The first week in October began with great news of a tri-party North American trade deal but sovereign checkbooks in Europe and a hawkish U.S. turned things south as the week progressed. Italy’s push of the ECB envelope on budget deficit thresholds drove volatility higher, reminding us that European growth and political situation remain tenuous. In the U.S., hawkish comments from Fed chair Powell served notice that intent for policy rates is clearly higher and the bond market responded, particularly on the long end of the curve.
- Yields moved sharply higher on the back of continued strong U.S. economic growth indications (ISM) and hawkish Fed comments. 10-year and 30-year yields hit seven- and four-year highs respectively.
- The big move in rates, due to strong economic results, hit interest rate sensitive assets like preferred stocks, REITs, and bonds particularly hard but curve steepening is helpful to bank stocks (financials).
- Despite the down week for the S&P 500, it closed only 13 points below the 2,872 record high set back in January.
- Having led the way largely over the past three years, large cap growth stocks (i.e. NASDAQ 100) have been in a downtrend since mid-June. The NYSE FANG+ index is still up 22%ytd, but since its peak on June 20th is down 10.8% and below its 200-day moving average for the first time since June 2016. The S&P 500 is up 5.1% over the same period.
- Terms for NAFTA renegotiation (USMCA) were settled last week which now go to each country’s legislatures for approval. The terms represent a slight improvement for the U.S. but carry no meaningful economic impact. Markets hadn’t priced in very much risk premium on this front, so deals are not being viewed as material across the financial markets.
- USMCA highlights included auto-industry minimum wage and export parameters, opening Canadian dairy markets to the U.S., a 16-year non-punitive sunset clause, and preserving the NAFTA dispute resolution mechanism.
- Despite political chaos and high deficit levels in Italy, unemployment has fallen 1.08% over the past two months - the largest two month decline since 2004.
- China took a notable stimulus step of suspending environmental reform incentives in an effort to boost corporate spending.
Economic Release Highlights
- Job growth wasn’t as strong as expected in September, but the unemployment rate ticked down to 3.7%, a record low last seen in 1969 and August job growth was revised much higher.
- September wage growth came in at 2.8%, nowhere near an alarming level but reinforcing the upward trend we’ve seen over the past few months. The 3m/3m annualized wage growth rate is at levels not seen since coming out of the GFC in 2009.
- September ISM non-manufacturing index hit 61.6, the second highest composite reading it has registered since its 1997 inception and the highest two-month surge on record. Key drivers were a record high in employment and a 14-year high in business activity.
- September ISM and PMI manufacturing reports were, again, both very strong at 59.8 and 55.6 respectively.
- Global PMIs for September confirmed a decelerating global economy. DM (53.3), EM (50.8), and global average (52) are all in expansionary territory but have cooled from one year ago levels of 56, 52.1, and 53.9 respectively. Most notable decelerations were in China and Italy.