Oct 4, 2017 - The market's attention today was occupied by the pricing of corporate and .... Distancing from stock price discussion based on feeling and little ...
StreetStuff Daily October 4, 2017
BECAUSE: The way to get good ideas is to go through LOTS of ideas, and throw out the bad ones…
3 October 2017
US Economics Research Tue 10/3/2017 11:34 AM
Rosenberger on September Employment
Reaching for the stars: Estimating potential growth, NAIRU, and r* with uncertainty •
Stephen Stanley Chief Economist
Attached is a summary of Gary Rosenberger’s monthly discussion with placement industry executives on the state of the labor market.
…The September employment report will be tough to interpret…I expect a 100k increase in payrolls, but there is no way to know whether a higher or lower number reflects larger/smaller storm effects of the underlying labor picture…Unfortunately, none of the data can be taken at face value…
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Nonfarm Payrolls
Recruiters: A Sept Jobs Rebound as Need Trumped Hurricanes, Politics, N Korea
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Employers Began Staffing Up for the Holidays and to Justify Next Year’s Budgets Hurricane Impacts: UP to 4 Days Lost in Houston, Up to 10 Days in Florida Labor Tightens Another Notch, Making It Tougher to Fill Open Orders •
In a recent speech, Federal Reserve Chair Janet Yellen reiterated her view that inflation would return to the Fed’s target over time, but also said the Fed’s inflation outlook could be incorrect if resource utilization was less than estimated, inflation expectations were inconsistent with the committee’s inflation target, and the Fed’s inflation framework itself was misspecified. We focus on two elements of uncertainty in the Fed’s inflation framework identified by Chair Yellen, the long-run rate of unemployment (u*) and the natural rate of interest (r*). We present our updated estimates of these variables, alongside estimates for potential growth, using data through Q2 2017. Our estimates now suggest NAIRU rose to about 5.5% in 2012-13 before falling back towards 5.0% more recently. If inflation firms in line with our US economic outlook, we don’t see much room for NAIRU to move lower. If, however, inflation remains stuck below 2.0%, then we see some downside risk to our estimate. We estimate that the natural rate of interest fell to 50bp briefly in 2008, before gradually moving higher to its current reading of -20bp. A near-zero natural rate of interest is consistent with recent Federal Reserve analysis and Chair Yellen’s recent statements. We doubt that r* will rise as much as Fed projections imply. Although potential growth has firmed modestly since 2013 and stands currently at 1.6-1.7%, the improvement has been driven by total hours, via an improvement in trend labor force participation, and not productivity, which remains sluggish by historical standards. We doubt whether fiscal stimulus and deregulation could boost r* by 75bp over two years, as FOMC projections anticipate. We do not find uncertainty about our estimates to be higher than normal, nor do we believe the Fed’s inflation framework is misspecified. That said, we continue to believe the Fed’s preferred methodology to estimate r* is likely misidentified, which contributes to wide
confidence bands that limit the usefulness of any estimate and what it means for the appropriate conduct of monetary policy. FIGURE 4 The US output gap is positive and will likely approach the output gaps of the late 1960s and early 1970s
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yield municipal index generated a total return of -0.54%, bringing the year-to-date total return to +7.72%. The taxable municipal index generated an excess return of +0.63% but underperformed the US credit long index by 1.05%. Spreads for taxable munis were 5bp tighter m/m, while the long credit index tightened 11bp. Muni issuance in September totaled $26bn, down 25% m/m and 34% y/y, with net issuance at +$5bn. Year-todate, gross issuance stands at $284bn, with net issuance at +$7bn. Muni fund flows remained positive in September, with inflows averaging about $700mn per week. As of September 20, 2017, ICI data show that fund inflows totaled $2.2bn during the month, bringing year-to-date inflows to $22bn.
Outlook and Recommendations FIGURE 7 Large changes in r* are rare: A 75bp change in r* over two years has happened only once since 1969
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3 October 2017
Global
Global manufacturing confidence ends Q3 on a strong note … In sum, global manufacturing confidence ended Q3 on a strong note, with our gauge touching the highest level since January 2012. We expect sentiment to be sustained around these levels in Q4, aided by buoyant demand.
3 October 2017
Municipal Strategy Monthly
Performance and Outlook – September 2017 •
The Bloomberg Barclays Municipal Index posted a negative total return in September of -0.51%, bringing the year-to-date total return to +4.66%. Munis outperformed the US Treasury Index, which returned -0.86%. The high
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The UST curve flattened over the month, with 5s30s and 10s30s lower by 9bp and 7bp, respectively. Munis followed suit, selling off 14-23bp across the curve, similar to the moved in Treasuries. On a relative basis, short-end ratios underperformed by 4pp; however, 10y ratios richened 2pp, and 30y ratios remained unchanged m/m. We believe that supply will be robust in the coming weeks, as October tends to be a heavier supply month. While we could possibly envision a marginal underperformance from the asset class compared with Treasuries in the near term, we do not expect it to be meaningful or to persist for long. Hurricanes: We discuss the aftermath of Hurricanes Harvey, Irma, and Maria, focusing on credits that could be affected by economic damages. We also take a look at some muni issuers that could suffer, as well as the effect on P&C insurers. Oil: We discuss the effect of lower crude prices on the economies of oil-producing states. While prices are expected to stabilize and state budgets have been adjusted, credit spreads of Alaska and Louisiana appear too tight at current levels, given the economic and political challenges facing them. Tax Reform: The long-awaited Republican tax reform proposal was released on September 27. On the surface, most of the proposals are relatively benign or perhaps even positive for munis.
Tue 10/3/2017 4:04 PM
Lyngen/Kohli BMO Close: Warsh Cycle The market’s attention today was occupied by the pricing of corporate and sovereign deals and the headline that suggested that Treasury secretary Mnuchin favored Jerome Powell for Fed chair over the presumed front-runner Kevin Warsh. The speculation was catalyzed by a Politico article with prediction markets moving Powell briefly to frontrunner status before Warsh took the lead again.
