Daily Market Color

Risk Assets Decline Amid Tax Reform, Political Drama

Strong Spending, Inferior Inflation

The Commerce Department’s report on personal income and consumer spending for September headlined the economic data released today.  Detailed in the report, consumer spending in the US grew at a healthy pace last month, as expected, while income and inflation growth edged higher.  Consumer spending rose 0.9% for September (+0.1% prior month), its fastest pace since August 2009, boosted by post-hurricane motor vehicle purchases in the South.  Overall personal income grew at a strong +0.4% monthly pace (vs +0.2% in August), albeit inflation-adjusted income figures were flat.  Inflation data in the report showed continued softness as the PCE index, the Fed’s preferred measure of inflation, increased 0.4% in September, yielding a below-target 1.6% annualized rate.  The core PCE index only managed a 0.1% rise MoM and 1.3% YoY – matching last month’s lowest yearly pace since 2015.



Busy Week in Washington

There’s no shortage of evolving drama in Washington to keep financial markets on their toes this week, beginning with the indictment of Paul Manafort, President Trump’s former campaign manager.  This morning, it was officially announced that Manafort and his business partner Rick Gates were being charged on 12 different counts, including tax fraud, stemming from the unregistered work they had been conducting on behalf of the Ukrainian government over the past decade.  Income received during that time went unreported, and the two had reportedly laundered millions of dollars through the dozens of companies they setup and controlled in the process.  The charges are the first to be brought forward as part of special counsel Robert Mueller’s ongoing investigation into Russian interference in the 2016 presidential election.

The charges against Manafort provide an unwanted distraction to Washington’s progress on tax reform, where House Republicans have indicated they will be releasing their proposed overhaul bill this coming Wednesday.  The GOP’s intentions are to have a passable version approved by both the House and Senate by Thanksgiving, which would allow for an executable bill by the beginning of 2018.  Some lawmakers feel that the current timeline is unrealistic and too aggressive to produce a widely accepted bill, especially given that the anticipated 20% corporate tax rate alone would add $1.5 trillion (entire Republican budget) to the federal deficit.  To get through the Senate, a measure can only afford to lose two Republican votes and still pass, which seems like an uphill battle as Senators Bob Corker, Susan Collins, and Rand Paul have already voiced discontent with the proposed reform.



Thursday has been tentatively scheduled for President Trump’s announcement of his nomination for the next Fed Chair.  Jerome Powell was still viewed as the favorite as markets opened up this week, with PredictIt assigning a roughly 80% probability that the current Fed Governor gets the nod, odds which were closer to 30% only a month ago.  Helping to drum up the anticipation, President Trump posted an Instagram video this past Friday in which he stated, “People are anxiously awaiting my decision as to who the next head of the Fed will be. It will be a person who hopefully will do a fantastic job. And I have somebody very specific in mind.”



US Treasurys rallied for a second consecutive session as investors exhibited a cautious tone to begin the week.  Yields/swap rates are down 1-5 bps across the curve, pushing the yield on the 10-year note to a one-week low of 2.37%.  US stocks drifted lower amid tax reform timing concerns, as the DJIA and S&P 500 shed 0.35% while the tech-heavy Nasdaq declined 0.15%.  In commodities, crude oil continued Friday’s supply-driven rally and posted a new two-year high, as WTI futures climbed 0.45% to $54.15/barrel while Brent crude rose 0.75% to $60.90/barrel. 


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