OREANDA-NEWS. October 25, 2017. The S&P 500 made it six straight weeks of gains with a 0.9 percent rise last week. More than half of the increase came on Friday after the Senate passed the budget resolution that moved Congress a step closer to delivering on tax reform. There is a long way yet to go, and there is no assurance that something meaningful will ultimately pass. But the odds have now increased, as one more procedural hurdle has been cleared. The view that tax reform had already been priced into the market was dispelled by Friday’s price action.

Bond yields also rose on the news. The ten-year note yield surged six basis points on Friday, and 11 on the week, to 2.38 percent, its highest level since early July. The two-year yield rose as well, but less so, just seven basis points to 1.58 percent. But that is its highest level in nine years, and resulted in a modest steepening of the curve. Contributing to the better sentiment was economic news from China, which reported year-over-year growth of 6.8 percent in the third quarter, reinforcing the view of a broad based global expansion.

Investors Paying Attention to Monetary Policy and Personnel Changes at the Fed

The expectation that the Fed will raise interest rates again in December has continued to rise. The Bloomberg world interest rate probability tool forecast for a December hike rose to 83 percent on Friday from 73 percent the previous week. The CME FedWatch tool odds climbed to 92 percent from 83 percent last Friday. The current Fed leadership has maintained its public posture that rates will, indeed, rise in December, and the current plan indicates another three rate hikes next year, although the ultimate path of policy remains dependent upon the data.

But, it remains uncertain who will lead the Fed beyond February when the current chair’s term expires. We may learn who the president’s nominee is as early as this week. The relative attractiveness of the candidates presumably in the running depends on how dovish or hawkish they are perceived to be. There is also the role of the Fed as regulator to be considered. The president has expressed his preference for low interest rates and a lighter regulatory touch. Investors presumably would welcome the same. They would also presumably prefer as little disruption as possible.

While the immediate uncertainty at the Fed relates to personnel, the other important central bank event this week relates to policy. This week, the European Central Bank is expected to announce a reduction in its quantitative easing program, beginning next year. Exactly what they announce, and the reaction in bond and currency markets will be watched carefully. And in Japan, prime minister Abe rolled to an election victory on Sunday, implying continuity in the Bank of Japan’s accommodative monetary policy.

Third Quarter Earnings Season in Full Swing

Third quarter earnings season ramps up this week with almost 40 percent of S&P 500 companies expected to report. The results so far have been mixed. Banks have been in the early spotlight, and weakness in trading has, in some cases, been offset by strength in wealth management. Investors have generally rewarded good execution, as companies as diverse as Morgan Stanley, IBM and Verizon have seen their results rewarded, while others have been punished. In the aggregate, earnings are now expected to rise by just 1.7 percent in the quarter, according to Factset. The quarter is understood to be impacted by the hurricanes and investors seem to be looking beyond it to some extent at the aggregate level, but perhaps less so at the company level.