The last week of October saw global equity markets claw back over 3% in what was a very difficult month overall for risk assets. Strong corporate earnings and a continued robust job market drove equity markets higher. Rates moved higher off the midweek flight to quality lows and the curve steepened. It was a roller coaster week with the U.S.-Sino trade dispute going from dire to hopeful on a Thursday morning POTUS tweet heard round the world which offered a constructive view of progress on a deal.
- Market related reports remained encouraging last week with a strong October jobs report, continued wage growth, strong corporate profits, and slowing, but still healthy, U.S. manufacturing sector metrics - all of which likely keep the Fed on point for a December hike.
- We are now past peak 3Q reporting with a solid earnings beat rate of 67.3%, more pedestrian revenue beat rate of 58.3%, and a marginally positive guidance spread. S&P 500 blended earnings growth is currently 24.9% (beginning of 3Q was 19.3%). If 24.9% holds, it would mark the second highest earnings growth since Q3 2010.
- Despite the highest annual wage growth since April 2009 (3.1%), the m/m rate slowed to 0.2% from several recent m/m 0.3%/0.4% readings. The October wage growth number was driven higher in large part by a weak October 2017 reading (base effect). Of note is that non-managerial wages have grown at a 3.94% annual clip over the past three months.
- Early in the week, the White House signaled willingness to enact tariffs on the remaining $267b of Chinese imports if talks fail later this month but then walked it back as the week wore on.
- Underneath near record high consumer confidence, the sentiment gap between Present Situation vs Future Expectation readings are at multi-decade wide spreads. Historically, this has been a concerning reading relative to the economic cycle.
- Bespoke highlighted the frequency of “higher costs” and “slowing activity” related comments in the response section of the ISM manufacturing report last week - more of a stagflation tone.
- Fed fund futures ended the week pricing a 72% likelihood of a 25 bps rate hike in December.
- Crude oil added to its reversal falling 6.5% last week, nearing bear market territory. It is still up 4.7% on the year, second only to the tech heavy NASDAQ (+6.5%) year to date. The oil selloff has pressured high yield bond returns due to energy sector spread widening similar to what occurred in the oil bear of 2015.
- The U.S. dollar held firm last week, still near a 16mo high versus a broad basket while the yuan rallied on trade breakthrough news but remains down meaningfully over the past year.
Economic Release Highlights
- 250,000 new jobs in October far exceeded estimates of 190,000. Headline unemployment registered 3.7% and annual wage growth climbed 0.3% to 3.1%.
- September headline and core PCE both came in right at the 2% Fed target. This metric has moved notably higher from summer 2017 levels but has been relatively flat since March 2018.
- September personal income came in lower than expected at 0.2% M/M (0.4% expected).
- September consumer spending was solid at 0.4% M/M, right at consensus and August was also revised slightly higher.
- August S&P Case-Shiller HPI grew 0.1% M/M and is up 5.5% Y/Y. Monthly price increases have fallen flat recently while annual rate has slowed from mid-6% range to mid-5% range.
- October consumer confidence held strong at 137.9, despite financial market volatility. The index is near an 18 year and all time high of 144.7 reached back in 2000. The strong job market is translating to no concern in consumer-ville.
- October's PMI manufacturing reading came in at a healthy 55.7. It featured 5-month high new level of new orders but was the slowest headline reading in six months. Cost pressures were highlighted from higher input costs and tariff-related pressures on metals.