Having failed to call the past election as well as Brexit, we’re not putting much stock in betting markets though in this case they do seem to offer a lean that matches our own view. It’s not clear who the leading candidate is in President Trump’s mind but the market reaction seemed somewhat out of step with either candidate. The 5-year and the frontend led the 2bp rally and the long bond lagged even though both candidates offered a profile that was more hawkish than Yellen. …… Tactical Bias: The curve’s moves were unusual in that front-end and belly led the rally. While we were tempted to ascribe this to the news about Powell being seriously considered as a leading candidate for the Fed, a simpler and more consistent observation suggests that 2s and 5s were the areas where futures showed the market most short and the move was at least partly a consequence of very high yield levels being achieved almost across the board (5s over 1.95% and 10s over 2.36%). As such, we’re still neutral on the outright level of yields and looking for a better risk/reward to adjust our lean. We’re tactically looking for steepeners as better entry points for longer-term flattening moves though we’ll admit that our proclivity is to take a more bullish stance given the tone of recent geopolitical headlines. …On the data front, ADP is likely to garner more attention than usual, because it offers a slightly cleaner read of the employment situation than NFP will this Friday due to hurricane effects. Although the market does often focus on ADP ahead of the payrolls print, we’ve often been wary of the errors around these estimates and continue to view the overall track record with a slightly skeptical eye. Still, in this case, the print may justifiably attain a bit more significance till the effects of the hurricane wash out of the BLS data.
NFP & ADP MoM SA
US Rates at the Bell October 3rd, 2017 Trader’s Tab
Pre-NFP Positioning Puzzle (A): Legacy Longs vs. Tactical Shorts = Flattener Bias…On a (+5 to -5) normalized scale Citi’s RPM has futures positioning in TY and WN at +2.6x and +3.5x, respectively. Open PnL remains negative, at -1.3x and -1.1x, respectively. This is somewhat offset by shorts in the front-end, with white ED$’s at -1.3x.
Pre-NFP Positioning Puzzle (B): However, today’s
JPM survey showed “active client” record short USTs, while 3m FV and TY put-call ratios have begun trading modestly “puts over”. These mixed signals in the context of locally extended technicals have us thinking some range consolidation is in order, with the largest standard deviation in NFP estimates since July 2010 (46K, range: -45K to 209K) meaning the market may be far less sensitive to a surprising result.
…Recap & Discussion:
UST bearish momentum waned on light volumes (~65% 20dma) in the NY session as Fed Governor Powell looks to usurp poleposition from Kevin Warsh as the most likely Fed Chair candidate thanks to US Treasury Sec. Mnuchin’s endorsement and his pro-deregulatory agenda laid out today at GWU. … With little else to sate the market’s short
attention-span, as we await ECB Minutes and US employment data later this week, there was an
unusually sharp focus on divergent positioning data released today; our Citi RPM showing still one-sided long (and flattener-biased) positions in TY and WN futures (+2.6x and +3.5x on 5 to -5 scale), while JPM’s Trsy Survey showed “active clients” to be at record short positions. Allegiances aside, we much prefer flow and open-interest-based data over survey-based data (with inherent sample size and agency bias), but we do think that both can be “accurate” as they may represent different cohorts of investor with different time-horizons. In this light, with anecdotal flow of late showing downsidepreference and with 3m FV and TY risk-reversals beginning to creep to “puts-over” in the last 48hrs of trading(fig. 5), it’s quite possible that tactical shorts could be at risk of a local squeeze, while legacy long-positions (held by less mark-tomarket sensitive accounts) can continue to underpin the current bearish trend. Net-net, these mixed signals in the context of locally extended technicals (figs. 3-4) have us thinking some range consolidation is in order, especially with the hurricane-effected employment data likely to have few accounts pre-positioning with a convicted stance. … That however, doesn’t mean we don’t continue to see medium-term downside for duration, with the latest manufacturing surveys (PMI and ISM) showing not only globallysynchronized industrial growth, but also more indications of supply-chain derived inflationary pressure.
normalised P&L respectively). However, the net position in WN may be partially offset by shorts in swaps that have been building up over the last month. ED Reds have had $3m taken off the net long base in a week.
03 Oct 2017 18:45:45 ET
US Credit Strategy Focus Tax reform: close shave for US credit
03 Oct 2017 14:05:16 ET
Energy Weekly Chinese Policy Decisions After the 19th Party Congress are Likely to be Crucial for Oil Markets •
03 Oct 2017 10:24:22 ET
RPM Daily Cleaner Positions in FX and Libor •
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Summary: Long cash (+1.5) / neutral futures (+0.3): Long positioning cross market, except in Asia, especially in TY (3.1), OAT (3.4) and G (2.3). Cleaner positions in FX (DXY from -3.8 to -0.6 and EURUSD from +5 to +1.5) In North America – Cleaner Libor positioning: TY and WN futures positions offside (-1.3 and -1.1
US tax reform is finally taking shape, and we identify expected winners and losers in IG & HY credit across sectors, qualities and maturities. We favor decompression in credit quality and IG spread curve flattening, tying in the interplay of pension incentives, supply response, and reliance on tax shields. We introduce a bottom-up model of 250 large US cash repatriators to forecast the decline in IG supply, and discuss its sensitivity to tax rates and implementation periods. In the credit derivative space, we expect a modest effect on CDX IG spreads due to a potential reduction in IG cash bond issuance due to repatriation. For CDX HY, the elimination or capping of interest rate expense could be a headwind for low quality names, leading to underperformance of the index itself and equity tranches.
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Oil prices have taken a breather after reaching a YTD high of $59.49/bbl last week. Profit taking, producer hedging and weaker refining margins have weighed on crude structure and the outright oil price yet last week’s decision by the Chinese government to lower petroleum product export quotas in 4Q’17 could well be being underpriced in global refinery margins. Quota restrictions should cut Chinese gasoline and diesel exports by at least 180-k b/d y/y in 4Q’17, but given that Chinese runs were expected to grow by ~400-k b/d y/y in 4Q’17, the “real cut” is likely to be even deeper. The current policy direction may continue through 2018 which implies lower-than-expected Chinese gasoline and diesel exports which would be bullish for Asian (and also global) product cracks given the limited amount of spare regional as well as global refining capacity outside of China.
03 Oct 2017 19:32:52 ET
North America Commodities Flash Rates creeping higher but gold pricing may soon near a bottom
Long gold appears to be a ‘pain trade’ over the short-term given current market dynamics placing upward pressure on UST yields and the US dollar. But we favor buying a potential dip below ~$1,260/oz and also prefer upside gold optionality on a deferred basis as a cheap geopolitical and policy hedge. Two months out, the market-implied probability of a December Fed hike is nearly fully priced at ~67% and seems more exposed to potential data misses (e.g. inflation side). Over the last few weeks, investors have rightly focused on the bearish implications for the US Treasury market and thereby COMEX gold prices on the prospects for domestic tax reform. But tax cuts are far from a done deal. COMEX gold net long positioning has also scaled back considerably over the past three weeks and no longer appears stretched, giving funds room to add opportunistic bullish structures.
