After a busy week with market-moving speeches from Federal Reserve Chairman Jerome Powell and Vice Chairman Rich Clarida and the start of the highly-anticipated G-20 summit in Argentina, next week is also gearing up to be packed with key events. Note, that in memory of President George H.W. Bush, all of the major markets will be closed on Wednesday, December 5.
Saturday’s working dinner between President Trump and President Xi Jinping at the G20 summit in Buenos Aires was a “highly successful meeting,” according to a statement released by the White House. President Trump has agreed to leave the U.S. tariffs on $200 billion worth of Chinese goods at 10% effective January 1, 2019. The two leaders have agreed to work toward structural tech negotiations for the next 90 days. If at the end of those 90 days, no meaningful negotiations transpire, the tariffs will increase to 25%.
“This was an amazing and productive meeting with unlimited possibilities for both the United States and China. It is my great honor to be working with President Xi,” Trump said.
While it was originally scheduled for Powell to testify before the Joint Economic Committee on the economic outlook on Wednesday, it is uncertain whether or not the hearing will be rescheduled due to National Day of Mourning.
The Fed’s Beige Book is also scheduled to be released at 2:00 p.m. ET on Wednesday.
While it is still widely expected that the Fed will raise rates at its next meeting Dec. 18 to 19, Deutsche Bank wrote to clients that Powell’s and Clarida’s speeches last week may have marked a shift in the central bank’s tone for the future. The speeches “by the FOMC’s leadership had the potential to mark a turning point in the Fed’s narrative about its tightening cycle. While we view Chair Powell and Vice Chair Clarida’s comments as raising the risk of a Fed pause as early as the first half of 2019, we do not believe their comments undermine the pre-existing Fed narrative that monetary policy should be returned to a neutral stance.”
Crude oil (CL=F) has been getting pummeled. After falling below $50 a barrel this week, the commodity just posted its worst month in a decade as global supply concerns continue to weigh on prices. The Organization of Petroleum Exporting Countries (OPEC) will meet in Vienna on Thursday. Because of oil’s recent weakness, the meeting between OPEC and its main partner Russia will be an extremely important meeting.
“The next OPEC meeting will likely be closely monitored by markets given recent oil price movements (Brent and WTI decreased 30% since early October). While it is was earlier believed that Saudi Arabia would agree to cut production, recent statements suggest that may not be the case unless other oil producers also cut output,” Barclays wrote in a note.
As December begins, the jobs number on Friday is expected to show that the economy added 200,000 jobs in November versus the blowout 250,000 jobs added in October, according to economists polled by Bloomberg. The unemployment rate is expected to remain the same as the prior month at 3.7%.
According to Wells Fargo, “It is worth a reminder that one month of data does not make a trend, and that is particularly true when it comes to the jumpy and heavily revised payroll numbers. That makes it unlikely in our view that even a large downside miss would lead the Fed to hold off on a rate hike in December. If, however, the next couple of months’ jobs numbers show the trend in hiring is slowing, that could put the FOMC on a more gradual upward path in 2019. An upside surprise to payrolls or wages in November would point to the FOMC being likely to raise rates more than markets currently have priced in for 2019.”
Monday: U.S. manufacturing PMI, November (55.4 expected, 55.4 prior); Construction spending month-on-month, October (0.4% expected, 0.0% prior); ISM manufacturing, November (57.6 expected, 57.7 prior)
Wednesday: MBA mortgage applications, week ending November 30 (5.5% prior); ADP employment change, November (195,000 expected, 227,000 prior); Markit U.S. services PMI, November (54.4 expected, 54.4 prior); Markit U.S. composite PMI, November (54.4 prior); ISM non-manufacturing index, November (59.1 expected; 60.3 prior)
Thursday: Initial jobless claims, week ending December 1 (225,000 expected; 234,000 prior); Continuing claims, week ending November 24 (1.71 million prior); Factory orders, October (-2.0% expected, 0.7% prior); Durable goods orders, October (-4.4% prior)
Friday: Nonfarm payrolls, November (200,000 expected; 250,000 prior); Unemployment rate, November (3.7% expected, 3.7% prior); Wholesale inventories month-on-month, October (0.7% expected, 0.7% prior); University of Michigan sentiment, December (97.0 expected; 97.5 prior)
Next week remains light on the corporate earnings front. On Tuesday, auto parts retailer AutoZone (AZO) and home builder Toll Brothers (TOL) will report third-quarter financial results (AutoZone will report before the bell and Toll Brothers after the bell). Athleisure brand Lululemon (LULU) is set to report on Wednesday after the bell, and grocery giant Kroger (KR), chipmaker Broadcom (AVGO) and cosmetic retailer Ulta (ULTA) will round things out with reports on Thursday.
