Originally published by Rivkin Securities
The U.S. presidential election race is getting tighter and tighter, an average of polls surveyed by FiveThirtyEight.com has Clinton ahead with 48.3% and Trump with 45.4% implying Clinton’s probability of winning at 64.9%. A separate average by the New York Times has Clinton leading with 45.3% to Trump's 43.0% and a third survey by the Financial Times also has Clinton leading 44.9% to Trump's 42.7%.
In an interesting turn of events FBI Director James Comey has come out over the weekend stating that their recent review into Clinton’s email saga did not change the agencies previous finding and that no charges were warranted in the case. Clinton’s lead in the polls began narrowing immediately after the FBI announced it had reopened its investigation, perhaps now with this out of the way we may see a reversal in this trend. In reaction the Mexican Peso which weakens as Trump improves in the polls, has strengthened +0.83% against the US Dollar this morning shown on the first chart below.
As a result of the uncertainty around the outcome of the election the theme across markets is risk-off. U.S. two-year treasuries which are traditionally a safe haven rallied on Friday, with the yield declining -1.5 basis points to +0.793% and ten-year bond yields also fell -3 basis points to +1.783%. Both the S&P 500 & Nasdaq 100 declined -0.17% & -0.40% respectively and the U.S. dollar index closed -0.27% lower. 85% of S&P500 companies have now reported third quarter earnings, of those 71% have surpassed earnings estimates while 53% have exceeded revenue forecasts.
U.S. non-farm payroll data on Friday showed that in October 161,000 new jobs were added while the previous month of September was revised higher to 191,000
. While the 161,000 was slightly less than the 173,000 projected by analysts, it is well above the estimated 100,000 needed in order to maintain a steady unemployment rate against population growth. The unemployment rate decreased to 4.9% from 5% and further signs of a tightening labour markets, average hourly earnings increased +2.8% from a year earlier.
Elsewhere the trade balance deficit (MoM Sep) decreased more than anticipated to -$36.4 billion from -$40.5 billion previously and expectations of -$38.0 billion. Looking ahead to the December 14th FOMC meeting, there will now be a very high bar for the FOMC to not raise interest rates. Some have speculated that a Trump victory will cause the FOMC to postpone raising rates, however that would depend entirely on how financial markets continue to function if that scenario plays out.
Regardless of the outcome of the presidential race I think the FOMC will need to raise borrowing costs in December. Looking at the economy GDP is on track for a strong 3rd & 4th quarter, inflation is modestly below the 2% target and we continue to see the labour force tightening which is putting upwards pressure on wages. On top of this the FOMC has become concerned with the build-up of financial risk by leaving rates too low for too long and also their credibility with the market and the damage postponing a rate increase would be to that credibility.
The market is very prepared for this and it has been significantly factored in, what is important looking forward is the projected path of future hikes. The FOMC currently predicts they will raise rates two times in 2017, at the December meeting they will provide updated forecasts and the important outcome will be that they continue to project a very slow and gradual raising of interest rates, which they continue to stress in speeches and the minutes from the meetings.
In Europe a PMI survey of the Euro-zone for services (MoM Oct) was lower than anticipated at 52.8 vs expectations of 53.5 and a composite measure was also lower than expected at 53.3 vs 53.7 forecast. The report by Markit created a fairly mixed picture of the Euro-zone suggesting that perhaps GDP growth for fourth quarter may be unchanged from the third quarter. At the same time the report showed signs that business confidence is improving and early indications of a pickup in hiring. Overall the report provides further evidence that the Euro-zone continues to stabilise, however there are no clear indications that the recovery is gaining any significant traction.
Equity markets were broadly lower across Europe, the Euro Stoxx 600 declined -0.83%, the DAX -0.65%, CAC40 -0.78% and Euro Stoxx 50 -0.64%. The Euro gained +0.37% against the U.S. dollar and German bonds rallied, the two-year yield declining -1 basis point to -0.638% and the ten-year yield falling -2.6 basis points to yield +0.133%.
In the U.K. the pound gained +0.39% to the highest levels in a month following last week’s decision by a London court that a vote would be required before triggering article 50 to begin the withdrawal process from the EU. While the government will appeal this decision to the Supreme Court in early December, should it fail to be overturned then having the scrutiny of parliament over any deal negotiated with Europe is likely to reduce the “hard Brexit” concerns. At the same time the Pound is supported by the Bank of England which is unlikely to reduce interest rates for the remainder of 2016. While the bank also recently revised its inflation and growth figures higher for the near-term, further stimulus is not off the table yet as the bank suggests that they believe the worst is yet to come and will stand by ready to act if necessary.
Oil prices continued their recent slide ahead of an OPEC meeting in Vienna at the end of November with the initial sentiment fading around the announcement to reduce output by around 750,000 barrels per day. Recent comments by members such as Iraq stating they should be exempt for output cuts highlight the difficulty OPEC will face in formally agreeing to any deal. At the same time as both OPEC & non-OPEC nations continue to produce at record levels or near record levels. Both Crude Oil & Brent Oil fell -1.32% & -1.66% respectively, as the Baker Hughes Rig Count for the 4th of November showed an increase of 12 rigs. The second chart below highlights both WTI & Brent crude oil now under US$45 per barrel, previously we have seen the low US$40 levels where we have seen oil officials previously step up their rhetoric to support prices.
Precious metals also gained on Friday on demand for safe havens and U.S. dollar weakness, both spot gold & Silver closed +0.4% & 0.38% higher respectively.
Locally the seasonally adjusted retail figures (MoM Sep) surpassed estimates, increasing +0.6% with expectations for only +0.4%. Meanwhile the retail sales figures adjusted for inflation over the third quarter disappointed, decreasing -0.1% against estimates of +0.2%. Retail sales are an important indicator of consumer spending and inflationary pressures. Month-to-month readings can be very volatile and therefore it is important we look at the longer-term trends. From a year-on-year perspective the headline figure increased +2.8% from +2.6% previously halting ten months of declines. While too early be confident that this trend is reversing, it is an encouraging sign and if it continues to should flow through to benefit consumer spending, economic growth and inflation.
The Australia dollar was modestly weaker on Friday, down just -0.15% and the S&P/ASX 200 was also weaker closing -0.86% lower. ASX SPI200 futures closed 29 points lower on Friday however now with the FBI director James Comey’s statement that the recent review into Hilary’s emails we could see the market perform strongly today.
Data releases:
- BOJ minutes from September 21st Meeting 10:50am AEDT
- German Factory Orders (MoM & YoY Sep) 6:00pm AEDT
- Euro-zone Retail Sales (MoM & YoY Sep) 9:00pm AEDT