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Week in Review

Week Ending: Friday, December 1, 2017

Recap & Commentary

U.S. equities moved higher during the week, tracking expectations of the Senate passing its tax reform bill. Those expectations came to fruition in the early hours of Saturday morning as the Senate voted 51-49 to advance its bill. The House and Senate now must merge (reconcile) their two bills into a single piece of legislation.  While there are key differences between the bills, a final version seems certain. The only real question is whether or not it will be ready by Christmas as the President has insisted.

Apart from the Senate’s efforts to pass its tax legislation, the week was marked by several other noteworthy events. On Monday, Michael Flynn, President Trump’s former National Security Advisor pled guilty to one count of lying to the FBI.  In addition, Flynn is said to be cooperating with Special Counsel Robert Mueller’s investigation.  Flynn’s testimony would only matter insomuch as it raises questions/concerns about whether it would derail/delay passage of Trump’s political agenda. 

On Thursday, OPEC agreed to extend its current production cuts through the end of 2018.  OPEC’s initial decision in 2016 to cut production, coupled with steadily increasing global demand and continued declines in mature fields have all helped to bringing oil markets closer to balance.  Oil recently reached ~$59/bl, it highest level in 2.5 years.  Many analysts expect prices to rise further in 2018.

Inflation, as measured by PCE, the Fed’s preferred inflation gauge, was largely inline with expectations reinforcing the notion that the Fed will raise rates once more at its December meeting.

Economic Bullet Points

Housing sector data was positive in the month, New Home Sales surprised to the upside for the second month in a row. Sales rose just over 6% in October, pushing the annualized rate to a new expansion high. Home prices continued to rise, the Home Price Index up 6.2% Y/Y, the best annualized rate in 3.5 years, and October marking the 16th consecutive month where year-ago gains accelerated. Low mortgage rates, falling unemployment, and low inventory suggest that prices have room to grow, but affordability raises a red flag.

Data out of the factory sector was also strong in the month, masked by a below expectations headline reading for the ISM Mfg. Index. Delivery times saw a welcome improvement after recent hurricane-related delays, quicker deliver times actually a detractor at the headline level.

Non-residential activity drove Construction Spending higher in October, a positive comeback for a component that had been lagging. Despite the improvement, the index is still modest at best.

The consumer at large had a strong October. The widely watched inflation gauge, Core PCE, rose 0.2% in the month, in line with expectations, and the prior month was revised higher. The Y/Y rate also met 1.4% expectations – both rates far from overheating, but the upward trend a definite positive. Consumer Confidence surpassed even high-end expectations, reaching a new 17-year high in November at 129.5. The second estimate for third quarter GDP was revised 0.3% higher to 3.3%. Nonresidential investment and inventory growth added but more than originally estimated, while residential investment and net exports subtracted a little bit less.

Of Note

  • North Korea fired its most advanced inter-continental ballistic missile (ICBM) to date on Tuesday. An analysis of the flight characteristics suggested that the missile has the ability to strike any target within the continental U.S.
Market Indices Week of 12/01

S&P 500                       1.5%

Russell 2000               1.2%

MSCI EAFE                -0.9%

MSCI EM                     -3.3%

Commodities            -0.6%

Barclay’s Agg.             0.0%

US Dollar Index           0.1%

10-Yr Yield                   2.36%

Oil ($/bl)                          $58

Gold ($/oz)                 $1,280

The Week Ahead

  • Factory Orders
  • ISM Non-Mfg. Index
  • International Trade
  • Employment Situation
  • Jobless Claims
  • Consumer Credit
  • Consumer Sentiment
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