Thankfully after today we can stop speculating on what the stock market is going to do depending on who the next President is. Now I don’t want to downplay the importance of our next leader, especially with regards to major issues like taxes, regulations, trade policy, and the next Supreme Court Justice but when it comes to the direction of the stock market in the next few years, it will be all about the direction of interest rates as that has been the predominant driver of this bull market. Sorry if I keep repeating myself. The lone exceptions and what will be highly dependent on the today’s winner will be healthcare of course because when the government is paying most of the bills…, financials because when the government is suffocating the industry with regulations…, and defense spending for obvious reasons. For every other industry, your short term stock market fate will not be determined tonight. It didn’t matter who won the 2000 Presidential election, it wasn’t going to stop the bear market in technology. It didn’t matter who won the 2008 election, the final March ’09 plunge in markets and subsequent multi year rebound was going to happen anyway.
The S&P 500 closed yesterday at 2131.52 and is now 2140. Its 2015 peak last May was 2130.82. After breaking above it in July and breaking below in October begs the question over whether it’s now a ceiling if it fails or remains a floor if it holds. Broadening out the market view by looking at the NYSE composite saw it close at 10,500 yesterday. It closed at 10,646 on the day the Fed ended QE3. The point is, the market has done essentially nothing for the past two years after QE ended and one year after the Fed first hiked rates and who wins tonight won’t change that path. Granted, massive QE in Japan and Europe has certainly mattered for global markets but you get my point.
As for the Fed’s December meeting, some are speculating that maybe they won’t hike if Trump wins because who knows what will follow but let’s put a stake in their credibility if that’s what stops them. Here is a chart of the CRB raw industrials index to reiterate the end of the commodity bear market and its implications for inflation. This does not reflect a pick up in demand of notice but the result of a year of supply cuts. Read below on growing wage pressures.
As we approach a likely Fed rate hike next month, the 3 yr note auction (highly sensitive to rate expectations) was mediocre. The yield was about in line with the when issued but the bid to cover of 2.69 was below the one year average of 2.86 and matches the weakest level since 2009. Also showing weakness was that dealers got stuck with almost 50% of the auction, well above the one year average of 37% and the highest level since June 2014.
Also of note today, inflation breakeven’s are moving higher with the 5 yr and 10 yr levels just off the highest level since July 2015. The conventional 10 yr note yield and the 30 yr bond yield today are breaking out to the highest since late May.
For risk assets that have been boosted by low rates, this is what matters most to stocks as we head into 2017, not who our next President will be.
The NFIB October small business index rose to 94.9 from 94.1 in September. Encouragingly it’s at the best level since last December. The internals however were very mixed. Plans to Hire and Capital Spending plans were unchanged. Those that Expect a Better Economy fell 7 pts after rising by 12 last month. Those that Expect Higher Sales fell 3 pts after rising by 5 last month. Positive Earnings Trends remained deeply negative at -21, down 1 pt. To the inflation point above, let’s add wage pressures, especially after Friday’s payroll report. Net Compensation rose 3 pts to 25, a 5 month high and Net Compensation plans for the future jumped 5 pts to the highest since December. Higher Selling Prices, the lever to offset rising labor costs, rose 3 pts but only after falling by 4 in September.
Bottom line, notwithstanding the headline gain (which the NFIB called ‘meager’), the internals were soft for business but positive for employees. The CEO of the NFIB said “The data contained in this report shows record levels of uncertainty among small business owners, and it is tied directly to the election, the result is economic inertia, with business owners unwilling to make the business decisions that would jumpstart the economy.” Also, “nearly half of the respondents cited taxes or regulations and red tape as their ‘Single Most Important Business Problem.’ I wonder who those respondents are voting for?
China’s exports in both yuan and dollar terms fell more than expected in October and is not getting the hoped for lift from a weaker yuan. The decline was 3.2% in yuan and 7.3% in US dollars. It’s clear that soft global trade and a shift in the composition of Chinese growth are offsetting the FX impact. Imports grew by 3.2% in yuan but fell 1.4% in US dollars. On a m/o/m basis the volume imports of copper, steel, iron ore, coal, crude oil and refined products all fell but still remain mostly higher y/o/y. In response to the softer data, the yuan is falling to a fresh 6 yr low vs the US dollar. Chinese stocks rallied by about .5% and while Asia was green across the board by about .5% as well.
Of particular note in China overnight was the Q3 monetary policy report from the PBOC where they pledge to “rein in asset bubbles and guard against economic and financial risks.” I guess acknowledging a problem is an important first step in dealing with it. The Shanghai property stock index fell 1.6% overnight when the rest of the market rallied.
While for September, German exports were soft as well as they fell .7% m/o/m, about in line with the estimates but prior months were revised down on balance. Industrial production was weak too as it fell 1.8% m/o/m vs the estimate of down .6% (partially offset by 5 tenths upward revision to August). The German economic ministry is blaming some of the miss to the timing of holidays. Considering the good October sentiment numbers out of Germany, I’ll give them the benefit of the doubt. The DAX is down slightly after the somewhat delayed September news. The euro is unchanged.
Lastly, UK manufacturing IP grew by .6% m/o/m in September, two tenths more than expected which partially offset weakness in mining, oil and gas production and utility output which dragged down the headline figure. This number is also not market moving.