Stock market climbing and rates flat

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Published Date 12/4/2017

This is a key week for markets. On Saturday morning, the Senate passed its tax cut package as was widely expected. The next step is for the conference committee to iron out the differences between the House version and what the Senate pulled together; then to full votes in both the House and Senate. No Democrat in the Senate will vote for the bill, mostly political. There are some key differences between the two versions, but likely we will have a bill signed by the president before the end of the year. Before the beginning of the tax cut bills, we expected a little more debate and worried a bill was unlikely to pass this calendar year; two weeks passed between the day the House Ways and Means Committee unveiled its tax plan and the day the full House passed the measure. On the Senate side, 23 days passed between unveiling details of a tax plan and passage. Very rapid for any Congress. The last major tax overhaul in the mid-1980s took about 18 months to get it passed.

The government will run out of money to pay bills next Saturday morning. The Congress is working on an extension that will last only until the 22nd of December; then a more lasting spending bill will have to be passed. Not to worry, no politician regardless of the party affiliation wants a government shutdown.

This is employment week: November employment report out on Friday; generally increases volatility. Wages remain an important component in the employment data; current estimates for average hourly earnings in November +0.3% after no increase in October, annual average hourly earnings thought to be +2.6% and up from 2.4% in October. (calendar below has the complete details).

The bond and mortgage markets remain in tight ranges even as stocks increase. Foreign buyers presently driving equity indexes higher. Back in 2012, foreign stock buyers retreated from heavy US buying, but recently they are back pushing indexes ever higher. In a sense rather surprising in that the tax cuts have been widely expected within markets; most times when markets front run a major event like a tax cut, the benefits are mostly baked into current levels. This time, not the case; the key indexes appear to have no end to how high they will increase. Tax cuts are the keystone, but also the strength of the present economy is adding to the euphoria in equity markets. The most recent Atlanta Fed GDP forecast for Q4 was a growth rate of 3.5%. If that holds as the data continues to flow, the economy would have increased from 3.3% in Q3.

The long end of the curve continues to impress, holding at low levels within tight ranges for mortgage rates. A week from Wednesday, the FOMC meeting and another rate increase in the Federal Funds rate. The Fed will increase the rate, there is little debate now. Next year still a toss-up, but presently the consensus is the Fed will move three more times.

This Week’s Calendar:

Today
- 10:00 am October factory orders were expected down 0.4%, as released down 0.1%
Tuesday
- 8:30 am October US trade deficit (-$47.1B)
- 10:00 am November ISM Services sector index (59.0 from 60.1)
Wednesday
- 7:00 am weekly MBA mortgage applications
- 8:15 am November ADP private jobs (+192K from +235K in October)
- 8:30 am Q3 productivity and unit labor costs, 2nd look (productivity +3.3% from +3.0% on the preliminary report; unit labor costs +0.2% down from 0.5% on the preliminary)
Thursday
- 8:30 am weekly jobless claims (240K from 2389K last week)
- 3:00 pm October consumer credit (+$17.0B from $20.8B in Sept)
Friday
- 8:30 am November employment data (Unemployment 4.1% unch from October, NFP jobs +185K, private jobs +183K, manufacturing jobs +20K, average hourly earnings +0.3% yr./yr. +2.6%)
- 10:00 am October wholesale inventories (-0.1%) Final November U. of Michigan consumer sentiment index (98.8 from 98.5)

Source: TBWS

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