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Weekly Economic Review Nov. 27, 2016


“Tax reform always hits different industries differently. It’s the ability to rise above those differences that makes tax reform hard.”

eld Curve

3 yr

5 yr

Last Week

2 yr 0.87 0.87

10 yr

30 yr

Last Month

3 yr 1.03 1.03

5 yr 1.30 1.30

10 yr 30 yr 1.77 2.50 1.77 2.50

Douglas HoltzEakin Republican Economist

Market Overview All major equity indices reached record levels this week, with the Dow Jones Industrial Average closing on Friday at 19,152.14pts, the S&P 500 at 2,213.33pts, and the Nasdaq Composite at 5,398.92pts. The Russell 2000, closing at 1,347.20pts, recorded its longest stretch of daily gains since 1996. While investors have cautioned that the Friday after Thanksgiving is typically good for stocks, this week is the third straight week in which equity markets have recorded gains. Sectors that did particularly well were telecom and utilities, while energy stood out as underperforming, largely due to the continuing fall in the price of oil. Many analysts believe Donald Trump’s promises on financial deregulation continue to spur the bullish sentiment, but are uncertain if the gains are sustainable and not an overreaction. Treasury yields closed on Friday with the highest levels since July 2015 - the 10-year yield increased to 2.358%, up half of a basis point. The massive selloff that occurred immediately after the Presidential Election has slowed this week, with only marginal decreases in price on Friday compared to prices on Monday. The U.S. bond market changed little over the past week, as attention largely shifted to increasing uncertainty in Europe. OPEC’s plan to enact an oil cut has largely fallen through again, with Saudi Arabia stating that a proposed decrease in output is not essential. In four days, the cartel will meet to finalize the deal, which could decrease production of crude oil to approximately 33 million barrels a day. Crude oil on Friday closed at $47.27/bbl on Friday, with the closing price lower than the week’s initial starting price at around $49/bbl.

Macroeconomic Overview The U.S. Commerce Department recently issued its revised estimate of U.S. GDP for Q3, with a slight upward revision from 2.9% to 3.0% annualized growth. If correct, Q3 2016 would have the highest GDP growth rate in two years, a positive indicator for economic growth and an important signal for the Fed’s decision on increasing interest rates in December. Trade was a key factor to the increase in GDP international trade contributed 0.87% of the 3% increase. In spite of continuing uncertainty of Donald Trump’s policies as President, the economy appears to be gaining momentum. The other important signal, employment, appears to be strong as the U.S. Labor Department reported on Friday that the United States added 180,000 jobs in November, a significant increase from October’s 160,000. The employment report is the last major piece of information the Fed will have before they announce a possible rate hike in December, and it appears that most signs are positive for the hike. According to pricing in federal futures contracts, investors now see a 100% probability of a move before the year ends. House prices have officially recovered from their fall in the 2008 financial crisis, according to the Federal Housing Finance Agency last week. Home prices rose 5.5% in the year up to September, signaling a strong recovery bolstered by growth in the third quarter. However, many analysts are skeptical of the real value of home prices, since after adjusting for inflation, prices are 16% lower than they were at the peak of the housing boom. Cities that saw the most significant growth in prices were Seattle, Portland (OR), and Denver.

Fixed Income Overview Due to massive selloffs this month after the U.S. presidential elections, many investors are predicting the largest monthly selloff of bonds since the 2008 financial crisis. The 10-year Treasury yield reached an intraday high of 2.417% on Wednesday, but closed 3.6 basis points lower at 2.355%, its highest closing since mid-2015. While yields have been steadily increasing since July of 2016, the election accelerated the selloff of bonds as many investors expect a more inflationary environment and increased government spending under Donald Trump’s presidency. Since November 9th, the benchmark yield has risen by over 40 basis points. On Tuesday, the Treasury auctioned off around $34bn in five-year notes at a yield of 1.76% - with a bid-cover ratio of 2.44, demand for bonds increased slightly over last week, which had a ratio of 2.42.

Liquidity is often lower before the holidays, and many point the strong increase in yields partially towards the annual effect of fewer market participants rather than Donald Trump’s expected policies. Later in the week, prices went from decreasing to mixed, a significant slowdown from the past several weeks that might indicate a peak of selloffs in the wake of the presidential election.

