The capital markets in the U.S are becoming quite excited. Equity managers point to the fact that recent gains have lacked a degree of volatility and have seen steady gains. Bond managers have pointed to the recent sell-offs which have been relatively muted. Hence, there is nothing to fear.
The jobs report was interesting and this is where the quandary begins. Many businesses reported reduced payrolls, especially those in the restaurant trade. No doubt higher wages of $12 an hour is eating significantly into profits. Jobs fell in the hospitality industry some 105k. Overall jobs shed 33k and this is the first decline for 7 years. The unemployment rate slipped to a 16 year low at 4.2%.
The jobs report is important for yet another reason. Whoever Trump chooses as his next Chairman of the Fed will have to jump to the mantra of increasing employment is good for growth and does not lead to inflation. That’s where Yellen and her cohort apparently are wrong. The current Fed thinking is that increasing employment will lead to shortages forcing inflation higher and therefore rates have to rise to contain inflation.
What Trump wants from his person is to not raise rates quite so quickly. His argument is that if we add to jobs that leads to nascent demand and the economy can happily grow at 3% without affecting rates too much. That’s possible, because that’s exactly what the U.S. economy did in the 60’s and what occurred then was a technical revolution. Currently, that revolution in the U.S. is all about instagramming and facebooking, neither of which adds to productivity.
Being nostalgic won’t help the economy. The economy needs a productivity boost and that comes by way of capex and investment. Both are risky choices for CEOs and Boards because that requires thought and strategy. It’s much easier to borrow to do a share buy-back or increase dividends. Both strategies lead to higher pay for the CEO and senior management.
The employment number will be distorted for some time. The hurricane damage will lead to construction jobs and a number of service jobs. As we head towards winter, the storms in the north will play their part in slowing the economy at times.
For Trump and his team, he needs some wins. Getting the tax reform bill through will be a start. The distraction of North Korea is a red herring as that is just what it is a distraction to make Trump look good, otherwise his administration will be seen for what it is, floundering. Trump needs some wins and the stock market is certainly giving his administration time.
Equities: the S&P 500 fell 0.1%, the Dow fell 0.01% to set a seventh successive record close, and the Stoxx 600 fell 0.4%
Currencies: the euro rose 0.2%.
Bonds: were slightly weaker. The U.S. 10-year closed at a five-month peak at 2.37%. The two- year bond soared to a nine year high to close at 2.51%. The 30-year closed at 2.904%.
The bond market is factoring in a rate hike which at present has a probability of about 78% for December 2017. Geopolitical risk on the Korean peninsula may intervene. It appears as though the North Koreans may have a missile that can hit the U.S coast if a Russian lawmaker is correct in his assessment and what he was told by North Korean military personnel (tbc).
The U.S. bond curve was steady with the 2/10 closing at 85.7 bp, the 2/30 at 139.8 bp, and the 10/30 closed at 53.9bp.
The ECB said it will publish a breakdown of corporate bonds it owns. It will commence providing more detailed information shortly. The BOJ said its bond holdings had fallen in September. This is a sign that the bank is slowing purchases and is being less accommodative in its policies.
Commodities: Gold rose 0.5% and WTI fell 3%. Rosneft is said to be looking towards a significant boost in oil exports to China. Russia is currently China’s largest oil supplier.
Aussie Market Today.
Bonds are likely to be a little weaker on the day as U.S. bonds slipped Friday. Credit looks set to be better bid with the Itraxx now hovering around 68.957. Aussie bonds won’t weaken too far as the Australian economy is not that supportive for a rate hike nor a steep yield curve.
Geopolitical risk has increased with the potential that North Korea now has a missile that can hit the U.S. What Trump does, has yet to be seen but tensions are increasing as the war of words mounts. Diplomacy may take a backward step.