The Federal Reserve finally put an end to its quantitative easing program on Wednesday in a move that had been widely anticipated for a very long time.
Meanwhile, the stock market roared back to record highs.
This week brings us a lot of important economic data including the jobs report, auto sales tallies, and manufacturing PMIs. The US will also be holding its midterm elections on Tuesday, which should clear out some more uncertainty for investors.
Or it might not.
“If we have a really uncertain situation, where the Senate is divided and candidates are threatening recounts, that’s really not good,” said Newedge’s Robbert van Batenburg to Reuters.
Here’s your Monday Scouting Report:
How Significant Is Labour Market Slack? In its October FOMC statement on Wednesday, the Fed said “On balance, a range of labour market indicators suggests that underutilization of labour resources is gradually diminishing.” This contrasted with the September FOMC statement, which read “On balance, labour market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labour market indicators suggests that there remains significant underutilization of labour resources.”
Economists interpreted this as the Fed being hawkish, signaling that tighter monetary policy via higher interest rates would come sooner than later.
“[W]e disagree with the committee’s view on labour market slack,” Goldman Sachs’ Jan Hatzius wrote in a note to clients. “While the unemployment rate is now below 6% and the explicit phrase in the FOMC statement that ‘… underutilization of labour resources is gradually diminishing …’ is factually correct, the implicit notion that underutilization is no longer ‘significant’ — the term used in the July and September statement — looks inconsistent with the employment and wage data. Specifically, the focus on the drop in the unemployment rate below 6% ignores two important aspects of labour market slack — labour force participation and involuntary part- time employment.”
- Motor Vehicle Sales (Mon): Analysts estimate auto sales climbed to an annualized rate of 16.6 million units in October, down from 16.3 million in September. “The data have been very volatile lately, but are still up on a year-on-year basis, highlighting the materialization of pent-up autos demand,” Bank of America Merrill Lynch economists said. “We still think there’s room to go, and continued easing in credit access could support vehicle sales ahead.”
- PMI Manufacturing (Mon): Economists estimate this activity index fell to 56.1 in October from 57.5 in September. “Although output growth slowed to the weakest since March, the pace of expansion remains robust,” Markit’s Chris Williamson said. “Even expanding at this slower rate, the goods producing sector should help drive another solid upturn of the economy in the final quarter of the year. A concern is that growth of new orders weakened sharply, which may translate into a further slowdown in coming months.”
- ISM Manufacturing (Mon): Economists estimate this activity index slipped to 56.0 in October from 56.6 in September. “ISM looks ripe for further moderation,” Credit Suisse economists said. “Various regional PMIs and the Markit PMI Index appear to be cresting (although not falling sharply). Global growth evidence has been sluggish. And last month’s New Orders index, which tends to lead other ISM subcomponents, dropped 6.7 points (currently 60). In terms of risks, we would be more surprised by a rebound in ISM than a number which falls below our forecast.”
- Construction Spending (Mon): Economists estimate spending climbed by 0.6% in September. “Stronger homebuilding activity as housing starts rebounded 6% should boost construction activity, although the concentration of gains in starts in multi-family units provides less upside per unit than if credit-restrained single-family activity were doing better,” Morgan Stanley’s Ted Wieseman said.
- Trade Balance (Tues): Economists estimate the trade deficit expanded to $US40.7 billion in September. “Import prices fell more sharply than export prices in September, which should have led to about a $US0.7 bn narrowing in the gap,” BNP Paribas economists said. “However, a pullback in the ISM export index, a deceleration in Boeing deliveries, and slower outbound container traffic suggest that real export momentum may have softened after six months of solid growth.”
- Factory Orders (Tues): Economists estimate orders declined by 0.7% in September. “Durable goods orders decreased by 1.3% in September, suggesting a return to more normal changes in activity after the volatility in July and August (owing to a surge in non- defence aircraft orders in July),” Barclays economists noted.
- ADP Employment (Wed): Economists estimate private payrolls increased by 212,000 in October. “Initial jobless claims have continued to push lower over the month, supporting the labour market and job growth,” Bank of America Merrill Lynch economists said. “Employment components of regional manufacturing surveys also point to greater hiring. Looking at as-reported data, ADP employment growth was weaker than BLS private payrolls in September, after running stronger in the prior 3 months.”
- ISM Non-Manufacturing (Wed): Economists estimate this services sector activity index fell to 58.0 in October from 58.6 in September. “Weaker growth in core retail sales suggests that the index may have fallen a bit further, following September’s drop from August’s nine-year high,” economists at Capital Economics said. “What’s more, October’s flash Markit Services PMI fell from the previous month. However, a major slowdown in activity is unlikely.”
- Initial Jobless Claims (Thurs): Economists estimate the pace of weekly claims fell to 283,000 from 287,000 a week ago. “Initial claims have been below 300k for seven consecutive weeks and continuing claims have been steadily trending lower, suggesting solid improvement in labour market performance,” Nomura economists said.
- The Jobs Report (Fri): Economists estimate US companies added 240,000 nonfarm payrolls in October. The unemployment rate is expected to be unchanged at 5.9%. From Nomura: “The September employment report was broadly positive, with sizable upward revisions to the back months. Incoming data suggest strong economic momentum continued into October. Initial jobless and continuing claims are still near pre-recession levels. In addition, regional manufacturing surveys released thus far in October suggest that manufacturing employment continued to increase and consumers appeared to be slightly more optimistic about labour market conditions this month. Note that reports suggest that some companies plan to hire more seasonal workers this year than in the past, which could push up the timing of some hires. However, based on previous seasonal hiring trends, we believe this is more likely to affect the November employment report than the October report, but there is still some upside risk.”
- Consumer Credit (Fri): Economists estimate consumer credit balances increased by $US16.0 billion in September. “Nonmortgage consumer credit continues to rise quite rapidly, even with some moderation (initially) reported in August,” UBS’s Kevin Cummins said. “Over the last year, credit has risen by 5.0% ($US17.2 billion per month), slightly above the 4.2% increase in personal income but slightly below the 6.8% after taxes. Of course, total household debt growth also includes mortgage debt, which should rise as the housing market recovers.”
Wall Street’s equity strategists are more or less telling clients “I toldja so” in the wake of the S&P 500’s incredible rebound from October 15 lows. Like we said above, the focus has shifted to the midterm elections.
Deutsche Bank’s David Bianco argues that the most important policy issue for the stock market is how the US taxes foreign corporate profits. From Bianco’s October 9 note: “Most large US multinationals are exasperated by a high US corporate tax rate and especially by taxes imposed on foreign profits when repatriated. The S&P earns 40% of its profits abroad, up from 15% in mid 1990s. US companies cannot compete effectively abroad if they must pay taxes that companies headquartered elsewhere don’t. The slew of inversions, which Treasury recently rushed to impede, is evidence that US politicians don’t understand global businesses. Executives, while plenty patriotic, have a duty to put the company’s future first. Current US corporate tax rules impede globalization and thus growth everywhere. Visibility on a fix is key post election. The US doesn’t build walls to keep in and it shouldn’t tax like a global empire.”
As far as stock market returns are concerned, there are obviously always a lot of variables to consider. But generally speaking, the stock markets inclination is to go up.
“Since World War II, post-midterm election returns have averaged 17.5%, so time appears to be on our side for returns from October 2014 to October 2015,” S&P Capital IQ’s Sam Stovall said.
For more insight about the middle market, visit mid-marketpulse.com.
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