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Federal Reserve/Economic Reports

  • According to the November meeting minutes, FOMC members indicated the case to hike interest rates continued to strengthen. Many members believe a rate hike should happen “relatively soon” and argued that, to preserve credibility, such an increase should occur at the next meeting. Based on Fed fund futures, there is a 93% probability of a rate hike in December.
  • The Fed’s latest Beige Book, measuring the period between early October and mid-November, indicated activity continued to grow at a modest-to-moderate pace across most districts. Of note, the outlook for factory activity was positive, services activity grew, retail sales and housing activity improved, and employment grew.
  • The Labor Department said U.S. employers added a seasonally adjusted 178,000 jobs in November. The unemployment rate fell to 4.6%, the lowest level since August 2007, as 226,000 workers left the labor force (mostly part-time workers) and as the participation rate fell back to 62.7%, just above the cycle low of 62.4%. U6, the broadest measure of the unemployment rate, fell to 9.3% from 9.5%. Average hourly earnings rose 2.5% year over year.
  • The ISM Manufacturing Index rose 1.3 points in November to 53.2, above estimates for 52.5 and matching its highest since early 2015 as factory activity improved. Respondents’ comments indicated “increasing demand, some tightness in the labor market, and plans to reduce inventory.”
  • Third quarter real GDP was revised up to a 3.2% annual rate from an original estimate of 2.9%, caused by stronger consumer spending and residential investment but weaker capex and inventory investment than the early estimate. Final sales were revised up to a 1.7% annual rate from 1.4%.
  • The Conference Board’s Consumer Confidence Index rose in November to 107.1, above the estimate of 101.8 and its highest level since 2007. The increase is favorable for consumer spending growth during the holiday shopping season. Both the present situation and expectations indexes rose due to improvements in the outlook for business conditions, employment and income.
  • Housing starts surged 25.5% in October to a 1.323-million-unit annual rate, well above the 9.5% improvement expected. It was the biggest increase since July 1982, the fourth biggest gain on record and its highest level since 2007. Multifamily construction rose almost 75%.
  • CPI rose 0.4% in October, and core-CPI rose 0.1%. Year over year, CPI rose 1.6%, and core CPI rose 2.1%. Rising energy and shelter prices drove prices.
  • PPI remained unchanged in October, and core-PPI fell 0.2%. Year over year basis, PPI rose 0.9%, and core-PPI inflation was unchanged at 1.2%.
  • As of December 1, the Atlanta Fed’s GDPNow forecast for real GDP growth in the fourth quarter of 2016 is 2.9%, above the Blue Chip Economic Indicators consensus forecast of 2.2%.
  • The Citigroup Economic Surprise Index for the U.S. rose sharply over the latest three weeks from -6.3% to +24.7, reflecting better economic reports relative to expectations.

Financial Markets

  • Small cap stocks have continued to provide leadership during the most recent market advance, rising 2.5% over the latest three-week period. The S&P 500 returned 1.4% over the same period, and the NASDAQ was up 0.5%. The value style generated improve results, with the broad Russell 3000 Value index returning 2.9%, and the Russell 3000 Growth improving by 0.5%.
  • International markets were mixed, with the emerging markets rallying from oversold levels, up 0.5%, while the developed EAFE fell 0.4%. Year to date, the emerging markets are up 10%, and the international developed markets have generated a negative total return of 1.7%, weighed down by currency weakness relative to the dollar.
  • The Treasury yield curve again had a large upward move, with an anticipated gradual unwind of monetary policy and more stimulative and inflationary fiscal policies. The two-year was up 18 basis points to 1.1%, and the 10-year rose 23 basis points to 2.38%. The 10-year yield is now up 1% from its July lows, as the 5-year forward implied inflation rate increased from a low of 1.3% then, to a level of 2% now.
  • High-yield spreads fell to an option-adjusted spread of 4.5% over Treasuries, reaching new one-year lows. Spreads narrowed on higher optimism for improved growth and lower default risk, especially in the energy sector, which is showing improvement on the recent OPEC agreement to reduce production. Energy sector spreads fell almost 1%, reaching 4.8% over Treasuries versus its highs of 17.8% earlier in the year.
  • Oil prices rallied by $8.27 a barrel, over 19%, during the latest three-week period, rising to $51.68 on Friday. For the first time in eight years, OPEC members have agreed by January to reduce production in the amount of 1.2 million barrels a day. Russia and other oil producers also agreed to reduce output by another 600,000 barrels per day, an attempt to bring supply in line with demand. Due to the OPEC agreement and resulting strong upward move in prices, energy-related ETFs saw strong inflows.
  • Because the FOMC is likely to raise rates at their mid-December meeting, the broad trade weighted dollar index rose by 1.7%, closing the period at 100.77. The index traded to an intraperiod high of 101.7. The euro dropped by 1.8% against the dollar, to 1.066 euro/dollar. The euro has weakened further in Sunday overnight trading as the Italian prime minister announced his resignation after being defeated in the national referendum, causing many to target euro/dollar parity over the next number of months.
  • Gold continued to weaken as investors favored financial assets over the safe-haven metal. Spot prices fell by over $50, or 4% to $1,177/ounce. Silver prices also declined, by 3.6%, while copper rose by 3.6%.
  • For the fourth quarter of 2016, the estimated earnings growth rate for the S&P 500 is 3.3%, down from 5.3% at the beginning of the quarter. The decline in the bottom-up EPS estimate recorded during the first two months of the fourth quarter was smaller than the one-, five- and 10-year averages.
  • After the most recent rally, the Investors Intelligence Bull/Bear ratio stands at 2.52, below the level of 3 considered to be overly optimistic.

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Source: Bloomberg Data as of 10/28/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.