Daily Market Color December 5, 2016Service Sector Displays Robust Growth, Markets Largely Unaffected by Italian Vote Service Sector Growth, Fed Speakers Highlight US Activity The major US economic data release for today, the ISM non-manufacturing index, displayed the highest monthly growth in service industry activity in more than a year. Exceeding expectations of a 55.5 reading for the month of November, the 57.2 reported level reflected a 2.4-point increase over the previous month, providing a robust outlook for the economy’s largest sector heading into the end of the year. Furthermore, the business activity index increased to 61.7, its highest level since October 2015, while a measure of services employment also tallied a 13-month high of 58.2. Of the 17 service industries surveyed, only three contracted during the month – real estate, rental and leasing, and public administration. US investors also were absorbing speeches from two Fed officials today, both of whom stressed the need for future monetary policy to be closely aligned with fiscal policy, in which there is currently a significant amount of post-election uncertainty. Federal Reserve Bank of New York President William Dudley explained, “Economic expansions don’t die of old age, and there appear to be few imbalances in the economy that could lead to the current expansion ending, but, in order for this to remain the case, it is important that fiscal policy and monetary policy are well aligned going forward.” Dudley went on to say that he expects to work closely with the incoming Trump administration. St. Louis Federal Reserve President James Bullard echoed a similar tone as he discussed the need for future fiscal policies to improve productivity. Bullard stressed that changes made under Trump’s presidency need to boost growth and productivity on a permanent basis, not just provide a short-term stimulus. All three major stock indexes are up on the day, finishing at +0.25% to 1% (DJIA at all-time high), while Treasury yields/swap rates moved up 1-4 bps across the curve, pushing the yield on the 10-year note back up towards 2.40%. Oil Rises Further With Prospect of Non-OPEC Participation Prices of crude oil continued to rally, up to their highest level in more than 16 months this morning, as plans for a meeting between OPEC and non-OPEC members this Saturday in Vienna suggest the potential for additional production cut agreements. Fourteen non-OPEC members were invited to the meeting, including Russia, Mexico, Kazakhstan, Oman, Bahrain, Colombia, Congo, Egypt, Trinidad and Tobago, Turkmenistan, Azerbaijan, Uzbekistan, Bolivia and Brunei, who collectively pump one-fifth of the world’s oil. Russia has already pledged to reduce output by as much as 300,000 barrels per day while Mexico and Kazakhstan, the next two largest producers amongst the invitees, previously stated their unwillingness to participate in a production cut. OPEC’s current production target, 32.5 million barrels per day, stands only marginally below estimates for crude demand, underscoring the importance of shaving production outside of OPEC. Brent crude rose as much as 1.4% today, before trading at the current level of $54.80/barrel (+0.6%). WTI crude oil has seesawed throughout the day and is trading near $51.55/barrel (-0.25%). No Surprises in Italian Referendum For the third time this year, a populist vote has secured victory in a major national referendum, the only difference in Italy’s case from this weekend, is that the result was expected. Italian Prime Minister Matteo Renzi’s proposal for constitutional reform was easily defeated with a 60% against vs. 40% for vote on Sunday, leading to his announcement to resign given in an emotional speech a few hours after the vote results were released. Now entering a period of political uncertainty, Italy’s next decision will be whether to push for an early election for parliament, as Renzi stated that he would not be assisting to stabilize the caretaker administration. The euro weakened to its lowest level in 20 months immediately following the result, but recovered minutes later as investors viewed the effects of the referendum to be contained within the Italian borders. Currently, the euro is up 0.9% on the day near $1.076/EUR. Italian banks absorbed the brunt of the impact, with the share prices of the nation’s main banks falling more than five percent and costs to insure those banks’ bonds rising more than 15 basis points.