The Week Ahead – The Smorgasbord

Welcome to “The Week Ahead” where each Friday we take a moment to provide our thoughts on what we can expect in markets and the economy for the upcoming week.

The classic Las Vegas buffet, a smorgasbord of options. Seafood, steak, salad, soups of all varieties, pastas, roast chicken, BBQ chicken, fried chicken. It can be overwhelming when you grab that first plate. Where and what to start with? The standard salad and some appetizers, or maybe straight to the crab legs and steak, or maybe start with another classic, dessert! This past week has been a smorgasbord of information: Fed meeting, new Fed Chair nomination, Tax Reform Proposal, ISM Manufacturing/ Non-Manufacturing, private payrolls, wage growth, and unemployment. Additionally, we saw October come to a close with a bang, with the S&P 500 rallying 2.3%, its best month since February. It wasn’t a broad rally however, as the tech sector accounted for over 75% of the S&P 500’s return last month. In case you wondering, Tech’s weighting at 24.5% in the S&P 500 is now its highest since October 2000.

Going back to the buffet line, the Fed kept rates steady and markets currently are assigning a +80% chance of a December rate hike. President Trump nominated Jerome Powell as the successor to Fed Chair Yellen. A trained lawyer who has been a Fed Governor since 2012 and prior to joining the Fed Board, a partner at Carlyle Group and worked in the Treasury under the GWH Bush Administration. The markets took this in stride as selection signals a continuation of the current Fed regime. However, expect a greater priority on scaling back financial market regulations.

The Republicans finally unveiled their tax reform proposal, which is estimated to cut taxes by a net $1.5 trillion over ten years. Early looks, it appears tax cuts appear to be distributed evenly between personal cuts, corporate cuts, and pass-through entities. A target 20% corporate tax rate is being proposed which is fairly aggressive. Individual deductions would limit state and local deduction to $10,000 in property taxes per household; no income taxes could be deducted. Mortgage interest deductibility would be limited to $500,000 principal on one residence. However, existing mortgage debt would be grandfathered. This is still in relatively early stages and the final bill to be voted could look dramatically different.

Lastly, this morning the employment information was released with unemployment dropping to 4.1%. The decline was primarily due to labor force participation declining. The U6 underemployment report, a better gauge of overall unemployment, fell to 7.9%, the lowest rate since December 2006. The highlight of the report however was continued disappointment in wage growth, which fell to 2.4% year-over-year, the lowest rate since February 2016. As noted previously, wage inflation typically translates into broad inflation. 

After this week’s glut of economic information, next week will be relatively quiet with the Federal Budget Balance as the key economic highlight given all the tax reform discussions.

Data deck for November 4 – November 10: