D.C. Developments Move Back to Center Stage
With the FOMC rate cut and October jobs report behind us attention will shift back to D.C. for market direction this week. The biggest report of the week will be tomorrow’s October ISM Non-Manufacturing Index which is expected to show continued expansion in the services side of the economy. The story of the economy this year is the strength in consumer spending. It has literally carried the economy to this point, and that has, in turn, lifted the services sector while manufacturing remains moribund under the weight of trade-related uncertainties and global slowing. With a limited docket of economic reports this week developments in Washington D.C. will once again drive the headlines, and thus the trading direction. The on-again, off-again Phase 1 trade deal with China will provide the most potential for tradeable headlines while the beginning of public impeachment hearings will provide plenty of headlines as well. The impeachment process, however, will be slow in developing such that real market-moving news is still weeks, if not months, out from today.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||1.89%|
|6 Mo LIBOR||1.90%|
|12 Mo LIBOR||1.93%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Nov 4||Durable Goods Orders||Sep F||-1.1%||-1.1%||-1.1%|
|Nov 4||Durable Orders Ex-Transports||Sep F||-0.3%||-0.3%||-0.3%|
|Nov 4||Factory Orders||Sep||-0.4%||-0.5%||-0.1%|
|Nov 5||Trade Balance||Sep||-$52.5b||-$52.4b||-$54.9b|
|Nov 5||ISM Non-Manufacturing||Oct||53.6||53.5||52.6|
|Nov 6||Nonfarm Productivity||3Q P||0.9%||0.9%||2.3%|
|Nov 8||U. of Mich. Consumer Sentiment||Nov P||
|Nov 8||U. of Mich. 1yr Inflation Proj.||Nov P||2.5%||2.5%||2.3%|
|Nov 8||U. of Mich. 5-10yr Inflation Proj.||Nov P||2.3%||2.3%||2.3%|
Top 5 Events for the Week
Nov 4 - 8, 2019
1. Trade & Impeachment Developments – All Week
2. October ISM Non-Manufacturing – Tuesday
3. 3rd Quarter Productivity – Wednesday
4. Preliminary U. of Michigan Sentiment – Friday
5. September Factory Orders – Monday
1. Trade & Impeachment Developments—All Week
With the Fed decision and October jobs report behind us attention will be focused again in the prospects for a trade deal with China and any new developments on the impeachment front. The back and forth over the Phase 1 China trade deal might be good for a risk-on or risk-off move depending on the headlines. Our belief is that a modest Phase 1 deal will get signed but that the impact won’t extend much beyond the headlines. That is, it will be of limited economic benefit such that any move in Treasuries off an announcement is likely to be short-lived. The impeachment proceedings now move to the public phase and that will be ripe for fresh headlines but the process will play out slowly so any market-related impact will be limited for the time being.
2. October ISM Non-Manufacturing Index –Tuesday
The ISM Non-Manufacturing Index tomorrow follows the ISM Manufacturing Index from last week that has been in contractionary territory since August. The services sector, however, constitutes nearly 90% of the economy and it has been stronger, albeit softening some in recent months. The services index is expected to bounce some with a 53.5 forecast versus 52.6 in September. The index has averaged 56.8 over the past year so a moderate decrease is expected from the yearly average but still well above the 50 dividing line indicating more health in the services sector compared to the weaker manufacturing sector.
3. Third Quarter Productivity—Wednesday
When one looks at the factors that drive long-run GDP growth one element is labor force growth and the other is productivity. The lament from economists during much of this expansion is that productivity has lagged the 2.0% long-run average and that has kept potential GDP from gaining much above that number. Some signs of increasing productivity were noted in the first half of the year with prints of 3.5% and 2.3%, respectively. The third quarter, however, is expected to fall back to a slower 0.8% pace. If that expectation comes to pass it will reinforce the notion that long-run potential GDP is likely to remain around 2.0%.
4. Preliminary November Univ. of Michigan Consumer Sentiment—Friday
With consumer consumption two-thirds of the economy, readings on consumer confidence are an early tell on future spending. If confidence readings start to trend lower it’s a warning that the consumer may be close to pulling back. The preliminary November read from the University of Michigan on sentiment is expected to be 95.5 matching October’s final reading. The high print was 101.4 in March of 2018 when tax cut euphoria was running high. The average over the past year has been 96.2, so a near on-average reading is expected. Inflation estimates are expected at 2.5% for the 1-year period and 2.3% for the 5-10yr horizon.
With the manufacturing sector in a clear downtrend, today’s September Factory Orders report will be another view on that struggling sector of the economy. For September, factory orders are expected to dip –0.5% versus August’s –0.1% drop. So further weakness in the sector is expected.
Thomas R. Fitzgerald
Director, Strategy & Research