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Quarter Starts With Inflation Mystery Unsolved, Jobs Data On Way

October 2, 2017

(Monday Pre-Market) A new quarter dawns on Wall Street Monday in a week that’s packed with data, including monthly payrolls. The third quarter was a good one for the stock market, so we’ll see what Q4 brings as earnings season and economic numbers loom.

The Q3 ended with no end in sight to the inflation “mystery” — as Fed Chair Janet Yellen has called persistently low inflation amid a growing economy. Core Personal Consumption Expenditure (PCE) prices rose just 0.1% in August, the government said Friday, and are up just 1.3% over the last year. That’s well below the Fed’s goal of 2%. Last week, Yellen said that the prolonged weak inflation might mean the Fed should consider a more gradual approach to rate hikes, but also expressed concern about being behind the curve should inflation suddenly tick up. 

As of midday Friday, odds of another rate hike by the end of the year stood at around 77%, according to CME Group futures. That was a little below the readings above 80% earlier in the week, though it should be noted that any reading above 70% usually means rates are going to go up. Still, there’s a long way to go until the December Fed meeting, and we have a bunch of economic indicators to get through, including three non-farm payrolls reports.

The first of those reports, for September, is due this coming Friday. Recall that non-farm payrolls rose 156,000 in August, below Wall Street analysts’ expectations but not far off the three-month average of 185,000 and with some nice readings in key areas like construction and manufacturing. Generally, monthly job gains of 100,000 or more are all the economy needs to keep up with population growth, and four of the eight months so far in 2017 have seen jobs rise 200,000 or more. The last time that happened was in June.

While job growth has been solid, the same can’t be said about wage growth. Wages and salary readings from the PCE data showed no change in August, another signal that raises questions about the economy. Average hourly earnings rose just 0.1% in August according to the last payrolls report, and the question is whether these low pay raises might compress consumer spending. If that’s the case, it could spell trouble for the markets because consumer spending makes up such a big chunk of the economy.

One way to check consumer health is by watching auto and truck sales for September, which come out this Monday. Vehicle sales in August fell more than 6% from a year earlier, and sales in September, like those in August, might be affected by hurricanes that ravaged Texas and Florida.

Another consumer health indicator is sentiment. Michigan sentiment for September came in a bit below Wall Street analysts’ estimates Friday (see below).

One bright data note Friday was Chicago PMI, which jumped to 65.2, near the three-year high of 65.5 recorded earlier this year. Factory orders and the August trade balance are among the other numbers to watch during the week ahead.

While the data look mixed to start the new week, remember that the market has been in a rally mode for much of Q3, and indices are near their record highs. We’ve been talking lately about a shift toward the more cyclical sectors like financials, energy, and info tech — sectors that had all sagged at various points earlier this year as economic doubts crept in. Lately, they’ve been among the leaders, along with industrials and materials. At the same time, we’ve seen some of the so-called “defensive sectors” like telecom and utilities fall back on the leader board, even as other investments sometimes considered “safer” bets like gold and bonds take a tumble.

Ten-year bond yields remained above 2.3% as of midday Friday, up around 30 basis points from early in September. Additionally, the dollar was moving a little higher despite the bearish PCE data, and was up about 1% for the week. 

All this is to say that investor spirits continue to seem optimistic. That’s no guarantee that stocks keep rising, naturally, and events in Washington or overseas could turn things around quickly as people remain on edge about possible geopolitical developments. What the last week has lacked, however, is catalysts to drive the market much higher. Jobs data, followed by the start of earnings season the following week, might provide something new for the market to chew on as October moves forward. 

Dow Jones Industrial Average


As of midday Friday, the Nasdaq (COMP), represented by the blue line on this three-month chart, was outpacing the Dow Jones Industrial Average ($DJI) and S&P 500 Index (SPX) for best quarterly performance. Data source: Dow Jones, Nasdaq, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Town Makes Window Shopping Harder As Retail Sags: Amid the general market exuberance in Q3, shares of some retailers continue to struggle. This is in part due to the so-called “Amazon effect,” or fears of e-commerce replacing traditional stores. One Illinois city, Highland Park, is taking this e-commerce competition seriously enough to “downsize” its downtown, the Chicago Tribune reported. The city of Highland Park has re-drawn a 2004 regulation that required buildings in its central business district to have retail on the ground floor facing the sidewalk. Though the rule remains in place on the city’s main street, some of the side-street building owners downtown will have more flexibility to lease their ground floor space for offices or some other use. “What we are reacting to is an understanding that this isn't just a run-of-the-mill, boom and bust of an economic cycle," Joel Fontane, the city's director of community development, told the Plan and Design Commission in July, according to the Tribune. "As a matter of fact, this is counter cycle. We are in a decent economic time right now, yet retail is moving the other way at a significant, fast-moving pace." 

Mars Missions Mobilizing: There certainly have been some high-flying stocks this year, thanks to the markets rising double-digits since Jan. 1. Now a few companies want to literally “fly high,” setting their sights on the planet Mars. Tesla (TSLA) CEO Elon Musk made headlines late last week with the unveiling of his plans for a Mars journey, and Lockheed Martin (LMT) also said it plans to send humans to the red planet in the next decade. LMT is building the command module for NASA’s Orion spacecraft, and recently presented plans for a landing craft as well. Earlier this year, Boeing (BA) introduced its plans for a moon base and a “deep-space transport vehicle” that might be designed for a Mars trip. Whether any of these ideas get off the ground remains to be seen, but could make for an interesting new space race in the decade ahead, this time around with a much bigger private industry contribution than the Apollo program nearly 50 years ago.

Sentiment Holds Up Despite Hurricanes: The final Michigan Consumer Sentiment reading for September came in a little lower than Wall Street analysts had expected, at 95.1. That was down from 96.8 in August, and might reflect some impact from the big hurricanes in late August and early September. Still, 95.1 is a pretty strong read, equal to the preliminary September figure and up from July. “The resilience of consumers has again been demonstrated as concerns about the impact of the hurricanes on the national economy have quickly faded,” said Richard Curtin, the survey’s chief economist. Curtin said consumer confidence remains “very favorable” and expects consumer expenditures to increase 2.6% in 2017 and early 2018.

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