The Global Markets Weekly – 11/3/17

Posted November 5, 2017 by rvillareal

Busy Week Saw BoE, Jobs, FOMC, and Some Tax Bill Progress

A busy week saw few major shifts in the outlook despite the array of data and events. Validating consensus expectations, the Bank of England (BoE) on Thursday announced a hike in the official rate by 25 bps, the first in ten years, to 0.5%. Facing the dilemma of fighting inflation by tightening policy in the face of weak economic conditions, the MPC decided on a dovish compromise. Though marginally more expensive in nominal terms, the cost of credit adjusted for inflation will remain negative for some time. The Bank expects only two more hikes over the next three years to bring inflation back to the official target of 2%.

The decision was intended to shore up the Bank’s credibility after hyping investor expectations for a rate hike following “hawkish” comments at the September meeting with the statement that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months.” In the past, Governor Carney had often whipsawed investors by not delivering on rate expectations. The decision also puts the BoE into better alignment with similar gradual tightening policy shifts by the Federal Reserve and the ECB.

A non-event FOMC decision was followed by a no-waves jobs report, which showed a solid post-hurricane rebound in jobs, albeit a bit weaker than most estimates. While the innards were a bit softer than expected, particularly on wages, the reverse was true in September when the headline was weak, but the innards underlying the jobless rate and wages were strong. The Fed will continue to look through both months, as should investors as keying off any single report in isolation is typically more noise than signal.

We have more detail on the long-awaited Trump/Congressional tax plan in the first of two focus pieces in the full Weekly. The $1.5 trillion bill includes a lot of winners and losers as it may contain up to $6 trillion in cuts offset by $4.5 trillion in hikes. The Chamber of Commerce has welcomed the bill but would like to see more work done, and there are landmines for the mortgage industry and homebuilders, and the state/local income tax deduction may have to be revisited or it may scuttle the bill. Even an agreement on principles passed by Christmas would be enough of a victory, providing the plan passed in early 2018. Otherwise, Republicans fear loss of Congressional control, which could mean that the Democrats could roll-out impeachment articles in 2019.

Coming Week’s Key Indicators and Events:

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