“The Powell Put is in Place”

Last week’s .25 bps Fed rate cut, stronger than expected Q3 GDP(a) reading, better than expected October Employment Report, and revisions to August and September’s Employment Reports propelled US equity markets to fresh highs. Importantly, that rising tide also helped the Nasdaq composite to a record high for the first time in three months.

The current outlook for U.S. equities remains “confirmed uptrend.”

Our reengaged trade higher, since October 3, has been extremely diverse in complexion – from wood products and heavy machinery, to materials and industrials. We are on the leeward side of Q3 earnings reports as this week gets underway. 64% of the S&P 500 sectors have delivered better earnings results versus consensus estimates, though Wall Street is projecting a 2.8% Y/Y decline in EPS according to Sam Stovall of CFRA.

Last week’s Fed rate cut provided investors and markets with what had been highly anticipated and priced into the market. The follow-up commentary also provided investors with a sense that the US economy may not need additional monetary accommodation in the near term. That outlook received confirmation in the form of the October Employment Report on Friday morning.

At first blush, the October Employment Report seemed fairly emblematic of what we have grown accustomed to seeing for many months: job gains, and healthy employment market metrics. And that is all true. However, the report was significantly stronger than it appeared on the surface, and for some very important reasons.

Non-farm payrolls increased 128,000 in October. Econoday consensus was calling for a gain of 90,000 for the month. Additionally, the topline gains for the previous month, September, were revised significantly higher, from 136,000 to 180,000. August’s topline gains were also revised higher. The unemployment rate in October was 3.6% – matching Econoday consensus, but .1 tick higher than September’s 3.5%. Importantly, the Labor Force Participation Rate (LFPR) rose to 63.3% from the previous reading of 63.2%. Average Hourly Earnings, on a Y/Y basis, rose 3.0%.

The fact that the US economy added 128,000 jobs in a month that also saw manufacturing jobs take a hit (-36k), due largely to the GM strike and a drop in temporary employment related to the 2020 census, is impressive – particularly this late into the economic cycle.

In short, this report delivered an economic narrative that runs counter to calls for weaker economic performance in Q4. It also dovetails neatly with the Fed’s outlook, outlined by Fed Chair Powell on Wednesday, that any additional cuts in the near term (December) are no certainty.

Another meaningful data point, released Wednesday of last week, was Q3(a) GDP. It came in at 1.9%, versus Econoday consensus that was 1.7%. Fueling the better than expected quarterly GDP reading was consumer spending. Real consumer spending in the quarter was 2.9%. Though weaker than the 4.6% registered in the last reading, it was stronger than the 1.7% that was expected. The fact is that the American consumer has increasingly been the driver of economic expansion. That is due in no small part to the fact that the US economy is running at full employment with rising wages and near cycle high readings of consumer sentiment and confidence.

This week’s economic calendar highlights:

International Trade (merchandise and services) figures for the month of September are released at 8:30 am. August’s total imbalance was $-54.9 B. Econoday consensus is calling for that gap to narrow to $-52.5 B in September.
Obviously, given the centrality of trade on several fronts, this data will be closely watched.

The EIA Petroleum Status Report for the week ending 11/1 is due out at 10:30 am. The previous week’s report reflected a mixed inventory picture with crude inventories rising 5.7 M bbl, while gasoline (-3.0 M bbl) and distillates (1.0 M bbl.) saw fractional tightening.

Weekly Jobless Claims for the week ending 11/2 are due out at 8:30 am. Though last week’s totals did reflect a very modest uptick in totals, this weekly claims report has remained reflective of a strong employment market. The strength of the employment market was given additional confirmation in last Friday’s release of the monthly employment report.

Flickr photo: by ucumari photography
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