Deutsche Bank 03 October 2017
Global Financial Strategy Market monitor: Models explain 80-90% of rates, forex and stocks moves Distancing from stock price discussion based on feeling and little evidence In this report, we take an empirical look at the impact of rising US 10y interest rates on US financial and tech stocks, forex, and TOPIX and Japanese financial stocks, with the aim of better understanding the correlation. The models built by our global financial team explain 86% of UST 10y yield movements (Figure 1), 93% of forex trends (USDJPY; Figure 11), 92% of Japanese stocks (TOPIX; Figure 31), 73% of life insurers (Figure 39) and 84% of banks (Figure 43). Interest rates could rise towards year-end: Financial stock investment strategy Absent a severe risk-off scenario, we expect the UST 10y yield to rise heading into the 12-13 December
FOMC meeting (Figure 1). The rise in US yields should cause yen depreciation and a rise in yen rates, resulting in higher Japanese stock prices. Our investment strategy for financial stocks firstly recommends trades based on sector share prices' sensitivity to interest rates and forex (Figures 45-46), the sensitivity of firms' capital and profits to rates and forex (Figures 47-48), and their sensitivity to the US corporate tax rate (Figure 49). Secondly, in sectors such as non-life insurance where the explanatory power of our approximation model is low, we recommend trades based on single-stock fundamentals such as hurricane impact (p. 6). Modeling interest rates and FX rate Our US Rates Research team approximates 10y government bond yields for Japan, the US, and Germany using the 1) policy rate, 2) spread between 2y yields and policy rates, and 3) net QE amount divided by net government bond issuance (Japan, US, and eurozone) (Figures 1-4). The interest-rate level implied by our model is around 2.73% at end-2017. It is difficult to approximate forex (USDJPY) rates, but our global financial team attempts to do so in this report based on the difference between US and Japan (1) expected inflation rates (5y5y), (2) medium-term interest rates (1y2y forward rates), and (3) central bank balance sheet growth (9mth forward) (Figures 11-14). This model explains 93% of forex movements since 2010. Japanese stock market depends on US rates Japan and US stock markets are driven by US rates. If 10yr UST yield rises, it results in either yen depreciation or rise in Japan long-term rates, leading to an uptrend (outperform) in Japan’s financial stocks. Bank (R2: 84%) and life insurance stocks (R2: 73%) are entirely in line with our models. In contrast, brokers and non-life insurers are lagging the models. BoJ monetary policy: Possibility of continued reliance on the US (1) If the LDP secures a reasonable seats in the election, increasing the chances of Abe's re-election as PM and party chair in September 2018, we expect likely picks for the position of BoJ governor would be Kuroda (reappointed), the Ambassador to Switzerland Honda, and Columbia University Professor Ito. In this case, the Bank is likely to retain YCC (and might even ease further). (2) However, if the LDP is defeated and the possibility of resignation of Prime Minister Abe or change in the LDP President increases, possible choices would include Deputy Governor Nakaso, Executive Director Amamiya and others. In this case, the Bank might slightly revise its YCC policy during 2018. (3) The birth of a non-LDP administration dominated by the Party of Hope would create a spike in uncertainty regarding monetary and other policies.
04 October 2017
The Outlook - MBS and Securitized Products CMBS vs CLO Relative Value This week CMBS and CLOs join forces. CMBS vs CLO We look at relative value between CMBS and CLOs. CLOs vs CMBS We compare CLOs and CMBS and look at relative value in a separate section. Otherwise, resets resurge and IG mezz spreads continue tighter. Survey says…Income and net worth rose from 2013 to 2016 We highlight key takeaways from the Fed’s triennial Survey of Consumer Finances published last week. We review proceedings at ISTAT EMEA; Benchmark ABS deal updated We review the proceedings at ISTAT EMEA; Benchmark ABS deal updated. Monthly mortgage credit performance monitor This report keeps investors informed about interesting current credit trends and highlights important drivers for mortgage loans across credit spectrums. Trump Tax Plan: Tough Sledding Ahead We provide an early analysis of the tax proposal.
Term Premium: A Longer Term Catalyst for Higher Rates We remain bearish strategically and tactically short the market with first yield objective of 2.45% for 10s. 04 October 2017
Early Morning Reid Macro Strategy …Yesterday my team and I published a few reports. The first was a Credit Bites report called ‘US corporate debt at record highs but….’. In it we discuss how if we were looking for triggers for the next crisis within credit markets (outside of worries about trading liquidity which we discuss in out LT Study) then one concern is the record levels of US non-financial debt/GDP with the increase and level of this debt consistent with that seen just before the last three recessions and associated default cycles. However we also show that on another ratio corporate debt looks quite low relative to
history, leaving us with the usual issue in this cycle, namely that debt remains at record high levels across large swathes of the global economy but that debt servicing is cheap and employment and profits in good shape. The other report we put out was a Macro Bites called ‘S&P 500: The longest winning streak on record soon?’. This short note follows a similar one we did on vol last month and shows how remarkably consistent 2017 has been for monthly US equity returns, so much so that the S&P appears to be on course for a possible record breaking year of consistency and performance. We also published the report “Credit Derivatives Strategy: Razor-Thin Risk Premia and Efficient Hedges Against Their Repricing”. Although current stretched valuations may last for a while given decent growth and no inflationary pressures, the report looks into mediumterm macro hedges to protect credit portfolios against potential fundamental shocks.
03 October 2017
US Economic Perspectives
Low volatility belies economic uncertainty
03 October 2017
Macro Bites - S&P 500: The longest winning streak on record soon? When we did the monthly performance review for the EMR earlier this week we noticed a few remarkable stats for the S&P 500 that deserved more attention. If we see a positive return in October and then in November we’ll break two new records for the index. See this one page note to see what they are. As a word of warning though, the S&P's total return dipped 3.6% and 7.1% respectively in the subsequent month when one of these record runs ended.
Actual and implied volatility in financial markets have tested historic lows this year, yet there has been plenty happening in Washington and elsewhere to engender significant uncertainty about prospects for economic policy. Partially reflecting these developments, quantitative news-based measures of economic uncertainty have been more elevated recently – running at levels above historical norms. The disconnect between market vol and various survey- and news-based measures of uncertainty were the subject of a roundtable discussion of researchers at the Federal Reserve Board last week in which we participated. The session focused on the quantitative measurement of economic uncertainty, its connection to financial markets, and its effects on the real economy. We discuss the key takeaways from this roundtable, including our findings that some measures of economic policy uncertainty may be distorted due to changes in popularity of the underlying topic over time, such as the rise in Fed popularity with increased transparency, or due to a focus on low readings in disagreement across forecasters, while individual forecast uncertainty may remain elevated.
