Everything up, 2nd week in a row

Week ending Friday October 6th 2017

A strong week for markets with equities, USD, copper and bond yields all moving up. Markets are very much looking through any weather-related damage to the economy in 2017Q3.


Equity markets are still excited by the prospect of a juicy 2017Q3 earnings season starting next week, as most firms will feel the boost from the weak USD in the quarter versus the prior year and prior quarter. This tailwind will unwind eventually and mean little in the longer term – and could turn into a headwind if recent USD strength continues.

Short-term bond yields remain strong as markets are firmly betting on a rate rise in December even if they believe in fewer going forward. Yellen’s doubts about the Phillips Curve will only embolden them – and ironically may get it going again as Chuck Norris (rather than Prof Phillips) does his work

The data

While the weekly jobless and monthly September nonfarm payroll numbers disappointed the “all private” average hourly earnings growth was much better than expected. The figure may have been distorted by layoffs of lower earners pushing the average up as the “non-supervisory” average hourly earnings growth was more subdued. The negative growth in total payrolls would mean that total income growth would disappoint despite the unexpectedly fast hourly earnings growth for those in on the payrolls.

Surveys from Markit and the ISM confirm the continuing bullishness of those surveyed for September business confidence, particularly the large non-manufacturing service sector – but appear to have little relationship to actual GDP.

With inflation so low rate rises and Fed balance sheet shrinkage ahead, it seems there is a fundamental mismatch between hope of improving NGDP growth and tighter monetary policy, a competition in which monetary policy will win eventually.

Next week

Data is light until Friday when the triple whammy of CPI for September, October retail sales  and University of Michigan inflation expectations and consumer sentiment hits the tapes. Corporate earnings are expected to be good so maybe a disappointment or two could occur. The big news will be any sign of a replacement for Yellen, of course. In the betting markets Warsh leads Powell, 40% to 30%, i.e. too close to call.


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