Midterm elections largely produced the expected result and equity markets rallied on the diminished likelihood of market-adverse legislation like tax cut and regulatory rollbacks. The yield curve flattened slightly while the 10-year U.S. Treasury yield touched its highest levels since 2011. Beyond the elections, markets absorbed a modest economic calendar and it seemed apparent that oil, China, and the Fed are the key macro issues driving markets.
- A few interesting election anecdotes while we await final vote counts one week later. - POTUS investigation(s), debt ceiling showdown, and trade agreement angst (USMCA) are the most likely takeaways from the new Democratic House. - This was the largest swing in the House toward the D’s in an R Presidency since 1974. - Preliminary reports have this as the highest turnout for a midterm since 1914. - The Wed stock market reaction was the strongest in response to a midterm since 1982.
- Despite some evidence of decelerating economy, the FOMC meeting statement sent a reminder of their intent to hike once in December and three times in 2019. The market still sees one in December and two in 2019. The market is clearly looking for a Fed pause in 2019.
- Blended Q3 earnings growth is coming in over 25%. It is worth noting that despite tax law base effects kicking in starting Q1 2019, next twelve months estimated YoY earnings are still 34.78%.
- Last week’s closing 10yr UST yield of 3.24% seems very low from a historical perspective but the summer of 2016 1.358% yield wasn’t that long ago.
- A notable event in the attempt to handicap the U.S.-Sino trade conflict was last week’s hardline speech from President Xi which changed things at the margin because he now can’t back down without appearing weak. This conflict likely extends well beyond the 11/30 G20 meetings and tariffs on Chinese imports will spike from current 10% level to 25%.
- Oil prices hit bear market territory last week as U.S. sanctions on Iranian oil went into effect. U.S./Russia/OPEC all adjusted output to offset these sanctions and POTUS announced a six month waiver to eight countries to lessen their impact.
- There is debate as to whether the oil bear market is a reflection of slowing global growth or more pedestrian supply and demand adjustments. China reported record oil imports, last week.
- A surprisingly strong October PPI report (0.6%H/0.5%C) revealed the sharpest gains in 7 years and may have set the table for an upside surprise on CPI this week.
Economic Release Highlights
- Last week’s jobless claims of 214k is a record 192 straight weeks at or below 300K, 57 straight weeks below 250k, and 18 straight weeks below 225k.
- The BLS JOLTs survey showed a drop in job openings but no change in the quit rate which, at 2.7%, is at the highest level since the introduction of the survey in 2000.
- October’s ISM Services index slowed to 60.3 which is the first time in the history of the index there have been back to back >60 readings.
- The October services PMI increased over September to 54.8. Strong new orders and rising prices were common themes cited. The Composite reading fell from 61.4 to 60. Two of only four readings over 60 since the inception of the index happened in the last two months.
- Global manufacturing PMIs showed broad deceleration last week and services and composite PMIs this week were similar.