Midterm Elections and FOMC Meeting are Week’s Highlights

Nov 05, 2018

Elections and FOMC Highlights of the Week

The midterm elections loom and once past that event risk we have the FOMC rate decision on Wednesday with no rate change expected. While most polls have the Democrats taking control of the House, the Senate is likely to remain in Republican hands and as such divided government could be in our future for the next two years. Regardless of the outcome, in every midterm since 1946 the S&P 500 has finished above the October low. Thus, getting past the event may be more important to the markets than the outcome of the event itself, at least for the balance of the year. If the post-midterm trend follows, a bullish finish for the stock market could spell trouble for bonds and additional supply this week in 3yr, 10yr and 30yr bonds will likely keep a lid on any rally that may try to stir in the wake of the midterms. 


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

 

NOV 5 - NOV 9,  2018

1. Midterm Elections — Tuesday
2. FOMC Rate Decision — Thursday
3. October ISM Non-Manufacturing — Monday
4. October PPI Readings — Friday  
5. November U. of Michigan Sentiment — Friday
 

 

1.  Midterm Elections —Tuesday

The outcome of the midterm election tomorrow will certainly be impactful to markets but longer-term the result is not likely to alter the trend in markets post-midterm elections. The S&P500 has finished in the green at year-end after an October low in every midterm year since 1946. In many respects just the passage of heightened event risk, like an election, is enough to shift to a risk-on tone despite the changes the election brings in the balance of political power. In any event, the latest polls have the House flipping to Democratic control with an average gain of 39 seats predicted. That would provide the Dems a modest majority of 234 seats,  16 more than the 218 needed.  With a Democratically-controlled House you can kiss goodbye to any chance of passing Tax Cut 2.0 and that’s likely good for muni bonds as additional deficit-financed supply will be kept off the government ledger for a couple years. But as we mentioned above, just the passing of the election  is likely to spur a post-election stock rally and that is not likely to be good for bond prices in general. Just something to consider as you stay up late to watch the election results roll in tomorrow. 

 

2.  FOMC Rate Decision—Thursday

The FOMC begins its two-day rate setting meeting tomorrow and they are widely expected to conclude the meeting with no change in policy. They are likely, however, to tweak the statement to reflect the highest degree of certainty that they will hike in December and likely keep the quarterly hiking schedule in place when the calendar turns to 2019. The solid October jobs report, with its 3.1% YoY gain in wages—hurricane influenced or not—will allow the Fed to continue to characterize the economy, and labor market, as strong and that may be reflected in the outlook expressed in the statement. Thus, we think the odds are the short-end remains under pressure  as it begins to price in more than the two rate hikes it currently has priced. 

 

3.  October ISM Non-Manufacturing Survey—Monday

The October ISM Non-Manufacturing Survey is due later this morning with the non-manufacturing, or services, survey expected to print 59.0 versus 61.6 in September.  The average over the past year has been 58.5 so the October result should show a modest sequential decrease but a slight beat versus the yearly average. Anything above 50 represents expansion so the survey is likely to show continued strength in the services sector which constitutes nearly 90% if the economy. 

 

ISM Non-Manufacturing Survey

 

4.  October PPI Reading—Friday

Typically the wholesale inflation readings (PPI) are followed by the more consequential retail inflation readings (CPI) such that the PPI release gets little attention. This month, however, PPI has the week to itself with CPI coming out next week. For October, overall PPI is expected to increase 0.2% matching September’s increase and the YoY figure is expected at 2.5%, just under the 2.6% from the prior month. PPI ex-food and energy YoY is  expected to increase 2.3% versus 2.5% in September. The higher PPI readings have not generally been flowing into CPI this year and that has led to concerns about profit compression as companies struggle to pass-through increased input costs to the consumer.  That’s just one of the many reasons to explain the stock market struggles over the last month. 

 

5.  November University of Michigan Sentiment —Friday

The preliminary read on November consumer sentiment is expected to print at 98.0 compared to October’s 98.6.  The sentiment index has averaged 98.3 over the past year so a below-trend reading is expected but still strong. The survey also has two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 2.9% and the longer-run expectation (5-10 years) moderately lower at 2.4%. The near-term inflation expectation has been edging higher of  late and the Fed will be sensitive if consumers continue to ratchet-up expectations and that could give them yet another reason to continue with the quarterly rate hiking schedule.

 

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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