Last week saw the U.S. equity markets snap a three week winning streak, falling approximately 0.50%, while 10yr U.S. Treasury bond yields surged from 1.59% up to 1.72%. Gold traded sharply lower (down to its 200 day moving average) as did most industrial metals while the U.S. dollar strengthened nearly 1% against a trade weighted basket of other currencies. Crude oil traded higher on news of a tentative OPEC production agreement in Algeria and a fifth consecutive unexpected weekly decline in U.S. crude oil inventories.
One of the more notable events of the week included a promise by U.K. Prime Minister, Theresa May, that she will trigger Article 50 by March of 2017. This action will set in motion a two year period during which the U.K. will have to negotiate and complete their exit from European Union. The British pound fell 4.6% after Theresa May’s comments, hitting its lowest level since May 1985 on Friday in what looked like an algorithmic flash crash in the currency.
Several FOMC members were on the speaking circuit last week with various narratives including highlighting the damaging effects of chronically low interest rates, heightened inflation concerns, and questioning the ongoing efficacy of QE. Accordingly, interest rate sensitive assets traded all week as if they were pricing in a December rate hike with bonds and higher dividend yielding stocks losing ground. Since the September 21st FOMC meeting, high yielding and high valuation segments of the equity market have struggled as evidenced by utilities (-7.11%), REITs (-4.95%), telecom (-3.76%), and consumer staples (-1.62%).
Economic news for the week was positive on the margin with nine indicators beating estimates and nine missing estimates. The most anticipated release was the September jobs report which registered a slight uptick to 5% unemployment and 156,000 jobs. The report modestly missed estimates but did show decent wage gains of 2.6% year over year. Another interesting trend in the jobs report was labor force participation increasing to 62.9%, up 0.5% in the past year, which is the biggest annual increase in participation since 1995. The September jobs report was mediocre enough to take a November (pre-election) hike completely off the table yet decent enough to maintain support for a possible December rate hike by the FOMC. The September ISM Manufacturing report (51.5) beat expectations but the ISM Services report (57.1) absolutely crushed them registering its biggest monthly increase on record.
