Here are some thoughts on the main developments that are likely to impact the markets in the coming week. While I think most of the developments will ultimately result in lower Treasury yields and dollar, as well as higher stock prices, uncertainty ahead of the Presidential election should restrain any market move as well as impart volatility during the week.
FOMC Meeting -- Market Neutral
1. No one expects the Fed to hike on Wednesday, and it is unlikely that the Statement will change significantly. So, while the door will remain open for a December rate hike, that's likely to be about all one will be able to conclude from the Statement.
2. The evidence since the September FOMC Meeting was dovish, on balance:
a. The Unemployment Rate ticked up to 5.0% in September, underscoring the point Yellen made in her news conference that better labor market conditions are eliciting an increase in labor supply and thus accommodating stronger demand without undue inflation pressures -- which was a key reason the Fed did not hike rates at the September FOMC Meeting.
b. The September Core CPI slowed to 0.1% m/m, which should hold down the Core PCE Deflator to 0.0-0.1% m/m with a decline in the y/y to 1.6% from 1.7%, due Monday.
c. The Q316 Employment Cost Index -- a major indicator of labor cost inflation -- remained at 0.6% q/q for the 2nd quarter in a row. The y/y was steady at 2.3%, although up from 2.0% in 2015.
d. While Q316 Real GDP Growth sped up to 2.9% (q/q, saar), about 1 percentage point of it resulted from a jump in US soybean exports to China -- which could be one-off, in which case it will subtract from Q4 GDP Growth. An underlying 2.0% pace in Q316 is an anemic bounce after the 1.1% H116 Real GDP average.
Key US Macroeconomic Data -- Mostly Softer
1. I think the risk is for a counter-consensus decline in the October Mfg ISM, due Tuesday.
a. The Phil Fed Mfg Index points to a decline. It correctly predicted the direction of the Mfg ISM in 6 of 9 months this year. This is a better tracking record than any other manufacturing survey, including the Market US Mfg PMI. Although the latter rebounded in October after it fell in September, the bounce-back was likely catch-up to the increase in the Mfg ISM in September.
b. The damage of the stronger dollar on manufacturers could be one of the fundamental factors behind a decline in the Mfg ISM.
c. Seasonal factors boost the m/m change in the October Mfg ISM by 0.4 pt less than they did in October 2015.
2. The Chicago PM - which is based on a broader sample than just manufacturing -- also has a 6 of 9 month tracking record with the Mfg ISM so far this year. Chicago PM comes on out Monday.
3. I think the October Employment Report risks printing weaker than or in line with consensus.
a. Consensus is for a speedup in Payrolls to +175k m/m from +156k in September. I think Payrolls may stay around 150k. While the Unemployment Claims data improved in early October, they are not a reliable predictor of speedups/slowdowns in Payrolls. A downside risk that I see comes from the potential for employers to delay hiring until after the Presidential election -- hiring delays would not have impacted the Claims data. Also, I think there is a possibility that economic growth is slowing somewhat. And, it is possible that the jump in Private Payrolls in September was just an offset to their sharp slowdown in August. If so, October Private Payrolls should slow. Evidence for these risks could be the drop in "Jobs Plentiful" in the October Conference Board Consumer Confidence Survey. October Payrolls show no tendency to pull back from trend in past Presidential election years, however.
b. Consensus is for a dip in the Unemployment Rate to 4.9% from 5.0% in September, and cannot be ruled out. A decline in the Rate is suggested -- counter-intuitively -- by the weaker jobs components of the Conference Board Consumer Confidence Survey. Also, the un-rounded Rate was 4.96% in September, so a small decline would round down to 4.9%. Note that a 4.9% print should still be viewed as providing slack in the labor market, since it would be the same level the Fed had seen in the September FOMC Meeting.
c. Consensus is for 0.3% m/m in Average Hourly Earnings, after AHE came in lower than expected at 0.2% in September. Calendar considerations support a 0.3% print, but these considerations were in effect in September, as well -- and did not dominate the print. Note that calendar considerations point to a 0.1% m/m AHE (and decline in the y/y) in November.
Oil Prices and the Dollar -- Bearish for Dollar
1. Oil prices are likely to sink further on Monday, after OPEC failed to reach agreement to cut production at this week's meeting. A drop in oil prices could push down the dollar, as it should reduce the "transactions" demand for this global currency. The dollar also could be held down by this week's US economic data, if my expectations for them turn out correct.
Presidential Election -- Volatility
1. Headlines regarding Clinton's emails and the latest polls will likely be the focus in this last full week before the election.
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