…One challenge in news based searches is distinguishing between “popularity” and “uncertainty”. Does increasing news attention devoted to policy uncertainty reflect true uncertainty or merely increasing interest in and information about policy developments? To take an example, over time, the Fed has striven to reduce market volatility around important changes in monetary policy by enhancing the transparency and communication of its policy making intentions and process. Market fluctuations around key shifts in policy, especially lift-off dates for policy tightening (Figure 7), have trended lower over time (Figure 8), suggesting that the Fed has succeeded in its objective. Liftoff in 1994 came as a shock, whereas those in 2004 and 2015 were much more anticipated thanks to more clarity in Fed communication.
…Conclusions What we conclude form the Fed roundtable discussion and our preparation for it is first that substantial progress has been made in the quantitative measurement of economic uncertainty, and that news-based measures appear most promising. That said, news-based metrics may be vulnerable to an upward bias when structural changes result in an increase in the popularity of some news topics – for example, the effect of increased Fed transparency in generating more news stories about Fed policy moves. Second, we conclude that market vol, and implied vol, do not necessarily reflect levels of uncertainty. Vol is depressed when economic times are good, and recent extreme low levels of vol may indeed have been induced in part by uncertainties about policy changes that could potentially have a positive impact on growth. Finally, economic uncertainty does not appear to play a major role in driving business cycles on average, but it can exacerbate economic downturns (and be more highly correlated with spikes in vol) during cyclical downswings.
Bonds (+), equities (-) and MM (-): Flow momentum continued to stay muted with our 'money at work' indicator falling to its lowest level in six weeks. This was majorly driven by DM equity outflows with EM equity inflows also slowing. Overall, total equity funds (-0.0%, MFs:-0.1%, ETFs: +0.0%) suffered 21-week high outflows while total bond fund flows (+0.2%) rose to a 7 week high, mainly helped by DM credit funds. Traditionally volatile MM funds (-0.1%) saw marginal outflows for a second week in a row, after what had been strong inflows over the summer period.
03 October 2017
Weekly Fund Flows - Bond funds in demand despite rising rates Investors opted for diversified taste across equities and bond funds last week, but overall flow momentum continued to stay subdued. Most noticeably, investors took a fresh look at developed market (DM) allocations, as DM equity funds ended their five-week inflow streak with five-month high redemptions, while DM bond fund flows noted seven-week high inflows. Overall, the previous month has seen a rollover in global flow momentum across total equities and bonds, and we expect the slowdown to continue on the back of our expected fade in global composite PMIs (see Fig. 1). Within the DM region, European equity funds gained again, while the growing anticipation of a proposed tax reform could not make a case for US equity funds, which suffered highest outflows in 14 weeks. Bond funds on the other hand gained across all major regions and especially in the US, as sovereign fund redemptions were comfortably offset by inflows into credit - despite US 10-year bond yields topping 2.3% for the first time since July. Financial sector funds, which typically benefit from rising rates, saw 12-week high inflows, but the close relationship with the 10-year bond yields now suggests downside for financial flows over the coming weeks (see Fig. 2). Last but not least, the Fed's start to trimming the balance sheet did not deter emerging market investors as the region's equity funds gained for the sixth consecutive week.
4 October 2017 | 12:55PM JST
Japan Economic Flash: Revising up our 3Q2017 real GDP tracking estimate to +1.5%
Reflecting August data, we raise our tracking estimate for 3Q2017 real GDP to +1.5% qoq annualized, from +1.2% previously. Our upward revision mainly reflects stronger-than expected recovery in export activities since July, leading us to revise up real GDP export growth to +6.0% qoq annualized from +3.8%. Our forecasts on other demand components are largely unchanged. Personal consumption is likely to decelerate to virtually zero growth in 3Q, following strong 2Q spending. Private capex is expected to remain on a moderate recovery path. Meanwhile, a temporary fall-off in public works, which pushed up the overall GDP in 2Q, is inevitable in our view. Real core household spending declined -0.1% mom in August following a similar decline in July. Real exports are recovering rapidly, rising +3.0% mom in August, after +1.7% in July. Production also picked up +2.1% mom in August. August national core CPI (excluding fresh food) accelerated to +0.7% yoy. However, the main
factors lifting it were energy and medical care, while other components remain muted. In fact, August national new core CPI (excluding freshfood and energy) remained stagnant at +0.2% yoy, and the September Tokyo new core CPI at 0.0% yoy Prime Minister Abe called for a snap general election (ballots cast on October 22). The election will be contested under a tripolar configuration, comprising (1) the ruling coalition LDP/Komeito, (2) groups of parties centered by Ms. Koike, governor of Tokyo, and (3) groups of left-wing parties. Opinion polls indicate that the ruling parties will win a simple majority at least. The outcome is hard to predict, however, given around one-third of voters are likely to be undecided.
…Asset markets have moved swiftly in reaction to the news. At the macro level, rising likelihood of tax reform has lifted economic growth expectations, inflation breakevens, and Treasury yields. In the equity market, these dynamics have helped extend the recent equity factor rotation from growth to value and boosted the performance of cyclical equities relative to defensives.
Exhibit 5: Treasury yields and presidential approval
3 October 2017 | 4:17PM EDT
US Equity Views: Progress toward tax reform creates earnings upside and gives new life to Trump trades Progress in Washington, D.C. toward tax reform has lifted our economists' estimated likelihood of enactment in 2018 to 65%. Below we discuss the potential impact on S&P 500 earnings from various proposed reforms and examine the recent performance of equities sensitive to tax reform and fiscal stimulus, including high tax rate stocks, cyclicals, small-caps, value stocks, and firms with strong balance sheets. Tax reform could boost corporate earnings substantially, but the effect on the aggregate US equity market, and the distinction between winners and losers, will depend on details that remain to be negotiated. Recent stock market performance suggests investors are already pricing some optimism regarding tax reform. The White House's tax reform plan outlined last week would bring the US federal statutory corporate tax rate to 20%, close to the OECD average and significantly below the median S&P 500's company's current 27% effective rate. Exhibit 1: White House tax plan relative to current law and prior proposals
3 October 2017 | 6:08PM EDT
US Quarterly Chartbook: S&P 500 returns 4% in 3Q as Info Tech rally continues S&P 500 returned 4% in 3Q and has risen 14% YTD. Information Technology has led the market all year, rising 9% during the quarter and 27% YTD. However, the sector lagged in September as investors rotated into Energy and Financials. Russell 1000 Growth has beat Russell 1000 Value by 13 pp YTD (21% vs. 8%), but the relative performance reversed by 140 bp during the last month. Looking forward, we expect growth stocks will outperform given Goldman Sachs forecasts for modest GDP growth and limited upside to oil prices. Large-cap growth and value mutual funds should benefit given managers of both styles are overweight the Info Tech sector. Although Tech accounts for 31% of the Russell 1000 Growth index, only 40% of growth funds has outperformed YTD. Tech represents just 7% of the value index, but 70% of funds is ahead of the benchmark YTD.