As the European Central Bank aims to improve liquidity in the repo market by improving the lending of securities, spreads between U.S. and German bond yields reached record levels on Tuesday. German two-yield bonds rebounded on Wednesday from minus 0.744% to minus 0.70%. Many investors are criticizing the bank’s quantitative easing program’s effect on repurchase agreements and the use of securities for collateral in the sector.


Industry Focus: Marijuana Industry

In 2015, the legal marijuana industry in Colorado created more than 18,000 new fulltime jobs and generated $2.4 billion economic activity, according to a study conducted by the economic consulting firm Marijuana Policy Group. The state commissioned the study to analyze the initial marijuana market size and demand in Colorado, as well as a review of market performance post-legalization. Other than the direct increase in demand of legalized marijuana, indirect impacts of marijuana legalization come from increased demand on local goods and services: growers rent warehouse space and purchase sophisticating lighting and irrigation equipment, for instance. Marijuana retailers similarly rely on other companies, like contractors, lawyers and book-keeping services, to conduct their own businesses. Importantly, the study estimates that the majority of growth in the legal marijuana industry is not coming from new, previously untapped demand for cannabis, but rather from siphoning off the unregulated black market. Finally, on the tax side of the ledger, the report finds that marijuana is already pulling in tax revenue at three times the rate of the alcohol industry. By 2020, the firm expects marijuana taxes to outstrip cigarette taxes as a revenue generator. Given the continued trend of marijuana legalization in the US, the marijuana industry is gaining interest as a high growth industry.

Transaction Highlights Insurer Allstate to buy SquareTrade for $1.4 billion Property and casualty insurer Allstate Corp (ALL.N) said on Monday it would buy SquareTrade Holding Co Inc for about $1.4 billion from a group of shareholders that include Bain Capital. SquareTrade, founded in 1999 by Ahmed Khaishgi and Steve Abernethy, offers extended warranty plans for electronic gadgets. The deal, which will help AllState expand into new markets and products, is expected to close in January. Allstate, which expects the acquisition to dilute its earnings per share for three years, intends to fund the deal with cash and debt. Jose Cuervo postpones IPO after Trump election Jose Cuervo, the world's biggest tequila producer, has put its initial public offering on hold following the U.S. presidential election of Donald Trump, which has weighed on Mexican stocks and currency, according to people familiar with the matter on Wednesday. Jose Cuervo, known officially as Becle, had filed with the Mexican bourse in September for an IPO that sources had said could raise as much as $1 billion. The valuation of many Mexican companies has been hit by Trump's surprise victory on Nov. 8, fueled by concern about the U.S. president-elect's campaign promises to renegotiate or scrap the North American Free Trade Agreement. DraftKings and FanDuel agree to merge Two major daily fantasy sports sites set aside rivalry as they face common challenges. Daily fantasy-sports sites in general allow users to create virtual sports teams using real athletes from a given league. The makebelieve team’s standing rises and falls based on the real-life performance of its individual members. The site operator makes money from entry fees, often amounting to about 10%, and doles out cash to users whose teams do well. The two companies, which together spent upward of $500 million on advertising last year to try to build unique brands, had been talking about merging for months, with those talks accelerating in the past few weeks. As expected, DraftKings Chief Executive Jason Robins will serve as CEO of the new company, while FanDuel chief Nigel Eccles will be chairman. These two privately held companies are expected to merge in the second half of 2017.

