U.S. equities extended their run higher to seven straight weeks
The dollar also rose once again last week, and since September 8, has climbed almost 4 percent, trimming what had been a 10.6 percent decline in the DXY index since the start of the year to 7.2 percent.
It wasn’t just earnings that contributed to the rise in sentiment. Third quarter GDP rose 3.0 percent per the advance estimate, surpassing the 2.6 percent Bloomberg consensus estimate, and defying forecasts of a hurricane induced slowdown from the 3.1 percent pace of the second quarter. It was the first back-to-back growth of 3 percent or better since the second and third quarters of 2014. Personal consumption slowed somewhat from the second quarter, as did business investment, and housing was a drag on the overall total. But inventories and trade more than made up the difference.
Congress Clears the Way for Tax Reform; Meanwhile the ECB reduces QE
Congress edged a little closer to delivering on tax reform, at least procedurally, as the House passed the fiscal 2018 budget resolution. Details of the proposed tax bill are expected to be unveiled this Wednesday. Of course, there is still work to be done, as many Republican members from high-tax states in the northeast voted no in opposition to the proposed restriction on the deductibility of state and local taxes, although reports over the weekend suggest that the property tax deduction may well be preserved. Democratic House members were unanimous in their opposition to the resolution.
And if all that wasn’t enough to generate enthusiasm among equity investors, the European Central Bank (ECB) delivered on its widely expected plan to reduce its quantitative easing (QE) program beginning next year, but did so in such a way that left the open the possibility of extending the program beyond the targeted September end date should conditions warrant. It also said it would maintain low interest rates well beyond the cessation of quantitative easing.
Investors welcomed the dovish tone to the announcement and promptly drove Eurozone stocks higher and the euro lower. The EuroStoxx 50 index closed out the week with a two-day gain of 1.7 percent following the ECB’s announcement. Over the same two days the euro fell from 1.18 to 1.16 against the dollar. The EuroStoxx index has now risen for eight straight weeks, gaining 6 percent, despite stocks in Spain falling for the third week, although the decline was modest.
Japanese stocks also continued their own seven-week streak of uninterrupted gains, as the Nikkei index climbed another 2.6 percent bringing its rise since September 8 to 14.2 percent, more than doubling the gains in the Eurozone and almost tripling the advance of the S&P 500.
Investors Keeping an Eye on Economic Data
Treasury yields were little changed last week, but were hardly dormant along the way. After ending the previous week at a yield of 2.38 percent, the ten-year note surged as high as 2.47 percent in early trading last Friday, only to end the day at 2.41 percent. Bonds are likely to remain somewhat jittery this week. We are likely to learn who the president’s nominee to head the Federal Reserve will be, and the two presumed front runners, Powell and Taylor are viewed as being on opposite ends of the dove/hawk spectrum. And while little of consequence is expected from it, the Fed does meet this week.