The Daily Update - NFPR

Today’s October non-farm payroll release showed 261,000 jobs added which was below expectations (for a post hurricane rebound) of 313,000 jobs created. The prior month’s reading was revised up to 18,000 from -33,000 and the two month net revision was +90,000. The unemployment rate edged lower to 4.1% from September’s reading of 4.2% although the participation rate fell to 62.7% from 63.1%. The average hourly earnings figure was below expectations growing 2.4% yoy and down from last month’s reading of 2.9% yoy: this follows on from a still relatively muted Q3 employment cost index report which was in line with expectations and registered a quarterly increase of 0.7%. With the caveat that there is still likely to be hurricane related distortions in the data, these numbers point to an improving labour market but also to a still subdued inflation and wage picture: investors continue to expect another rate hike at the December meeting on the back of these numbers.

Yesterday, after a few weeks of fuelling much speculation with his tweets, Donald Trump finally confirmed Jerome Powell as his nomination for the next Fed chair, although the position will still need to be confirmed by the Senate. Powell had become the market front runner into the latter stages so although his appointment is seen positively it was expected: Jerome Powell already serves on the board as a governor and is perceived to imply a continuation of policy.

Also overnight the Republicans continued to try and move forward publishing a draft of the ‘Tax Cut and Jobs Act’. The corporate sector certainly gains as the tax bill in its current state seeks to cut the corporate tax rate to 20% from 35%.  While it was also spun as a ‘middle-class tax cut’, it looks to offer more for the higher income earners. It phases out inheritance tax for the wealthy, reduces the tax rate for those earning USD400,000 to USD1m to 35% and even though the top 39.6% tax rate on income is retained it does not kick in until USD1m. The bill also contains some unpopular measures that are meeting resistance: for example, the proposal to curtail state and local tax deductions and eliminate mortgage interest deduction for new home loans above USD500,000. Overall, the proposals add USD1.5tn to the national debt over 10 years, matching the figure allowed under the Budget Resolution passed last month, but this is unlikely to sit well with the deficit hawks. Clearly, some negotiation and compromises are likely to be required to get the Bill to the stage of having enough votes to pass in both the House of Representatives and Senate.

Recent data points have pointed to the US economy growing at a ‘solid’ pace: notably 3Q GDP grew at a 3% quarterly annualised rate having expanded 3.1% in 2Q and the Conference Board Consumer Confidence figure reached its highest level since December 2000.  That said, the 3Q breakdown shows volatile inventory gains contributed to 0.7% to the 3% GDP gain and underlying components such as real final sales to domestic purchasers showed a more modest expansion of 2.2% in Q3. Looking beyond the volatility of one individual quarter the rate of growth is less impressive: Q3 growth is up 2.3% yoy and post the GFC annual GDP growth has mainly been in the 1.5-2.5% range, except for 2015 when it touched 2.9%.  Even the Fed’s latest median projections look for growth to run at 2.1% and 1.9% for 2018 and 2019 respectively.  The issue is whether growth can sustainably be boosted above 3% and are the proposed tax changes really going to end up giving much of a sustainable boost on this front.

Importantly, the inflation data remains well behaved and with balance sheet normalisation also underway we still see the Fed taking a gradual and patient approach to raising rates.  The announcement of Jerome Powell as the next Fed Chair implies continuity of policy going forward.  Thus, our view remains that the Fed will remain ahead of the curve and we continue to favour positioning at the long end of the yield curve.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.