11/06/2017
It isn’t often that a monthly gain of 261,000 new non-farm jobs is considered something of a disappointment, but that was the case with the labor market’s performance in October. Due to the distorting impact of recent hurricanes on September’s jobs report, the Bloomberg consensus forecast had called for a rebound-driven gain of 313,000 new jobs. The revision of September’s initially-reported 18,000 loss to a gain of 33,000 essentially closed the gap between the forecast and the actual result, but the headline total fell short of expectations.
 
Given the weather-related noise in the data, the more meaningful three-month average gain rose to a healthy 162,000. But the decline in year-over-year average hourly earnings to 2.4 percent from a revised 2.8 percent in September added to the sense of modest disappointment. It’s worth noting that the wage data itself was likely distorted by the hurricanes. On a positive note, the unemployment rate fell to 4.1 percent, its lowest since December, 2000.
 
Changes underway at the Fed
 
There was little immediate reaction in the bond market to the jobs report on Friday, but yields did fall slightly by day’s end following the widely-anticipated announcement of the president’s nomination of Jerome Powell to succeed Janet Yellen at the Fed. Perceived as likely to continue Yellen’s measured removal of accommodation, as well as sympathetic to some loosening of financial regulation, Powell’s nomination is considered to be less disruptive for markets than other contenders for the job.
 
However, the yield curve did continue to flatten. The spread between the two-year treasury note yield and that of the ten-year fell to 72 basis points, the tightest since November, 2007. And there are more changes to come at the Fed, with reports that New York Federal Reserve president Dudley is expected to announce his retirement. Earlier in the week the Federal Open Markets Committee chose to leave rates unchanged, but did nothing to dissuade the market from expecting another rate hike in December.
 
Earlier in the week the headline Personal Consumption Expenditure (PCE) deflator for September climbed to 1.6 percent from the 1.4 percent level that had persisted since June. The year-over-year core rate remained at a subdued 1.3 percent, just fractionally above its lowest point in the past five years. In contrast, the Federal Reserve Bank of New York’s underlying inflation gauge for September, released several weeks ago, registered a reading of 2.8 percent.
 
Other economic data looking positive
 
The rest of the week’s economic data continued to show an economy that was continuing to expand at a solid pace. Consumer spending, consumer confidence, and motor vehicle sales all rose. The ISM manufacturing index declined slightly, but remained at a healthy level, while the services gauge rose to a new cycle high.
 
Stocks extended their streak of weekly gains to eight, although the advance was a modest 0.3 percent, as measured by the S&P 500. Corporate earnings reports continued to exceed expectations, and the long-awaited details of the Republican tax reform proposal were made public. That there were relatively few surprises among those details, along with the expectation that the final legislation is likely to look somewhat different from what has been proposed, resulted in little reaction in stock prices.
 
Eurozone growth slowing slightly
 
According to Eurostat, third-quarter GDP growth in the Eurozone slowed slightly from the second quarter, but the year-over-year pace of activity rose to 2.5 percent, a level not seen since 2011. The companion report on prices showed that inflation remains dormant, however. The trailing twelve-month consumer price index rose just 1.4 percent, with the core rate rising by just 0.9 percent. The euro was unchanged on the week, while the EuroStoxx 50 index climbed 1.0 percent on the week, its tenth straight weekly gain. But it was Japanese stocks that set the pace again last week, as the Nikkei index rose 2.4 percent in yen terms, its eighth straight weekly advance. The local currency MSCI Emerging Markets index also rose smartly on the week, rising 1.2 percent, halting a modest two week skid.
 
The expected pace of news flow slows down this week, and the economic calendar is comparatively light. Third quarter earnings season continues with approximately 20 percent of companies yet to report. And in Washington, negotiations will continue around the provisions of the proposed tax bill.  
 
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The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).

The Federal Reserve Bank of New York’s Underlying Inflation Gauge captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data. 
 
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
 
The ISM Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM).
 
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.
 
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 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. 
 
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
 
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
Indexes are unmanaged and are not available for direct investment.
 
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