October 30, 2017

The major stock market averages gapped down at the open. The Dow is currently down 88 pts and the SPX is down .4%. The Nasdaq is down .2%. Gold miners and energy stocks are trading higher. On the other hand, pharmaceuticals, consumer staples, transports and banks are lower on the day. The dollar is a bit weaker against a basket of foreign currencies and commodities are modestly higher. WTI crude oil is treading water at $54/barrel (an 8-month high). Bond prices are higher on the day as yields tick lower. The 5-year Treasury yield is back down to 2.0% and the 10-year yield is down to 2.39% after recently spiking to 2.46%. But still, it seems the path of least resistance for interest rates is up. 

CNBC reports President Trump will nominate a new Federal Reserve chair on Thursday. For investors, candidate Jerome Powell, a current Fed governor, represents status quo in terms of monetary policy views compared with current Fed Chair Janet Yellen. This choice would probably cause the least volatility in capital markets in the near-term. CNBC refers to him as the “leading candidate,” although Mr. Trump’s preference is not clear. He could also choose to retain Janet Yellen. Alternatively, economist John Taylor and former Fed Governor Kevin Warsh are also seen as candidates. 

Two former Trump campaign advisors have been cornered by the FBI. The campaign’s foreign policy advisor George Papadopoulos has now pled guilty to lying to FBI agents concerning the investigation into Russian interference in the election. Specifically, he lied about meetings between himself and Russian nationals. The meetings, it  seems, weren’t illegal, but obstructing an FBI investigation is. Separately, former campaign chair Paul Manafort has been indicted on charges related to money laundering and “conspiracy against the United States.” Most of the charges relate to incidents before he managed Mr. Trump’s campaign. However, he is also charged with lying to the FBI about his work for a foreign government as recently as this year. According to Bloomberg, last year he left the campaign when “information surfaced about his earlier work in Ukraine for a pro-Russian party…”

We got September’s Personal Income & Outlays report this morning, but its usefulness is probably marred by hurricane related issues. Consumer spending growth accelerated to 3.0% during the month, led by a jump in spending on replacement vehicles. And the savings rate dipped to 3.1%, a 10-year low. That’s not good news and we hope it is a temporary dislocation. On a year-over-year basis, inflation picked up slightly to 1.6%, which is still pretty low. Core inflation, which excludes food & energy, held steady at 1.3%. Remember, the Fed’s core inflation target is 2.0% so clearly this report does not encourage monetary tightening. Barron’s reaction to the report: “core inflation remains lifeless in an unwanted highlight of an otherwise solid income and spending report.”

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