Equity markets rallied, and interest rates moved slightly higher last week. Tax reform, the Russia probe, Jerome Powell’s Senate confirmation hearing, and a big week for retail were the primary highlights. The stock market highlighted both winners (small caps, retail) and losers (multinational tech stocks) of the tax package. Flynn’s plea deal makes certain that the collusion/obstruction conversation is going nowhere. Powell indicated he will maintain the same course as Yellen’s Fed which markets applauded.

Market Anecdotes

  • The economy is growing, financial conditions are loose, industry de-regulation is in full swing, inflation is benign, and unemployment is the lowest since 2000. For good measure, the Senate passed a significant fiscal stimulus package – The Tax Cuts and Jobs Act. The bill is projected to add approximately $1t to the federal deficit over 10 years and stimulate economic growth by nearly 0.7% in the first year.
  • The shift from brick and mortar to online further solidified itself last week with ‘Cyber Monday’ generating a record $6.6b in sales for an increase of 17% over last year.
  • 1yr Treasury yields have doubled over the past 12 months while the 10yr, 20yr, and 30yr yields are all lower than where they were at this time last year. A flattening yield curve, which typically happens during the later stages of tightening campaigns, hurts bank stocks by reducing their net interest margin. Lighter bank regulation is certainly a tailwind, but regional banks will remain under pressure if curve flattening persists.
  • A December 14-15 European summit is the next crucial step in the Brexit saga. Here, Prime Minister Theresa May must convince EU leaders that “sufficient progress” has been made on U.K. payments to the EU and the rights of EU nationals living in the U.K. If EU leaders are not satisfied, the all-important trade talks won’t happen until March 2018, which would greatly increase the risk of leaving without a deal.
  • October’s job report indicates that wage growth was strong for the low- and middle-income earners, fitting with the anecdotes that minimum wages are going up and many industries are struggling to find workers.
  • This year’s average growth rate of capital expenditures has been the best since 2014, with significant increases in mining structures and both IT and industrial equipment suggesting it’s likely to remain on an accelerating path well into 2018.

Economic Release Highlights

  • The second estimate of 3Q GDP was revised 3 tenths higher to a 3.3 percent annualized rate.
  • Citi Economic Surprise Indices for the U.S. and Europe are near their highest levels in years. Japan is still in positive territory but has pulled back in recent weeks while EM & China have languished since mid-year.
  • New home sales rose 6.2 percent in October to a 685,000 (600-650 expected) annualized rate and a new expansion high. Year-on-year sales are up 18.7 percent for a nearly 2 percentage point gain from September. Supply on the market remains very tight, falling from 5.2 months down to 4.9. For perspective, housing supply back in August was 5.9 months.
  • Consumer confidence surged to a 17-year high in October. Optimism that stock prices would rise also surged to multi-year highs and remains near its highest levels since 2003. Conversely, expectations that stock prices will fall has plummeted, and in this month’s survey dropped below 20% for the first time since 2007.