Data & Indicators Current Week Date 22-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 23-Nov 24-Nov 24-Nov 24-Nov 25-Nov 25-Nov

Time (ET) Statistic For Actual 10:00 AM Existing Home Sales Oct 5.60M 7:00 AM MBA Mortgage Index 19-Nov 5.50% 8:30 AM Continuing Claims 12-Nov 8:30 AM Durable Orders Oct 8:30 AM Initial Claims 19-Nov 251K 8:30 AM Continuing Claims 12-Nov 2043K 8:30 AMDurable Orders, Ex- TransportationOct 8:30 AM Durable Orders Oct 4.80% 8:30 AMDurable Orders, Ex- TransportationOct 1.00% 9:00 AM FHFA Housing Price Index Sep 0.60% 10:00 AM Michigan Sentiment - Final Nov 10:00 AM New Home Sales Oct 563K 10:00 AM Michigan Sentiment - Final Nov 9380.00% 10:30 AM Crude Inventories 19-Nov -1.255M 10:30 AM Natural Gas Inventories 19-Nov 12:00 PM Natural Gas Inventories 19-Nov -2 bcf 2:00 PM FOMC Minutes 2-Nov 8:30 AM Continuing Claims 12-Nov 8:30 AM Initial Claims 19-Nov 10:30 AM Natural Gas Inventories 19-Nov 8:30 AM International Trade in Goods Oct -$62.0B 8:30 AM Advance Wholesale Inventories Oct -0.40%

Briefing Forecast Market Expects Prior Revised From 5.38M 5.40M 5.49M 5.47M NA NA -9.20% NA NA NA NA NA -0.10% 245K 243K 233K 235K NA NA 1977K NA NA 0.20% 2.20% 1.10% 0.40% -0.10% 0.20% 0.30% 0.20% NA NA 0.70% NA NA NA 580K 587K 574K 593K 9180.00% 9160.00% 9160.00% NA NA 5.274M NA NA 30 bcf NA NA 30 bcf NA NA NA NA NA NA NA NA NA NA NA NA NA NA -$56.1B 0.20% 0.20% 0.10% 0.20%

Upcoming Week Date 29-Nov 29-Nov 29-Nov 29-Nov 30-Nov 30-Nov 30-Nov 30-Nov 30-Nov 30-Nov 30-Nov 30-Nov 30-Nov 1-Dec 1-Dec 1-Dec 1-Dec 1-Dec 1-Dec 1-Dec 1-Dec 2-Dec 2-Dec 2-Dec 2-Dec 2-Dec

Time (ET) Statistic For 8:30 AM GDP - Second Estimate Q3 8:30 AM GDP Deflator - Second Estimate Q3 9:00 AM Case-Shiller 20-city Index Sep 10:00 AM Consumer Confidence Nov 7:00 AM MBA Mortgage Index 26-Nov 8:15 AM ADP Employment Change Nov 8:30 AM Personal Income Oct 8:30 AM Personal Spending Oct 8:30 AM Core PCE Price Index Oct 9:45 AM Chicago PMI Nov 10:00 AM Pending Home Sales Oct 10:30 AM Crude Inventories 26-Nov 2:00 PM Fed's Beige Book Nov 7:30 AM Challenger Job Cuts Nov 8:30 AM Initial Claims 26-Nov 8:30 AM Continuing Claims 19-Nov 10:00 AM Construction Spending Oct 10:00 AM ISM Index Nov 10:30 AM Natural Gas Inventories 26-Nov 2:00 PM Auto Sales Nov 2:00 PM Truck Sales Nov 8:30 AM Nonfarm Payrolls Nov 8:30 AM Nonfarm Private Payrolls Nov 8:30 AM Hourly Earnings Nov 8:30 AM Unemployment Rate Nov 8:30 AM Average Workweek Nov

Actual -

Briefing Forecast Market Expects 2.90% 3.00% 1.50% 1.50% 5.20% 5.20% 101 100 NA NA 153K 160K 0.30% 0.40% 0.40% 0.50% 0.10% 0.10% 5140.00% 5200.00% 1.00% 0.70% NA NA NA NA NA NA 255K 253K NA NA 0.30% 0.60% 5150.00% 5210.00% NA NA NA NA NA NA 165K 180K 155K 170K 0.20% 0.20% 4.90% 4.90% 3440.00% 3440.00%

Prior Revised From 2.90% 1.50% 5.10% 9860.00% -5.50% 147K 0.30% 0.50% 0.10% 5060.00% 1.50% -1.255M NA -24.70% 251K 2043K -0.40% 5190.00% -2 bcf 5.12M 9.18M 161K 142K 0.40% 4.90% 3440.00% -

SFCU Weekly Economic Review 12/01/2016