2017 Sales Growth: Fastest mega cap sales growth: MU, FB, EOG, NFLX, AMZN 2017 Earnings Growth: Fastest mega cap EPS growth: CVX, NFLX, NVDA, FB, AMT Largest S&P 500 Stocks by equity cap: AAPL, GOOGL, MSFT, AMZN, BRK.B Lowest Valuation S&P 500 Stocks by P/E (NTM): MU, CHK, MYL, M, WDC Lowest Valuation S&P 500 Stocks by EV/EBITDA (LTM): VIAB, FL, DISCA, UAL, HPE
Best YTD performers: NRG, VRTX, ALGN, ATVI, MU Worst YTD performers: FL, UAA, RRC, MAT, AAP
3 October 2017 | 6:34PM EDT
Global: GS Economic Indicators Update
The September global CAI increased by 0.1pp to 4.8%, while the DM CAI remained at +3.2%, and the September EM CAI printed at +6.1%. The GS US FCI tightened slightly by 4bp to 98.99, this was predominantly due to a stronger dollar. The Euro area FCI eased by 6bp to 99.58 on account of higher equity prices. The Japan FCI tightened by 4bp to 99.07 as a result of higher bond yields. The UK FCI eased by 2bp to 98.03 on the back of stronger equities. The September US CII increased by 0.1pp to +1.7%, while UK's CII remained at +2.2%. The September Euro area CII increased by 0.1pp to +1.3%, and Japan's CII increased by 0.2pp to +0.9%. The global MAP increased over the past week, predominantly led by upside data surprises in the the US and Euro area.
October 2, 2017
JEF Economics
Monday Morning Recon …The Week Ahead in the Bond Market: …Treasury This Week
Coupons: Treasury will announce next week’s 3s, 10s, and bonds on Thursday morning. We expect that the sizes of the auctions will be unchanged from the last set of reopenings at $24 bln, $20 bln, and $12 bln, respectively. The $56 bln package of auctions will raise $29 bln cash then the auctions settle on Monday, October 16th . Note that because of the holiday the following Monday and the condensed schedule of bill auctions on Tuesday, both the 3- and 10-year auctions will take place on Wednesday, October 11th while the bond reopening will be held on Thursday, October 12th
October 3, 2017
US Economics & Rates Strategy: Treasury Market Commentary, October 3 Treasury yields ended slightly lower on Tuesday, catalyzed by a story suggesting Treasury Secretary Mnuchin was said to be favoring Governor Powell for the next Fed chair. Intermediate-sector Treasuries outperformed in the move. 10y yields ended at 2.32% and the S&P 500 hit a new all-time high. Treasury yields started the overnight session under mild upward pressure after press reports suggested Tokyo governor Koike will not run in the October 22 national election. The Nikkei 225 index moved higher, to levels not seen in 2 years, and USD/JPY broke above 113 after the report circulated. In the JGB market, the 10y auction came out slightly weaker than expected, but 10y JGB yields failed to break above 0.08%. 40y JGB yields also touched 1.10%, but that level invited buying. 40y JGB yields are hovering near their mid-July highs reached after the sell-off sparked by the ECB Forum in Sintra. A break above 1.10% would open the door to levels not seen since the BoJ cut rates into negative territory (January 2016). … With no data on the US calendar in the morning, price action was dictated by headlines. At 8:00 AM, a Morning Money story from Politico began to circulate that suggested "sources close to the Fed Chair selection process" ... "confirmed Kevin Warsh and Jerome Powell as the current front-runners with Treasury Secretary Steven Mnuchin said to be favoring Powell." The suggestion that Powell may now be the front-runner caused the intermediate sector of the Treasury curve to richen on the butterfly and the overall
curve to bull-steepen. The 5y point richened up to 3bp at one point on the 2s5s30s 50:50 fly, while the 2s30s curve steepened up another basis point. The belly-led rally in Treasuries continued into the afternoon with the 10y yields touching 2.32% just before noon. The S&P 500 traded mostly sideways throughout the move and the DXY index softened a touch. Treasuries weakened a touch into the 3:00 3:00 PM close where 10y yields ended at 2.33%. After the close, Treasury yields crept to fresh lows for the day while the S&P 500 crept to fresh highs. The S&P 500 closed at another all-time high of 2,534, up 0.22% on the day.
At 4:00 PM, CNBC broke a story that suggested the House of Representatives tax plan is "highly likely" to include a fourth tax bracket that would affect the wealthy, but would not be higher than the highest bracket currently at 39.6%. The tax framework released in late September called for three income tax rates of 12, 25 and 35 percent... GDP tracking Upside in auto sales raised our 3Q GDP tracking estimate to 3.1% (from 2.8% previously).
October 4, 2017
FX Morning Daily Commentary, 10/04 …Fed debate. US bond yields have eased back overnight as markets discussed the potential successor to Janet Yellen for the Fed Chair. This debate may stay for some weeks to come until it becomes clear if the Fed will be headed by somebody like Kevin Warsh with some hawkish in credentials or by a perceived dove such as Jerome Powell who, according to Politico, is favoured by Treasury Secretary Mnuchin. More important is the stance of the US economy which seems to be entering an acceleration stage. Car sales have come in strong and the national US Retail Federation expects strong holiday sales gaining 3.6-4% compared to last year. The US 10-year yield finds support at 2.30 which is important for our bullish USDJPY call.
October 2, 2017
Mid & Large Cap Banks: How Willing Is Your Bank to Pay Up for Deposits? September 2017 CD Rates What's new: Most CD rates held fairly steady in September, with the average 36-month CD rate up just 1 bp M/M, to 0.90% while the average 12month and highest rates paid were unchanged M/M at 0.59% and 1.48%, respectively. On a Y/Y basis, the average highest CD rate paid is up 38 bps (a 51% deposit beta). The online banks, however, which typically offer higher rates than banks with branches, saw their 36-month CD rate decline 4 bps M/M (to 1.54%) and their average highest rate decline 1 bp M/M (to 2.11%), even as their average 12-month rate increased 1 bp M/M (to 1.21%). Overall, September was a pause from the otherwise consistent upward trend we've seen in banks' deposit costs as a result of increased competition for funding. Based on intra-quarter commentary from bank managements, though, we expect that upward trend to resume, at least directionally, going forward. …Investment recommendations: Our highest conviction OW-rated banks (in order) include SIVB, OZRK, and KEY in midcaps, and GS, WFC, and DFS in large caps.
nature and more “synchronized” in nature than at any time since the years 2005-2006-2007.
