November 03, 2017
Fed Chair, US Jobs, Tax Bill in Spotlight
A review of the week's top global economic and earnings news.
For the week ending 3 November 2017
Global equities set record highs again during the week, against a backdrop of solid economic and earnings growth. Yields on US 10-year Treasury notes edged lower, trading at 2.34% versus 2.42% a week ago. The price of a barrel of West Texas Intermediate crude oil firmed by around $2 to $54.60 this week. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 9.50 from 10.8 last week.
Trump names Powell to replace Yellen
US president Donald Trump nominated Jerome Powell to replace Janet Yellen as Federal Reserve Board chair. Powell has been a member of the Fed Board of Governors since 2012. If confirmed, he is expected to maintain monetary policy continuity while rolling back some post–financial crisis banking reforms.
US unemployment rate falls to lowest level since 2001
The US economy created 261,000 new jobs in October as the labor market rebounded from disruptions linked to hurricanes Harvey and Irma. The bounce-back was somewhat smaller than economists had forecast, however, falling short of the 310,000 consensus view. The unemployment rate fell to 4.1%, a 16-year low. Average hourly earnings disappointed, coming in unchanged versus the prior month, and rising at a 2.4% rate year over year, down from 2.8% last month.
Republicans flesh out tax bill
Corporate tax cuts make up the centerpiece of the tax reform proposal unveiled this week by Republicans in the US House of Representatives. Among the bill’s provisions is one that would permanently lower the corporate tax rate from the current 35% to 20%, though interest deductions for businesses would be limited. The plan retains the top 39.6% income tax rate, but raises the threshold at which the tax would kick in for married filers from $470,000 to $1 million a year. Under the proposal, the 40% estate tax would be eliminated in 2024, while the estate tax exemption would immediately double to $11.2 million per married couple. Unchanged under the plan would be 401(k) plans, though deductions for state and local income taxes would be eliminated. Property tax deductions would be limited to $10,000. Some of the themes emphasized in the bill are the elimination of many tax credits, deductions and exclusions, which could simplify the complex tax code somewhat. However, other provisions make it more complex in areas such as the taxation of pass-through businesses.
BOE hikes rates for first time in decade
The Bank of England’s Monetary Policy Committee hiked its policy rate from 0.25% to 0.5% this week, the first increase in more than 10 years. The move comes in reaction to a post-Brexit surge in inflation, largely because of weakness in the pound sterling that resulted in rising import prices. The MPC indicated that further rate hikes are expected “at a gradual pace and to a limited extent.” The pound fell 1% after the announcement while yields on United Kingdom government bonds declined, aided in part by concerns expressed by the MPC that the uncertainty surrounding Brexit will continue to weigh on domestic activity, which has slowed even as global growth has accelerated. The last time the MPC hiked rates was in July 2007.
Fed left policy on hold
The Federal Open Market Committee left rates unchanged at their November meeting but hinted that a rate hike remains likely at its December meeting. The FOMC statement acknowledged that late-summer hurricanes had caused mild economic disruptions but that they were unlikely to persist over the medium term.
US consumer confidence hits 17-year high
The Conference Board’s consumer confidence index rose to the highest levels since December 2000, spurred by surging equity prices and tight labor markets. In addition, investor confidence reportedly rose this week, with the Investors Intelligence survey hitting a bullish reading of 63.5%, up from 63.2% a week ago. In early September the index stood at an eleven month low of 47.1%.
Venezuela seeks debt restructuring
Venezuelan president Nicolas Maduro said Thursday that his country will seek to restructure the nation’s outstanding debt. Maduro said state-owned oil giant Petroleos de Venezuela will make a principal payment of $1.1 billion on Friday for a bond that came due on Thursday. However, US sanctions against Venezuela will make the restructuring more challenging because of restrictions on US investors dealing with Venezuelan officials.
With nearly 80% of the constituents of the S&P 500 Index having reported, third-quarter earnings are expected to increase 5.9% compared with the same quarter a year ago. Stripping out the insurance sector, which was hampered by the impact of several hurricanes, the growth rate rose to 8.5%. The blended revenue growth estimate is approximately 5%, according to FactSet Research.
|Mon, 6 Nov||eurozone, UK||Service sector PMIs, investor confidence index|
|Tue, 7 Nov||Australia||Reserve Bank of Australia rate-setting meeting|
|Tue, 7 Nov||eurozone||Retail sales|
|Wed, 8 Nov||China||Trade balance|
|Thu, 9 Nov||United States||Wholesale inventories|
|Fri, 10 Nov||United Kingdom||Industrial production, trade balance|
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg New; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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