tool ascribes an 89 percent probability. A number of Fed officials have repeated their abiding belief in the relationship between employment and wage inflation, most recently outgoing Vice Chair Stanley Fischer in a television interview last week. Some at the Fed may also want to raise rates to give the Fed more room in the future to lower them if necessary, believing the economy is currently strong enough to absorb somewhat higher rates. Last week’s economic reports likely did little to suggest otherwise, particularly the ISM report on manufacturing conditions, which climbed to its highest level since 2004.
Third quarter earnings reports begin this week, and estimates published in FactSet’s Earnings Insight report have fallen to 2.8 percent growth year-over-year. Lower energy prices and catastrophic insurance losses are among the reasons. Investors, however, appear to be looking through this quarter to the fourth quarter and beyond as earnings growth is expected to rebound to 10 percent or more, according to FactSet. Banks are the first to report this week, including Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo. It is generally expected to be a mixed quarter for the banks, with less robust trading and investment banking activity. And the yield curve between two and ten-year notes contracted by eight basis points in the third quarter. The banks have been rallying lately, however, as the so-called reflation trade has returned and the yield curve has steepened once again.
Overall the S&P 500 rose 1.2 percent last week, as it recorded its fourth straight week of gains, having risen 3.7 percent over that interim. Conversely, crude oil gave back some its recent strength, unable to sustain its recent move above its 200-day moving average. On the week, WTI fell $2.38 to $49.29 a barrel. The dollar also added modestly to its recent strength.
Political risk in Europe is once again in the news and raising investor anxiety levels. An independence movement in Catalonia pushed Spanish equities lower by almost 2 percent last week, even as the broader EuroStoxx 50 index managed a fractional gain for its sixth straight weekly advance. And Austria goes to the polls this weekend when the populist Freedom Party hopes to do well following populist gains in the recent German election. And on this week’s domestic economic calendar is the retail sales report for September, which is also likely to be distorted by the hurricanes, and the University of Michigan’s consumer sentiment report. And on Wednesday the Fed releases the minutes of its September meeting.
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The CME Group FedWatch tool calculates unconditional probabilities of Federal Open Market Committee (FOMC) meeting outcomes to generate a binary probability tree. CME Group lists 30-Day Federal Funds Futures (FF) futures, prices of which incorporate market expectations of average daily Federal Funds Effective Rate (FFER) levels during futures contract months.
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
FactSet “Earnings Insight” Report, October 6, 2017, https://insight.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_100617.pdf
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
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