The S&P 500 made it six straight weeks of gains with a 0.9 percent rise last week. More than half of the increase came on Friday after the Senate passed the budget resolution that moved Congress a step closer to delivering on tax reform. There is a long way yet to go, and there is no assurance that something meaningful will ultimately pass. But the odds have now increased, as one more procedural hurdle has been cleared. The view that tax reform had already been priced into the market was dispelled by Friday’s price action.

Bond yields also rose on the news. The ten-year note yield surged six basis points on Friday, and 11 on the week, to 2.38 percent, its highest level since early July. The two-year yield rose as well, but less so, just seven basis points to 1.58 percent. But that is its highest level in nine years, and resulted in a modest steepening of the curve. Contributing to the better sentiment was economic news from China, which reported year-over-year growth of 6.8 percent in the third quarter, reinforcing the view of a broad based global expansion.

Investors Paying Attention to Monetary Policy and Personnel Changes at the Fed

The expectation that the Fed will raise interest rates again in December has continued to rise. The Bloomberg world interest rate probability tool forecast for a December hike rose to 83 percent on Friday from 73 percent the previous week. The CME FedWatch tool odds climbed to 92 percent from 83 percent last Friday. The current Fed leadership has maintained its public posture that rates will, indeed, rise in December, and the current plan indicates another three rate hikes next year, although the ultimate path of policy remains dependent upon the data.

But, it remains uncertain who will lead the Fed beyond February when the current chair’s term expires. We may learn who the president’s nominee is as early as this week. The relative attractiveness of the candidates presumably in the running depends on how dovish or hawkish they are perceived to be. There is also the role of the Fed as regulator to be considered. The president has expressed his preference for low interest rates and a lighter regulatory touch. Investors presumably would welcome the same. They would also presumably prefer as little disruption as possible.

While the immediate uncertainty at the Fed relates to personnel, the other important central bank event this week relates to policy. This week, the European Central Bank is expected to announce a reduction in its quantitative easing program, beginning next year. Exactly what they announce, and the reaction in bond and currency markets will be watched carefully. And in Japan, prime minister Abe rolled to an election victory on Sunday, implying continuity in the Bank of Japan’s accommodative monetary policy.

Third Quarter Earnings Season in Full Swing

Third quarter earnings season ramps up this week with almost 40 percent of S&P 500 companies expected to report. The results so far have been mixed. Banks have been in the early spotlight, and weakness in trading has, in some cases, been offset by strength in wealth management. Investors have generally rewarded good execution, as companies as diverse as Morgan Stanley, IBM and Verizon have seen their results rewarded, while others have been punished. In the aggregate, earnings are now expected to rise by just 1.7 percent in the quarter, according to Factset. The quarter is understood to be impacted by the hurricanes and investors seem to be looking beyond it to some extent at the aggregate level, but perhaps less so at the company level.

That same sentiment applies to the performance of the overall economy in the third quarter. The advance estimate of GDP is scheduled for release on Friday and the Bloomberg consensus forecast estimates 2.5 percent growth. That would represent a decline from the 3.1 percent pace of the second quarter. But any decline in activity attributable to the hurricanes is expected to be recaptured by the rebuilding effort in the fourth quarter. The economic calendar this week also includes reports on manufacturing activity, durable goods orders and new home sales.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
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.
Bloomberg's World Interest Rate Probability (WIRP) uses Federal Funds Futures (FF) futures to infer the implied probability of future FOMC decisions.
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.
Indexes are unmanaged and are not available for direct investment.
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