Prior week summary
The major U.S. equity indices moved higher last week as solid third-quarter corporate earnings results and U.S./China trade optimism boosted investor sentiment in the face of growing global growth fears and Brexit uncertainty. Third-quarter U.S. corporate earnings season has impressed thus far as roughly 80% of the S&P 500 companies that have reported have topped consensus estimates. While a better-than-expected corporate earnings season has been a welcomed surprise to many market participants, it is not without concerns as Caterpillar, an oft-watched economic bellwether, missed earnings expectations and lowered full-year earnings guidance, citing “global economic uncertainty” stemming from “trade tensions and other factors.” Economic data for the week was largely negative. The U.S. Markit manufacturing PMI topped consensus estimates, but new and existing home sales, durable goods orders, and a consumer confidence measure surprised to the downside.
In the U.K., Brexit drama ensued, dominating headlines and whipsawing the pound. Prime Minister Boris Johnson successfully passed his version of the Withdrawal Agreement Bill through Parliament on Tuesday, but suffered a defeat later the same day that saw his attempt for expedited implementation of the bill denied in favor of a deadline extension request to the E.U. With the October 31 deadline fast approaching, the E.U. unanimously decided on October 28 to extend the Brexit deadline to January 31. President of the European Council, Donald Tusk, indicated that the deadline extension is flexible and that the U.K. could leave prior to January 31 if a deal is ratified by the U.K. and E.U. parliaments before then. The three-month extension now increases the likelihood that Prime Minister Johnson will, with the help of Labour Party leader, Jeremy Corbyn, call for an early December snap election in an attempt to break the impasse in Parliament.
The look forward
Market participants are gearing up for a busy week as third-quarter GDP, the October non-farm payroll report, and the FOMC rate decision are all slated for release. The Fed Funds futures market is implying just over a 90% chance that the FOMC cuts the target range 25 basis points on Wednesday. Updated figures on construction spending, consumer spending, the ISM manufacturing index, and wholesale inventories also dot the economic calendar.
Market implied policy path (Overnight indexed swap rates)
Fixed income snapshot
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