Synchronized and stronger Global GDP growth points to an acceleration in growth over the year 2018 (into the year 2019) than in the year 2017 (which was stronger growth than the year 2016 !). Growth in the year 2019 is forecast to be as resilient as the growth rate of 2017 ! Thus, the years 2017, 2018 and 2019 likely may be years of rising interest rates, globally – driven by central banks EXIT from ZIRP and Q.E. – supported by solid GDP growth and resilient inflation. Exhibit 4: Current 1-yr and 3-yr CD Rates, by Bank For example, before mid-2019, 10-year yields on sovereign debt may be as high as: • • •
2.81% in the USA – see Table 2, 0.87% in Germany, 0.21% in Japan !
The rise in yields following Donald Trump’s victory foreshadowed some of this “growth optimism,” but, clearly, NOT ALL of the improvement ! Importantly, in our models GDP growth forecasts, we assume NO federal Tax Reform/Cuts measures!
Tue 10/3/2017 1:51 PM
U.S. Rates Strategy: The Basis of our Baseline Forecast for FOUR FOMC Rate Hikes over the next 24-months !
So, should such reforms be adopted by Congress, we would have to factor that in to the growth and interest rate trajectories !!!!
Forecast of FOMC Interest rate Hikes
Our models baseline forecast remains for FOUR FOMC short-end interest rate hikes over the coming 24-months.
John D. Herrmann Over the coming 21-to-24-months, our GDP growth models forecast improved global GDP growth – see Table 3: • • • • •
stronger US growth, stronger E-Z growth, stronger China growth, stronger Japan growth AND stronger BRICS growth!
In turn, these economies will support economic growth throughout the world over the years 2017, 2018 and 2019! Thus, over the years 2017-2018-2019, the economic (GDP) growth strength likely may be more “global” in
*** There is a “risk” (82.7%) that the first rate hike occurs th as early as at the December 12-13 Meeting !!! *** If not, then the next FOMC interest rate hike very likely st may be at the March 20-21 2018 Meeting – according to our models !!! Of course there are risks to the contrary of our core baseline forecasts, such as: • •
geopolitical risks between the USA and North Korea, for example. there are other geopolitical and financial/banking risks around the world !
Good Luck to All in 2017-2018-2019 !
US Markets Closing Notes, October 3rd 2017 04 October 2017 - 1132 Recap and Comments: It was a relatively muted session, with Treasuries trading in tight ranges across benchmarks and on the whole little changed. A modest rally in the front-end did contribute to a steepening bias on the curve as the market recouped some of the sharp flattening seen on Friday. Equities closed up ever-so-slightly while the USD was little changed against the G10 on net. Market moves didn’t necessarily reflect it, but there were two notable developments in the US worth flagging today. First, after reports on Friday that both Warsh and Powell have interviewed for the Fed Chair position, Politico reported this morning that they are seen as frontrunners, with Mnuchin said to be favoring Powell. While Yellen’s reappointment would obviously be the least disruptive in terms of a potential change in FOMC policy, a decision to appoint Powell would likely similarly throw cold water on the budding theme of a potential shift in FOMC reaction function. While his appointment could still introduce the risk of a hawkish shift in FOMC expectations, the fact that Powell has been an FOMC voter since 2012 would likely reduce the risk of a wholesale rethink of FOMC communication and strategy that could emerge under a more outsider candidate. The other development that is worth highlighting is the surge in September auto sales to an 18.47mn units annualized pace. To be sure, like much of the recent and upcoming economic indicators, the surge in auto sales was aided by the impacts of Hurricane Harvey and Irma, with sales supported by consumers looking to replace damaged vehicles. With that storm volatility noted, the reason I see these data as notable is because of how it fits into our bias on the market. As John highlighted in today’s Morning Call, we think that Treasuries are approaching key support levels that may be attractive for reengaging the market, but are still hesitant to recommend a buy. One of our apprehensions is on the flow side, as real money appears to be patient in stepping back into the market. Back in May, when US Senior Economist Kevin Cummins and I visited clients in Asia, I found it notable that in almost every meeting in both Tokyo and Beijing Kevin was asked about the state of the consumer, and specifically whether slowing auto sales were an early sign of a more muted consumer outlook. Some of these concerns may be cleared up with a rebound in auto sales. While this likely won’t itself be a game-changer, given the amount of focus auto sales we received from international investors it could give one more reason for them to remain patient and continue edging back their “buy” targets.
Flash Economics Is there a risk of a recession in the United States? We can first look at growth in the United States from the supply side: once the participation rate stops increasing, US growth will be capped by the level of potential growth at a constant participation rate, i.e. around 1.5%. But it is also important to look at the demand side: could demand for goods and services fall, dragging growth below potential growth?
The slowdown in job creation will dampen household demand, but not more than the supply of goods and services; There could be a downturn in corporate investment: it is high, the capacity utilisation rate is quite low and the profitability of US companies has dropped; There could be a downturn in residential construction and commercial real estate under the effect of rising long-term interest rates and their negative effect on both demand for credit and property prices. But the rise in dollar long-term interest rates is expected to be modest
Altogether: On the supply side, the main shock will be the end of the rise in the participation rate; On the demand side, the main risk concerns corporate investment.
3 October 2017
Market Musings MUSICAL CHAIRS AT THE FED
Markets face an uncertain future for the makeup of the Fed. Recent news reports have sharply raised market expectations that former Fed Governor Kevin Warsh will be named the
next Fed chair before long. We see Warsh as the most likely nominee, followed by current Governor Jay Powell. In the near-term, Warsh would be more hawkish than current Chair Janet Yellen, who reportedly remains a potential candidate as well. There is a noticeable disconnect between the hawkish views of other current or prospective Fed Board nominees and the easy money, easy regulatory priorities of the Trump Administration. We see a growing risk over time for greater political pressure on the Fed to support faster growth, smaller trade deficits, and more manufacturing employment — at the potential cost of higher inflation and/or risks to financial stability.