And here’s what caught market correspondent Myles Udland’s eye.
The biggest market event of the past week was Federal Reserve Chair Jerome Powell’s speech on Wednesday at the Economic Club of New York.
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy—that is, neither speeding up nor slowing down growth,” Powell said.
And for those not steeped in the world of parsing statements from Fed officials for signals about policy decisions, the only words that really mattered from Powell were “just below.”
Following Powell’s comments, stocks ripped higher with the major U.S. indexes gaining more than 2% across the board. The market action indicates that investors saw Powell’s phrasing as suggesting a potentially less aggressive path for interest rate hikes next year.
Markets also interpreted this phrase as standing in intentional contrast to Powell’s early-October utterance that interest rates were “a long way from neutral.” The neutral rate of interest is the level of interest rates economists think supports an economy that operates at full employment with price inflation meeting the Fed’s 2% goal.
How any investor or economist or strategist interprets Powell’s commentary is up to him or her. I am partial to the idea that markets moved so violently on Wednesday because broad market positioning was betting on lower stock prices and a stronger dollar — positions that ended up wrong-footed on Wednesday — not because Powell drastically shifted the Fed’s outlook.
But any one investor’s interpretation of the Fed chair’s comments is less important than accepting that right now, any commentary from Powell is going to be a market mover. That is the signal to take away from this past week’s events.
Some on Wall Street, however, are somewhat divided on whether Powell really changed the Fed’s outlook as drastically as Wednesday’s action would suggest.
“Directionally, we agree that Fed commentary has shifted somewhat in a dovish direction over the past few weeks,” said economists at Goldman Sachs on Friday. “In the wake of tighter financial conditions and lower oil prices, the emphasis has shifted from a need for restrictive policy to the importance of data dependence while the tone on inflation expectations also appears to have shifted somewhat in a dovish direction … We, however, think that markets have overstated the extent of the shift for three reasons.”
To Goldman, markets for one thing overstated the importance of Powell’s October comments, which were made in an interview with PBS and not a prepared speech. Second, the firm thinks the market’s reaction implies that investors didn’t read the entire key sentence, stopping at “just below.” And though the Fed’s signature language on the neutral rate may now be “just below” instead of a “long way away,” Goldman thinks the Fed’s overall outlook for the labor market and economy remains notably unchanged, implying a quarterly pace of rate hikes remains likely in the time ahead.
At Capital Economics, Paul Ashworth writes that Powell’s revised formulation of how far the Fed remains from its estimated neutral is not a “genuine shift” in the chair’s stance.
“The minutes of the Fed’s early November FOMC meeting revealed that another rate hike was coming ‘fairly soon’, i.e. in December, and that ‘further rate hikes’ would be required,” Ashworth writes. “Admittedly, market sentiment has deteriorated since early November, but the incoming economic data have held up well. Powell said nothing this week to suggest he was more worried about the real economic outlook or that inflation would undershoot the target.”
David Zervos, chief market strategist and head of global fixed income strategy at Jefferies, said Friday, however, that Powell’s commentary “amounted to a full retraction” of his early-October comments. “[Powell’s] gaffe in early October, and his stubbornness in retracting it, created some wild market swings,” Zervos writes. “But as with all good policy-error related opportunities, this one too had to come to an end.”
On December 19, Powell will speak with reporters after the Fed’s latest monetary policy decision is announced. And in 2019, Powell will hold a press conference after all eight of the Fed’s scheduled policy announcements. (This week, Powell had been scheduled to speak before the Senate’s Joint Economic Committee on Wednesday, but the declaration of a national day of mourning following the death of President George H.W. Bush puts that appearance in question.)
Now over time, investors may grow less excited about hearing from Powell. Indeed, part of Powell’s communication strategy of increasing his comments may be aimed at tamping down market volatility around any one of his public utterances. Additionally, the economic outlook may obviously change or the Fed may alter its forecasts or policy statement in some way so as to make follow-on comments from the Fed Chair moot.
But whether you think the market gets its interpretation of the Chair’s future comments right or wrong is less important than knowing his comments will be market movers.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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