Stocks and bond yields continued to move higher this week. Stocks are also trading near all-time highs and the long-term Treasury bond hit a 52-week high yesterday. The jobs number this morning was a little light, but close to expectations. The unemployment rate fell to 4.6%. But wages fell and that won’t help the Fed get to their 2% inflation target.
Both consumers and stock investors are confident with Trump’s win. With that, all signs point to a Fed rate hike in about two weeks. In the final Fed meeting of the year, we’ll not only get a hike, we’ll also know the Fed’s thoughts for next year in the press conference that follows.
Thanks to Dent Research, provided here is our weekly information roundup ending the weekon December 2, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news
U.S. Economy Created 178,000 Jobs in November… The unemployment rate dipped to 4.6%.
What it means – The number of jobs matched expectations as well as the average for the last several months, and that’s a problem. In the post-election economic euphoria, investors appear to expect positive surprises around every corner. It’s not going to happen. Saving 700 jobs at Carrier, a division of United Technologies, is nice, but there are another 1,400 jobs at the company that are headed south. We have an unexpected President-Elect, and the Republicans control both houses of Congress, but none of that changes our slow-growth economy because the Boomers are still getting older.
Buried in the jobs report was a modest $0.02 drop in hourly wages, cutting some of the $0.11 gain in October.
The birth/death adjustment, which represents how many jobs the Bureau of Labor Statistics guesses it missed in its survey, was all but absent this month at 2,000 additional jobs.
OPEC Cuts Output by 1.2 Million Barrels Per Day… After months of failed talks, the oil ministers of OPEC nations announced an agreement to trim supply in an effort to boost prices.
What it means – Well, it worked on the first day. After falling 4% on Tuesday when talks stalled, oil prices shot up 10% on the announcement of the deal on Wednesday , and kept climbing Thursday. But as usual, there’s a lot to be figured out.
The biggest problem is that OPEC members rely on non-OPEC members like Russia to voluntarily cut their production as well. And a committee that includes Venezuela and Algeria will oversee the entire enterprise. Those don’t sound like business partners I want to have, or like trusty arbiters of what’s fair and who is playing by the rules.
It’s easy to see how a country in dire straits, like Venezuela, or Iraq, or most of the other OPEC members, would cheat a little to get more cash in the door. I think oil prices will trend higher in the short-term, but then as the deal falls apart – and U.S. frackers come back online – prices drop.
U.S. Third-Quarter GDP Growth Revised up from 2.9% to 3.2%… A little more consumer spending and less inventory growth pushed the measure higher.
What it means – More growth is good, but it was just one quarter. Averaging it with the numbers for the first and second quarter (0.8% and 1.4% respectively), the U.S. economy expanded by 1.8%. That’s nothing to write home about.
Right now, the Atlanta Fed estimates the U.S. economy will grow by 2.4% in the fourth quarter. If this happens, it would mean that we grew 1.95% in 2016.
S&P CoreLogic Case-Shiller Home Price Index Rose 0.4% in September… The index remains up 5.1% over last year.
What it means – I expected the annual number to drop a bit in September, reflecting more or less flat monthly readings for much of this year. Looking at the figures, we might have another month or two before that happens. The monthly gain was the best since March, with Tampa and Dallas leading the way. New York is at the low end, growing only 1.8% over last year, followed by Washington, D.C. at 2.7%.
Holiday Sales Mixed so Far… In-store sales dropped 5% over last year, even though retailers amped up discounts. At the same time, online sales jumped 17% over Thanksgiving and Black Friday, and rose 9.4% on Cyber Monday.
What it means – Online sales are growing rapidly, but still account for less than 15% of total sales. Flat or falling in-store sales has a bigger impact than rising online sales.
It looks like holiday sales may grow modestly at best this year, but we know one thing for certain. There will be a lot of UPS, FedEx, and U.S. Mail trucks roaming neighborhoods right through Christmas Day!
Trump Corporate Tax Cut Will Hit Banks… Large financial institutions and other organizations with tax-loss carryforward balances will have to write down those assets if the incoming administration cuts corporate tax rates.
What it means – It sounds counterintuitive, but it makes sense. Companies that lost a lot of money in the downturn, notably banks, have huge losses that they are able to match up against future profits, lowering their tax bills for years to come. These losses are carried on their books as assets. If a company has $100 million in losses when the tax rate is 35%, the benefit is $35 million. If corporate taxes fall to 15%, the benefit falls to $15 million, so the “asset” just lost $20 million.
To be sure, lower taxes help for years to come while this sort of asset impairment is a one-time thing, but it’s still going to hurt in the year that the government cuts taxes… if they actually get it done.
Eurozone Inflation Inches up 0.6% Over Last Year… Inflation moved a touch higher from October’s 0.5% annual increase.
What it means – Excluding food, energy, alcohol and tobacco, inflation was flat at 0.8%, where it’s been since August. While the headline number might’ve moved up a bit, the overall message is the same – there simply isn’t much inflation. This might give the ECB room to ease a bit more next week, probably by extending its bond-buying program. But there’s a snag.
Since the U.S. presidential election, the dollar shot higher and pushed the euro down from about 110 per dollar to 106. Essentially, our markets are doing the ECB’s work. As the euro gets cheaper, so do European exports. The ECB might hold off to see how this plays out over the next couple of months.
Student Loan Forgiveness To Cost More Than $100 billion… The Government Accountability Office (GAO) estimates that the newly expanded student loan income-based repayment program will cost the government at least $100 billion, if not closer to $200 billion.
What it means – You mean, when we offer people something for free, they take it? Who knew?! According to the GAO, the average loan balance of those using the income-based repayment program is $67,000, which means they hold graduate degrees because undergraduate borrowing is capped at $57,500. So we have a lot of doctors, lawyers, and MBAs joining the income-based repayment program. Imagine that. Smart people see a way to lower their personal bills, kicking the tab to taxpayers, and they take it.
Unfortunately, most of the people in the group most likely to default – those who never finish college but carry student loans with balances between $5,000 and $10,000 – aren’t taking advantage of the program.
Japanese Amusement Park Removes Frozen Aquatic Life from Skating Rink… The amusement park had encased dead fish and other sea life in the ice as a novelty.
What it means – Apparently, the creatures – 5,000 of them – were already dead when purchased from a fishmonger, so there was no cruelty involved. Still, potential patrons found it creepy enough to stay away. The park management apologized profusely to the public. They should apologize to their investors instead.
Next Week – Next week is light on economic reports, bringing just factory orders in the U.S. along with some lesser releases.
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