The deregulation debate … Would Yellen’s opposition to the Administration’s regulatory agenda disqualify her? Not necessarily — especially if the Senate confirms Randal Quarles to the Vice Chair for Supervision (as seems likely) and Trump gets to name the replacement for Vice Chair (for Monetary Policy) Fischer as well as up to two other governors. Four Trump appointees could outweigh the remaining three (Yellen, Powell and Brainard) on easing regulation (which is an issue for the Board rather than the full FOMC). In a recent speech, Powell — who has been the acting vice chair for supervision following the departure of former Fed Governor Daniel Tarullo — hit on similar themes. He argued that the gains from the core of the post-crisis reforms should be preserved, including the benefits from stress testing. On the Volcker Rule, he also conceded that there is “a lot of room to address the burden” it puts on some firms, stating that the Fed and other regulators are actively looking at ways to be more efficient. His tone appeared more open to reforms. Powell noted that a “five agency look at the Volcker Rule” is underway. Markets have been optimistic that regulatory reform could happen without action by Congress, via changes implemented by the various agencies, including the Fed, OCC and FDIC. For a number of Congressional Republicans, this is a top agenda item, and they would very much like to see Yellen replaced by someone they regard as more amenable to their views. This is more likely to be Warsh than Powell, in our view. In the end, the choice of the next Fed chair is likely to come down to which constituencies the White House feels it has to placate with its appointments
to the Federal Reserve Board, and whether easy monetary policy or easy regulatory policy is considered the priority. With the possible exception of Cohn, all of the candidates that favor deregulation also are hawkish on monetary policy, most notably Warsh. A significant risk, then, is greater political pressure on the Fed to deliver continued monetary accommodation even in the face of a potentially overheating economy and higher inflation. An alternative might be to keep Yellen as Chair but surround her with governors who will be more sympathetic toward deregulation, starting with Quarles as the vice chair of supervision. This approach arguably would be less disruptive and ultimately more market-friendly, even if greater public disagreement over regulatory issues among Fed officials resulted for a time. Powell might be seen by some in the Administration as a compromise between these two directions. Which option President Trump chooses could be decided within the next two to three weeks.
4 October 2017
Global Economic Perspectives US Recession probability: still close to zero. Monthly data flow up to August signals little turbulence ahead. Many of you have asked that we refresh our 'hard activity turning point indicator', first described here. The update is in Figure 1 below, which is almost identical to the one in our previous instalment: the probability of a recession happening in the US in the next twelve months is minimal. We argued in July that our indicator historically outperformed the ISM's top-line figure in picking out turning points. Although the gap between 'hard' and 'soft' data is large, the implied recession probabilities are actually in sync and show no signs of a slowdown ahead. Our indicator is robust to clustering and outliers. Our model automatically detects and downplays wacky prints. It can also accommodate changes in volatility— when the increased choppiness of a given series persists—so that it still picks up a clean signal through temporarily foggier conditions. Of course, we have hurricane effects in mind, for realized August and upcoming September prints.
3 October 2017 We show how each constituent series contributes to the indicator. Our model formalizes what we naturally do with heat maps. Just as our eye weighs heat map components by their signal-to-noise ratio, we can formally establish which constituent series matter for our indicator at any point in time. Historically, all contributions drop in sync ahead of a recession. Currently though, they roughly wash out, leaving the indicator essentially flat. This is the sense in which the current data flow flashes no warning signs. Figure 1: Factor- and ISM-implied probabilities of recession within next 12 months.
US Economic Comment Fed Chair discussions begin in earnest Fed chair discussions seem to have moved to the next level News reports suggest President Trump will announce the next Fed Chair in the next couple of weeks. The President and Treasury Secretary Mnuchin are reported to have met with both Jerome Powell and Kevin Warsh last week. We believe that Gary Cohn and Janet Yellen remain in the running, and at this stage, one should not discount other candidates emerging. The above names are mainstream candidates, and none is likely to result in a substantial near-term change in the direction of monetary policy. Kevin Warsh was a Governor and is likely near the top of the list Gary Cohn is Director of the NEC and is at or near the top of the list
Figure 2: Our indicator against the ISM (NBER cyclical peaks as vertical lines)
Figure 3: The two series more recently
Jay Powell is a current Governor and likely represents a "safe" choice Powell's recent comments on monetary policy: "The Committee has been patient in raising rates, and that patience has paid dividends" show he would represent consistency on the FOMC. Although we view him as being on the dovish side of the committee, he expects the FOMC to continue to normalize policy. He prefers a reforming of regulation, but any shift would be marginal. Jay Powell has experience at the Fed and at the Treasury under President George HW Bush. Over time, he has had greater responsibilities and influence within the Fed. He is a credible candidate that would likely face almost no resistance in the confirmation process. Janet Yellen, as Chair, is a viable option but not likely Given the rhetoric from the White House, we believe that Chair Yellen's reappointment is unlikely, despite her effectiveness as Chair. The possibility of another term cannot be discounted completely, as her confirmation would likely be relatively easy. Clearly, she represents the status quo on both regulation and monetary policy. We do not expect a near-term shift in the tone of monetary policy
3 October 2017
Global Rates Strategy A Hypothetical Treasury Issuance Scenario Investors should turn attention from the Fed to Treasury Treasury's issuance profile will change as the balance sheet roll-off begins in mid-October 2017. We are sceptical of much of a fiscal package, but in principle, that issue should be considered, as well. We start to lay out a framework to think about issuance. Balance sheet unwind and issuance Under a plausible scenario, the deficit increases $175 billion in 2018. The Treasury has considerable flexibility to issue bills due to demand for short-end USTs because of increased demand from money market mutual fund reforms. 1-month Tbills are trading 25bp rich to OIS, which suggests significant demand relative to supply. We think front-loaded nominal issuance makes sense for the Treasury in 2018, with some terming out over time (See latest Treasury Refunding Statement). How will issuance affect the curve? We expect an additional $18 billion in T-bill issuance in Q4 2017 to finance the initial Fed balance sheet run off. For 2018, both bills and coupons will likely be increased starting with February refunding, but still weighted toward bills. All else equal, we expect T-bills to cheapen by 3bp in the next quarter. Of course, the debt limit in earlyDecember will introduce other dynamics. For the long end, we expect only 10bp of term premium increase from the balance sheet unwind and overtime. In general, with our supply outlook of front loaded nominal issuance, we still see more flattening pressure for the yield curve. In the unlikely event of a large increase in the deficit, the flattening will be reduced. The Fed will still have roll into about $197bn of newly issued on the runs in 2018. As a result, securities lending window will still be a source of securities to the market, so the on-off the run spread should not widen in 2018. What are the key dates to watch ahead? Looking ahead, key dates to keep in mind for issuance are November 1st Treasury refunding announcement, the ongoing fiscal debate, and December 9th, 2017, the next debt limit and deadline for a budget resolution.
