Economic Outlook: General George S. Patton, the Economist?
- It was General George S. Patton that said, “There is a time to take counsel of your fears, and there is a time to never listen to any fear.” The big fear lever in the financial markets at the moment seems to be the swirling speculation regarding whether we might get a recession in the U.S. or global economy.
- We continue hearing questions from clients regarding whether a recession is imminent. Let’s follow General Patton’s advice and take counsel. For now, it makes the most sense not to listen to these fears as it is pretty difficult to make the case for recession in the U.S. The auto sales number last week was 18.24 million units annualized. Those are numbers close to 2005 record levels. Mortgage applications are up strongly. Housing starts are up on a 12-month basis in the mid to high teens. None of these look like recessionary data points.
- Last Friday’s Jobs report far exceeded expectations with 271,000 new jobs. There was stronger wage growth and the official unemployment rate is now down to 5.0%. This raises the possibility of a Fed move on rates in December, as they have maintained a close watch on the wage metrics in setting policy.
- ADP’s Employment Report was strong also, showing 182,000 new jobs. This report covers only certain private sector employers. That reading was in line with expectations.
- The most recent reports have confirmed in our minds also that fears about some sort of global recession are also overblown.
- China’s equity market finished last week particularly strong, posting its best session in the last two months and rising 4.3%. The catalyst for the move seemed to be further comments on financial reforms from the People’s Bank of China. Emerging markets were generally higher at week’s end, across the board.
- Global growth picked up momentum in October. The J.P. Morgan Global Composite Output Index climbed had previously hit a nine-month low in September of 52.8, feeding fears of approaching global recession. It rebounded to 53.4 in October, showing strength in both the manufacturing and service sectors.
- We also saw a pick-up in consumer confidence in Japan in the October numbers, now back near its highs from earlier in the year. The Japanese service sector posted strong numbers in the latest readings.
- If we don’t get recession, it is also difficult, to make the case for a significant bear market environment in equities.
Equity Markets: How Do You Spell Relief? E-A-R-N-I-N-G-S
- We have seen a significant rebound from the market heartburn of August and September.
- Corporate earnings reports are now largely complete for Q3. 74.0% of the S&P 500 companies are beating earnings forecasts. This is ahead of where we were at this point in Q2. The outperformance on the top line is not quite so robust – 44.0% are outpacing forecasts on revenue.
- The U.S. equity market closed the week strongly in the last hour of trading, erasing red ink that existed most of the day on Friday. The market is now close to its previous high and has enjoyed a strong rebound from the August-September lows. At this level, it appears to us to be fairly fully valued for the moment, though not over-valued.
- Though valuations seem to be in equilibrium, we could still see some further advance before year-end since a number of the worrisome irritants have been erased from analyst’s screens. How are market participants feeling RELIEF? Perhaps with four remedies: 1) Thanks to the budget agreement, there will be no government shutdown. 2) The market seems completely ready to digest a Fed interest rate hike, possibly as early as December. 3) Oil prices are off their earlier lows and 4) we have seen credit spreads in the corporate bond market narrow to a degree.
- All of these factors indicate more of a “risk on” environment.
Fixed Income Markets & the Fed: Janet is Watching
- After Friday’s Jobs report, the widely-followed U-3 rate for core unemployment stands at 5.0%. Getting less attention is the fact that the U-6 rate of the broader unemployed and under-employed dropped to 9.8% which is the first time in the six year recovery we have been below 10.0%. This U-6 number is one that Janet Yellen keeps an eye on.
- The futures market shifted odds of a rate hike in December from a little below 50.0% to as much as 68.0% after the release of the Jobs Report on Friday. The debate will now likely shift to a focus on what the Fed actually means when they predict that rate increases going forward will be “gradual”.
- Last week, the yield on the 10 Year Treasury note closed at 2.33%. This is a pretty big move and, after last Friday’s Jobs report, likely shows increased expectation that the Fed is more likely to finally move on the Funds rate in December. One week ago, it was at 2.14%.
The Week Ahead
- U.S., Initial Jobless Claims
- U.S., Retail Sales
- U.S., Producer Price Index