Financial News for the Week of December 8, 2017
HIGHLIGHTS OF THE WEEK
- The Federal Reserve meets next week and is near-universally expected to raise interest rates by 25 basis points, bringing the target for the fed funds to a range of 1.25% to 1.5%.
- The U.S. labor market continues to make progress with 228k jobs added in November. Given the current rate of job creation, it is only a matter of months before the unemployment rate pushes below 4%.
- The American economy is likely to continue its winning streak. Even without tax cuts, 2018 is likely to see growth around 2.5%. With increasing prospects for fiscal stimulus to push growth even higher, the Federal Reserve will continue to remove monetary accommodation.
The Fed Can’t Ignore A 3-Handle On Unemployment
As the Federal Reserve meets next week to decide interest rate policy for the final time in 2017 it is faced with ebullient financial markets and an economy that is operating increasingly close to full capacity. With November’s gain of 228k jobs, the streak of positive job creation entered its 86th month. The unemployment rate in November held steady at 4.1% (a seventeen year low), but with job growth trending above 200k, it is only a matter of months before it pushes to lows not seen since the 1960s.
While there are some doubts about the strength of the relationship between unemployment and inflation, an unemployment rate that begins with a three handle is certain to raise eyebrows. The unemployment rate is already below the FOMC’s assumed neutral level of 4.6%, and other broader measures of labor market slack, such as long-term unemployed and the U-6 measure of labor underutilization, continue to trend lower.
The hope is that employer demand for labor will draw discouraged workers back into the labor force, but the pool of such potential workers is dwindling. Relative to the population, the share of people outside of the workforce (not actively searching for a job), who want a job now is at the same rate it was prior to the recession (Chart 1). The employment to population ratio of core working-aged women (between 25 to 54) has already regained its prerecession peak (Chart 2). The ratio is still lower for men, but it has been steadily declining for no less than seventy years. Subtracting the long-run trend, the ratio does not appear all that abnormal.
Even without tax cuts, the U.S. economy appears likely to continue its winning streak. Growth in the fourth quarter is tracking close to 3%. With supportive financial conditions, economic growth in the range of 2-2.5% appears likely over the next year. Into this environment, Congress looks increasingly likely to pass a tax cut that will raise the deficit and add as much as $1 trillion to the national debt over the next decade.
Any boost to growth from the proposed tax reform plan is likely to show up in higher wages and inflation, which may have to be offset by additional interest rate hikes. Our model simulations based on a Taylor Rule monetary policy reaction function suggest that for every 0.25 percentage points added to economic growth above its trend rate, the Fed should raise rates by an additional 25 basis points. While there is considerably uncertainty around the timing of tax cuts, investors should not discount the likelihood that what Congress giveth the Federal Reserve may taketh away.
James Marple, Director & Senior Economist
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
Financial News for the Week of December 1, 2017
HIGHLIGHTS OF THE WEEK
- The prospect of corporate tax cuts led both the Dow Jones Industrial Average and the S&P 500 to record highs this week, with financial stocks outperforming substantially.
- Economic data was supportive, with third quarter real GDP being revised up to 3.3% annualized, as business investment came in stronger than initially thought.
- Incoming Fed Chairman Jerome Powell stated that “conditions are supportive” of a December rate hike, and we expect the Fed to proceed with one, followed by two more in 2018.
Tax Cuts Just Around The Corner
Economic data released this week also supported investor sentiment, with third quarter real GDP revised up to an impressive 3.3% as business investment accelerated (even more than previously estimated), with firms ramping up expenditures on equipment notably (Chart 1). This marks the strongest two consecutive quarters of growth for the American economy in three years. Momentum in business investment is expected to continue, with shale oil production likely to be a key contributor. Producers have ramped up activity this year in response to a rising price of WTI crude oil. OPEC’s commitment to extend supply cuts through 2018, announced this week, should maintain this momentum. As a result, the upside for the price of crude oil will be limited; we expect the price of WTI crude to sit in the US$50-55 range as the market balances out.
Incoming Fed Chairman Jerome Powell stated that “conditions are supportive” of a December rate hike at his confirmation hearing on Tuesday. Mirroring this view were Yellen and Kaplan in their speeches this week, in contrast to Kashkari who would like to see firmer evidence of inflationary pressures building before proceeding with a hike. At this point, markets are fully pricing in a December hike and we expect the Fed to proceed with one, followed by two more in 2018. Making this scenario increasingly likely is progress on the tax reform front which will require faster monetary policy normalization in order to temper the potential inflationary pressures
Katherine Judge, Economist
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
Financial News for the Week of November 10, 2017
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- With little to digest on the data front, attention was devoted to political developments this week. Stock markets remained upbeat through Wednesday, given optimistic expectations on tax reform, supportive earnings reports and gains among energy stocks.
- However, market sentiment turned down thereafter, as developments on tax reform failed to meet expectations, given key differences between the House bill and the newly-released Senate bill.
- While tax reform will remain top of mind in the days ahead, a number of important data releases next week will help tilt the narrative back toward economic fundamentals, with emphasis placed on the upcoming CPI report.
Tax Bills: When Two Is Not Better Than One
Markets remained upbeat through midweek, given optimistic expectations on tax reform, supportive earnings reports and gains among energy stocks. The latter were buoyed by a surge in crude oil prices, with rising geopolitical uncertainty in the Middle East, particularly in Saudi Arabia, being the main catalyst behind the move (Chart 1). Global demand has been strong and OPEC discipline is expected to continue, but the risks for oil prices are skewed to the downside as non-OPEC production is on the rise, particularly U.S. shale. The EIA reported that U.S. production reached 9.62 million (B/D) last week, which is at the top range of historical highs.
In short, there are enough differences between the two bills to make immediate passage less likely. Much rides on tax reform, with expectations for major change being one of the main supporting factors behind the impressive post-election gains in stock markets (Chart 2). As such, the delay is likely to weigh on near-term sentiment, with prospects for a later introduction of corporate tax cuts of particular concern to investors.
Tax reform is likely to remain top of mind in the days ahead, but a number of important data releases next week will help tilt the narrative back toward economic fundamentals. Hurricane-related volatility should begin to taper off in upcoming reports, supporting the Fed’s decision-making process. With the economy still on a solid course and the labor market tightening further, we remain of the view that the Fed will hike rates once more by year’s end. But, this will require some cooperation from inflation metrics, with the emphasis placed on next week’s CPI report.
Financial News- November 10th, 2017
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.