October 3, 2017
Economics Group Special Commentary
Is There an "Invisible Hand" Behind the 2 Percent Inflation Target Rate? The Federal Open Market Committee's (FOMC) 2 percent inflation goal is often targeted by adjusting the FOMC's monetary policy stance. The implicit assumption (or the invisible hand) behind the 2 percent inflation target is that PCE inflation is mean-reverting at the 2 percent rate. However, this assumption requires further inspection and raises questions regarding deviations from the target rate.
Executive Summary The Federal Open Market Committee’s (FOMC) 2 percent inflation goal is often targeted by adjusting the FOMC’s monetary policy stance. The implicit assumption (or the invisible hand) behind the 2 percent inflation target is that the inflation rate is mean-reverting at the 2 percent rate. However, this assumption requires further inspection and raises questions regarding the possibility that the inflation rate would deviate from the target rate. Moreover, what is the behavior of above-/below-target inflation? Are these deviations temporary or permanent in nature? An inflation target plays a critical role in the FOMC’s monetary policy decision making process. Therefore, testing, instead of assuming, to determine if the PCE inflation rate is meanreverting is crucial for decision-makers. Our statistical analysis suggests that the PCE inflation rate may be mean-reverting, although the evidence is tenuous. So, can we assume inflation is mean-reverting, and what level of confidence do we have? A mean-reverting series, by definition, can fluctuate from its mean but eventually returns to some average value. The next challenge is to estimate the pace of adjustment. That is, how long
does it take the inflation rate to return to the target rate after deviating from it? And does the PCE inflation series have a persistence/autocorrelation problem?
Why is persistence/autocorrelation of the inflation rate a concern for decisionmakers? Inflation persistence has crucial policy implications as a consistently below-/above-target inflation rate would suggest an accommodative/restrictive monetary policy for an extended period of time, all else constant. Therefore, a very slow pace of monetary policy normalization would be a possible result if belowtarget inflation persists for an extended period of time. Figure 3
Final Thoughts: The Invisible-hand may need a Boost
The mean-reverting along with lack of autocorrelation/persistence assumptions may be the ‘invisible hand’ behind the 2 percent target rate. However, our findings of autocorrelation suggest the invisible hand may need a boost. Moreover, the autocorrelation/persistence problem has broader implications for decision makers, as persistently lower inflation may not only affect interest rates but also other variables. One of them is the unemployment rate, as the original Phillips curve does not anticipate an autocorrelation problem, Figure 3. A persistently low inflation rate may also explain part of the slower wage growth in recent years. The persistently low inflation rate may reduce business production and their ability to raise prices and thereby may affect profit margins in a low-productivity era. The wage-price spiral may have lost its speed as well. Therefore, the invisible hand behind the inflation rate may need a boost.
October 3, 2017
Credit Strategy Credit Brief: Tax Reform Update ’UGE on Cuts, Light on Details The long-awaited tax proposal released this past week contains proposals to significantly cut individual and business taxes. However, the lack of detail leaves much to be desired for credit investors. In this credit brief, we take a look at the tax proposal, examine each area and offer potential impacts to the credit market, depending on how the details shake out. We also provide an updated summary of the impact tax reform could have on each IG and HY sector. Key Implications for Credit Markets 1) Central Scenario: Lots of Talk, Limited Impact. Overall, we expect lots of fanfare and discussion around tax reform, but ultimately the current proposal is likely to get watered down. The WFS Economics group expects a roughly $1.5 trillion tax cut that will consist of a middle class tax cut via a higher standard deduction and child tax credit and a reduction in the corporate income tax to 25%, funded partially by cash repatriation, but little else.
2) Marginally Positive for Credit: Lower Tax Liability. A drop in the corporate tax rate should still be seen as a marginal positive for credit as it should boost free cash flow. 3) Be Careful What You Wish For: Tighter Monetary Policy. A late cycle stimulus is likely to be met with tighter monetary policy at a faster rate. Tighter credit conditions typically weigh on spreads and push defaults higher over time. 4) Tail-Risk Scenario: Full Tax Reform. We view full tax reform (full elimination of interest deductibility, accelerated depreciation, cash repatriation and a shift to a territorial tax system) as a tail-risk scenario. If it were to occur, non-financial bond issuance could drop as much as 30% and spreads would likely tighten considerably, over several years. 5) Market Shift: Migration to Lower Quality. Tax policy that reduces the allowance for interest deductibility and allows immediate capex expense would likely cause capex-heavy companies to fund capital purchases with debt and highly profitable companies to fund with cash.
October 03, 2017
Economics Group Labor Force Participation for Men and Women Diverge Again From November to August, labor force participation rose 0.3 percentage points to 62.9 percent, a reversal in trend from long-term declines. The uptick came entirely from an increase in participation by women. … Older workers of both genders started staying in the labor force longer since the mid-1990s due to longer lifespans and employers shifting toward defined contribution plans. At the same time, women often have greater ability to delay retirement because service jobs tend to be less physically demanding and older women are on average in better health than their male counterparts, with fewer reporting disabilities. Additionally, women outlive men but typically earn less, making retirement more challenging to afford. These reasons may be behind the fact that over the past year women over age 55 entered the labor force on net while men in this category left. October 2, 2017
Economics Group September Payroll Preview: Buckle Up Work disruptions due to Hurricanes Harvey and Irma are likely to knock down payroll growth substantially in September. We expect payrolls to rise only 55,000 and for the unemployment rate to edge up temporarily. Will September Snap the Payroll Streak? September is set to be a wild month for payroll employment following the landfall of Hurricanes Harvey and Irma. It bears the potential to interrupt the 83 consecutive months of employment growth. The payroll figures stand to be negatively impacted via two channels. First, payrolls are likely to be depressed by work disruptions having delayed routine hiring. Second, employees who didn’t get paid because they weren’t able to work during the pay period covering September 12 will not show up on payrolls. This would have the biggest impact on the one-third of firms with weekly pay periods, particularly in Florida where Irma made landfall during the survey week. The extent to which typically employed workers were not able to
work during this period will be illustrated in the household survey (top chart) and leads up to expect a temporary uptick in the unemployment rate to 4.5 percent. Lessons from Mesdames Katrina and Rita … Recent events do not perfectly follow those of 2005. While Houston was never fully evacuated like New Orleans, the metro area hosts a population five times larger. And whereas Rita struck after the survey week in 2005, Irma arrived right at the start of the survey week. Using the initial claims print for the survey week in our usual monthly payrolls model points to a gain of about 152,000 jobs in September. However, after adjusting for hiring delays and some employees not working at any point over the survey week pay period, we have penciled in a 55,000 rise. Of course, payrolls are notoriously difficult to predict in even a typical month, so our forecast comes with a wider confidence interval than usual.
