Federal Reserve/Economic Reports

  • In a speech in Boston, Federal Reserve Chair Janet Yellen suggested policymakers could afford to be patient and that the Fed may need to overshoot its traditional unemployment and inflation targets for a short time to encourage business spending, bring workers off the sidelines, boost research and development, and prevent the economy from stalling. In a Wall Street Journal interview, New York Fed President Bill Dudley stated he expects rates to rise in the next two months.
  • Nonfarm payrolls rose by 156,000 in September, moderately below the consensus of 170,000, but high enough to view a Fed rate hike in December as likely. The average workweek improved to 34.4 hours, while year-over-year average hourly earnings rose 2.6%. The unemployment rate rose 0.1% to 5% as the participation rate rose. The unemployment rate for those with a bachelor’s degree or higher fell to 2.5%, while the unemployment rate for those that didn’t complete high school rose to 8.5%.
  • Retail sales rose in September by 0.6%, the most in three months, while August was revised up 0.1% to -0.2%. Sales rose at a 2.9% annual rate in the third quarter, well below the second quarter. Vehicle sales, gasoline stations, building materials, furniture, sporting goods and miscellaneous sales each rose by at least 1%. Electronics and appliances declined by 0.9%, and general merchandise fell 0.4%.
  • The Producer Price Index (PPI) increased by 0.3% in September, its first gain in three months and above estimates of 0.2%, while Core PPI for final demand climbed 0.2%. Year over year, PPI rose 0.7% and core PPI was up 1.2%.
  • Business inventories rose 0.2% in August, modestly above estimates, while retail inventories increased 0.6%, led by vehicles. Business sales rose 0.2%, led by wholesale, causing the inventory to sales ratio to remain unchanged at 1.39.
  • Job openings fell 6.7% to 5.443 million, its lowest level this year, causing the job openings rate to decline 0.3% to 3.6%. The number of unemployed per job opening rose to 1.44 from 1.33, below the historical average of 2.74.
  • The NFIB Small Business Optimism Index declined 0.3 points to 94.1 in September. The index is down 1.9 points vs. last year, well below the cycle high of 100.3 reached in December 2014, reflecting business caution. Five of its 10 components declined. The share of firms with job openings fell 6% to 24%. Capex plans declined, and the outlook for real sales growth was moderate.
  • The Conference Board’s CEO Confidence Index declined 2 points to 50 in the third quarter, indicating little change in attitudes ahead of the U.S. presidential election. Respondents’ assessment of current conditions was down slightly, while the near-term outlook was unchanged.
  • The ISM Non-Manufacturing Index (NMI) improved by 5.7 points in September to 57.1, above estimates of 53, and its highest level in nearly a year, as services activity recovered. All four NMI components rebounded, led by new orders, business activity and employment.
  • The ISM Manufacturing rose 2.1 points in September to 51.5, above estimates looking for 49.7, as factory activity improved. Nearly all components improved, led by new orders, production and employment. The ISM Price Index was unchanged at 53, reflecting limited price inflation.
  • The Atlanta Fed’s GDPNow estimate for the third quarter is now 1.9%, one half of the original estimate at the start of the quarter. Blue chip consensus is roughly 2.7%.

Financial Markets

  • Equity markets sold off in the first two weeks of October, as investors focused on weaker economic reports and the likelihood of a Fed rate hike in December. Reflecting this risk off behavior, small cap stocks had the weakest results domestically, falling 3.1%. The NASDAQ Composite was off 1.8%, and the large cap S&P 500 benchmark was down 1.55%.
  • Within international markets, the developed EAFE fell 2.15%, while the emerging market benchmark was down, but by a lesser 0.66%.
  • The yield curve shifted upward modestly, with yields on longer maturities rising more than shorter maturities. The two-year was up 7 basis points to 0.83%, the five-year up 14 basis points to 1.29% and the 10-year up 20 basis points to 1.8%. Inflation expectations, as measured by five-year forward inflation expectation rate, was 1.76% as of the end of the week, up from 1.4% in July. Investors in 10-year Treasuries are getting little real return (nominal yield less inflation expectations).
  • The probability of a Fed funds rate move by year end has moved up to 70%, with December as the most likely meeting for the announcement of a rate hike. The probability of another rate hike in the first half of 2017 remains low.
  • The trend in high-yield spreads remains favorable. Junk spreads versus Treasuries narrowed further, from 4.8% to 4.65%, with the greatest improvement seen in the lower quality rated debt. Low recession probabilities and the ongoing search for yield has been favorable for the asset class. Fitch lowered its high-yield default rate expectations for 2016 from 6% to 5% and initiated 2017 at 3% on expectations the economy will continue on its slow growth trajectory.
  • Oil prices continued to trend upward, reaching an intraperiod peak of $50.50 before finishing the week at $50.35 a barrel, up from $48.24 at the end of September. OPEC members are continuing dialogue regarding a potential freezing or reduction of production, while Russia appears willing to consider the same. Crude inventories rose for the first time since August. The number of rigs in production has increased as oil prices rose. The count is up 135 from its low of 404 in February, but is still down 159 this year and off 72% from 1,929 in November 2014.
  • The dollar has seen continued support and is now near a seven-month high, rising to 98.02 from a month-end level of 95.46. Rising expectations for a rate hike before year’s end is the primary source of this strength. The dollar rose to 1.0972 to the euro, and the pound has dropped to below 1.22.
  • Gold prices declined by $65 over the two-week period, lose some appeal as a Fed rate hike has become more likely. Holdings in gold ETFs have increased to the highest level since 2013, up 40% this year.
  • Similar with previous quarters, most companies cited the stronger dollar as a factor that either had a negative impact on earnings or revenues for the third quarter and in future quarters. Companies also cited higher wages as an issue. Additionally, the U.S. presidential election and events such as the U.K.’s referendum vote to exit the European Union continue to create uncertainty and volatility.

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Source: Bloomberg Data as of 10/14/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

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