Friday’s employment report, rightly or wrongly, confirmed expectations for a December shift in Fed policy. There will be a parade of Fed speakers. We can expect daily discussion about the implications. The punditry will be asking:

What will higher rates mean for financial markets?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted that the market story would focus on the FOMC and a possible change in policy. This was a good guess about the recurrent theme, although there have also been plenty of big earnings stories. To get the full story, let us look at Doug Short’s weekly chart. Doug’s full post discusses the muted effect of Friday’s strong payroll report. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

Doug’s update also provides multi-year context. See his weekly chart for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

The economic calendar is modest and earnings season is winding down. The entire market mood shifted with the employment report. A 2015 rate hike that seemed very unlikely two weeks ago has now become the conventional wisdom. Markets made a quick adjustment on Friday, but is there more to come? Providing some help (??) we will have a week-long series of speeches from Fed Governors and Presidents.

There will be many opportunities to opine on Fed policy and the consequences. Everyone will be asking:

What will higher rates mean for the markets?

Let’s divide this into two themes – the overall impact and specific markets.

  • Overall we have the three camps we have identified in the past:

    1. The market strength rests upon worldwide liquidity. Changing this could halt the rally.
    2. No. Fed policy has done little to help the economy, so gradual cuts will make little difference.
    3. No. As long as rate increases match economic growth, the market will respond well.

  • Sector effects are quite different, and vary widely.

    1. Bank stocks jumped about 2.8%.
    2. REITs declined.
    3. Utilities dropped 3.5% — almost a year’s worth of dividends in one day.

    • There are sources taking each of these positions. I expect it to be fiercely debated in the week ahead.

    As always, I have my own ideas, reported in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.

    • The Good

    The news of the week was mostly good.

  • Signs of compromise in Washington. A highway bill and extension of the Export-Import bank passed in the House with bipartisan support. The vote was forced via an arcane procedure – the discharge petition – used when committee leadership is blocking a vote. (The Hill) Compromise will be needed to avoid a government shutdown with a deadline of December 11th. (The Hill) Bob McTeer objects to handing the bill to the Fed.
  • Construction spending beat expectations with a monthly increase of 0.6%.
  • Home prices increased 6.4% year-over-year according to CoreLogic. This is more recent (September) data than other measures and consistent with the prior month’s report. (Calculated Risk)
  • ISM non-manufacturing was very strong at 59.1. Steven Hansen at GEI has the full story, with plenty of charts and comparisons. This table is particularly helpful.

  • Private employment growth beat expectations. The ADP report showed a monthly increase of 189K private jobs. This is a totally different method from the government surveys and provides useful confirmation.
  • Auto sales were very strong. The sector is “on fire” says Scott Grannis, who notes that the annualized rate of increase is 11% since 2009, 10% in the last year. Bespoke also notes the strength in F-150 sales, an interesting overall indicator.

  • The monthly employment report was strong. The employment news has so many dimensions that it is easy to spin. This time even the persistent critics had trouble finding a flaw. (Good WSJ summary of the numbers and additional commentary from New Deal Democrat).

    • Headline net job gains of 271K beat expectations by about 90K.
    • Labor force participation held steady at 62.4% and employment via the “household” report increased.
    • The unemployment rate dropped to 5% and below 10% on the U6 measure, which includes discouraged workers and the under-employed.
    • Voluntary versus involuntary part-time employment improved.
    • Average hourly earnings increased – now up 2.5% year-over-year. (Calculated Risk)
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