The FOMC statement was almost identical to the one given in September. Here are some differences though:
Today they referred to household spending as “rising moderately” vs “growing strongly” in September. Acknowledging the rise in the recent inflation stats they said “inflation has increased somewhat since earlier this year… Market based measures of inflation compensation have moved up but remain low.” This is an increase in the tone of their inflation language but they of course meant to not over do it.
They repeated that “The Committee judges that the case for an increase in the fed funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” They happened to add “continued” which begs the question over WTF are they waiting for but we of course know what. There was zero chance they were going to be blamed for influencing the election with a rate hike today.
Esther George and Loretta Mester dissented again but Eric Rosengren showed no backbone whatsoever and did an amazing flip flop by dissenting in September and not doing so again today.
Bottom line, the Fed is obviously political in their decision to not hike rates today. Rosengren is the most blatant example. The Fed did not want to take any risk whatsoever in causing a market selloff of substance over the next week which could in anyway tip the election. Assuming little change in the data over the next 6 weeks, will the FOMC continue the pace of one rate hike per year? At this rate, it will be the year 2028(!) before they reach their fed funds dot plot goal.
ADP said 147k private sector jobs were created in October, 18k less than expected but September was revised sharply higher to 202k from the initial print of 154k which is unusual because ADP rarely has big revisions. Smoothing out the two months puts average job growth at 175k which is exactly where it stood in August. Services dominated the job growth by adding 165k jobs. Goods producing areas shed a net 18k, mostly due to a 15k job cut in construction. Manufacturing jobs fell by 1k and job cuts in mining continued.
Bottom line, 3 month average job growth of 175k isn’t much different than the 6 month average of 179k but is a clear slowdown from the 12 month average of 192k and vs the 207k seen in 2015 and 234k in 2014. Mark Zandi in the release said “job growth remains strong although the pace of growth appears to be slowing. Behind the slowdown is businesses’ having difficulty filling open positions.” We’ve been talking for a while about the supply side labor issues being an impediment to faster economic growth. Expectations for private sector job gains in the BLS report Friday is 170k, not much different than the recent pace seen by ADP.
Worries over interest rates, both market based and with the Fed, the election and the drop in markets saw a sharp change in stock market sentiment this week. Investors Intelligence said Bulls fell to 41.7 from 47.1 last week. Rather than getting bearish, most went into the Correction camp which rose to a 4 month high at 34 vs 29.8 last week. Bears did rise to a 6 week high but only to 24.3 from 23.1. The 2nd longest bull market in history where any pain has been anesthetized by central banks has flattened the bears and the most bearish many get is ‘we’ll have a normal correction and let’s buy it.’
US dollar weakness for a 2nd day has gold near $1300 again. We can likely chalk up the weakness to the shift in the election polls. I repeat my belief that the US dollar is not on the cusp of breaking out above the 100 level even if the Fed hikes rates next month (and even if Hillary wins). One hike a year is not reason enough for me to get all bulled up on the dollar. As for gold and in addition to its contra move to the dollar, it is trading opposite to the world’s faith in central banks and that faith is clearly waning. I thus remain bullish.
Mortgage applications were little changed w/o/w. Purchase applications fell just .4% but sit at the lowest level since January. They still though are up 9% y/o/y. With the average 30 yr mortgage rate at the highest level since late June, refi’s fell 1.6% w/o/w and have fallen for the 4th straight week. They remain up 23% y/o/y when the average 30 yr rate was 25 bps higher.
As we finish the 4th year of Abenomics, Japanese consumer confidence is up all of 2 pts over this time frame. In October it fell by .7 pts to 42.3 which puts it just 1 pt above the 4 year average. The Income Growth component, which was a must have piece as part of the 2% inflation goal, is at 41. It was at 39.6 in September 2012 right before Abenomics began in earnest. Overall Livelihood fell to 41.4 in October. It was at 40.6 in September 2012. Lastly, Willingness to Buy Durable Goods dropped to 41.9 vs 42.3 in September 2012. I could bottom line this but the numbers speak for themselves.
The Eurozone October manufacturing PMI was revised to a slightly better 53.5 vs 53.3 initially and up from 52.6 in September. It ends the month at the best level since January 2014. The m/o/m improvement was driven by France and Spain as Germany and Italy were little changed but Germany was still at one of the strongest levels in the region at a 33 month high. Markit was positive saying “The eurozone manufacturing sector made a positive start to the final quarter. Output, new orders and new export business all rose at some of the fastest rates achieved over the past three years, building on the solid increases in quarter three and underpinning the steepest jobs growth since mid 2011.” This also came with price pressures as “input costs rose at the quickest clip in 15 months on the back of increased commodity prices, especially for energy and oil related products.” In response, output charges rose for the first time since last August.
Bottom line, the improvement in sentiment was good to see but growth for Q4 is still only expected to be 1.4% in the region. These sentiment measures are only measuring the direction of change, not the degree.
Brexit and price pressure fears influenced the UK construction PMI in October. While the headline number was up a touch to 52.6 from 52.3, “the recent phase of new order growth has been the weakest for 3 ½ years. Survey respondents noted that Brexit related uncertainty and concerns about the UK economic outlook had held back investment spending…At the same time, a sharp pace of input price inflation added to construction firms’ anxieties about the year ahead business outlook, with higher costs overwhelmingly linked to supplier price hikes in response to the weak pound.” These anxieties won’t get eased anytime soon.
German unemployment fell by 13k in October, well more than the estimate of a drop of 1k. This drove a one tenth drop in their unemployment rate to 6%, the lowest since reunification. When 1mm migrants needs to be absorbed, a strong labor market is a good cushion.