The coming week should be filled with high drama for markets as President Donald Trump is expected to name a new Fed chair, and Congress is set to unveil much-anticipated tax reform legislation.
It could be one of the most pivotal for markets in a long time. Trump's Fed pick has the potential to spearhead a major shift in monetary policy and deregulation, and interest rates have already been rising on speculation ahead of that announcement, expected by Friday.
The tax bill is also of big market interest since it has already been a catalyst for broader stock market gains and could drive fiscal stimulus and boost corporate earnings if Congress approves the bill with anywhere near the tax cuts expected. That will potentially be unveiled on Wednesday.
These two events are expected during what is already a super busy market week and an important time for the economy, which just notched the best two quarters in a row in three years. The 3 percent third-quarter growth came despite damage from hurricanes and heralds potentially stronger reports for October data.
The week is packed with events. There's a Fed meeting Tuesday and Wednesday, a Bank of England rate meeting Thursday, the Treasury's refunding announcement Wednesday, and a lot of economic data, from personal consumption to ISM and jobs, all week long. The Fed is not expected to raise interest rates until December, but the Bank of England is expected to hike rates Thursday.
There are also more than 120 S&P 500 companies reporting earnings, including tech and consumer bellwether Apple as well as Facebook, Pfizer and Aetna, a takeover target of CVS.
Stunning strength in tech sector earnings, from the likes of Alphabet, Intel, Amazon and Microsoft, helped send the Nasdaq to new highs Friday and set up hopes for an Apple or Facebook surprise.
"There's certainly going to be catalysts for volatility," said Art Hogan, chief market strategist at Wunderlich Securities.
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The bond market has been reacting to many headlines as candidates for the Fed chair were vetted by the White House and became rotating grist for Wall Street's tireless rumor mill.
"We've got the Fed chair, and we've got a tax bill coming. Both of them are bullish for rates," said Dan Clifton, head of policy strategy at Strategas Research. Bond yields move opposite price, and the 2-year yield, most closely tied to Fed policy, hit 1.63 percent Friday, a fresh 9-year high.
Bond yields have been rising amid speculation that the most hawkish choice, Stanford University economist John Taylor, could be named Fed chairman. Still, Jerome Powell, a current Fed governor, is the one viewed as the top choice of the Trump administration.
"My guess is the markets would be more supportive of Powell," said Ed Keon, managing director and portfolio manager at QMA, a unit of PGIM. Powell's style is seen as closest to current Fed Chair Janet Yellen, "and they would see Powell as a continuation of that policy," Keon said. "John Taylor would be perceived as being more hawkish."
CNBC reported Friday that Trump was leaning toward naming Powell to be the chair when Yellen's term ends in early February.
Clifton said it's possible both Powell and Taylor could be named, with Taylor serving as Powell's vice chairman. Some strategists doubt Taylor, known for his formula-based 'Taylor rule,' would want to play second fiddle to Powell, a Republican first appointed to be a Fed governor in 2012.
"When it comes down to it, when the vice president calls and says the president needs you to be the vice chair, it's hard to turn down the president," said Clifton. The Senate leadership already showed its preference for Taylor during a show of hands vote at the White House earlier this week.
Clifton said Senate support for Powell would be easier to win with Taylor by his side, but Taylor is also seen as more disruptive for markets were he to be named Fed chair because he is seen as likely to push interest rates up faster. The bond market may have a more subdued reaction if Powell is named chairman.
Taylor is viewed as someone who would see a much higher neutral rate for fed funds — 3.5 percent or more compared with the current Fed's 2.75 percent. "The knee-jerk reaction would be substantially higher rates and a big curve flattening in the U.S.," said Michael Schumacher, director, rate strategy at Wells Fargo. "I think you could see the 10-year yield go up 20 basis points relatively quickly to 2.60 to 2.65."
That could send ripples through the stock market, said Hogan, of Wunderlich. "The market can certainly handle higher rates. It just can't handle 20 basis points in two weeks," Hogan said, noting the 10-year was recently at 2.20. "We've certainly had time to digest that possibility [of Taylor], but the stock market hasn't adjusted to that," he said.
Wall Street's fear gauge, the CBOE Volatility Index, or VIX, has risen nearly 8 percent this month.
Market could react to 'spinach' in tax bill, not 'candy'
Clifton said it's possible the Fed news could come on Thursday, especially if the focus is on the difficult parts of the tax proposal. "Let's just say Nov. 1 comes and the tax bill gets released. This is an enormously wonderful tax plan on net. A lower corporate tax rate, lower individual rates …but the focus is going to be on the spinach and not the candy, so that could lead to bad press. So why not step on the bad press and announce your Fed chair Nov. 2?" he said.
Clifton said the aspects of the tax bill that lack consensus are a controversial proposal to limit annual 401(k) contributions and the elimination of state and local tax deductions, which is important in states such as New York and California. The elimination of some interest deductions for corporations is also under scrutiny.
The House on Thursday narrowly voted 216 to 212 to approve a budget resolution, a key step to tax reform. Twenty Republicans, most of whom represent high-tax blue states New York and New Jersey, opposed the measure.
Tax reform is seen as a positive for stocks, but the . The stocks of higher-taxed companies .
But Jack Ablin, CIO at BMO Private Bank, said he tracks small-cap behavior, and they've been recovering. Small-caps overall pay a higher tax rate than large-caps. The average tax rate for S&P 500 companies is about 27 percent, while it's over 30 percent for small caps.
As for the broader market, Ablin says some anticipation for a tax bill has already boosted the market. "Half is already baked in. We get a 4 percent pop if we get it, and a 4 or 5 percent decline if we don't," he said. Strategists said it will be important to see how much agreement there appears to be among congressional factions when the bill is unveiled.
Another factor in the early days of November that could get global interest rates moving higher is the Bank of England's rate-hiking meeting, where it is expected to raise interest rates. It follows the Fed in moving away from ultra-easy policy. The it is buying in its quantitative easing program in half but it extended the program, walking back slowly from its easing programs.
The combined efforts of central banks to tighten policy could add pressure to rates. The Federal Reserve's open market committee meets Tuesday and Wednesday, and while it is not expected to raise rates until December, it could discuss its program to slim down its more than $4 trillion balance sheet. The Fed cut its monthly bond buying by $10 billion and will continue to reduce it.
For that reason, the market will be keenly focused on the Treasury's refunding announcement on Nov. 1. "It's more of a background issue, but the Treasury starts to preview increasing supply for next year," said John Briggs, head of strategy at NatWest Markets. He said the expanding deficit should require more issuance.
"They could be vague or specific. … I'd think its probably less than more at this point. But it's on the radar," he said.
Always important is the monthly employment report, and the October report on Friday could be just as murky as the September report. Economists expect 310,000 nonfarm payrolls, after hurricanes Harvey and Irma resulted in a decline of 33,000 payrolls in September.
The identity of the Fed chair could be the key news for markets since it could drive interest-rate expectations. But Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman, said the market has already been building in its own view without tax reform or information on the new Fed. "People are coming around to the idea that maybe not the three hikes as the Fed is expecting for next year, but two," he said.
What to watch
Monday
Earnings: Noble Energy, CNA Financial, Lowes, Nintendo, Diamond Offshore, First Data, Sempra Energy, Boardwalk Pipeline, Texas Roadhouse, Vornado Realty, Everest Re
8:30 a.m. Personal income and spending
Tuesday
FOMC meeting begins
Earnings: Pfizer, BP, Mastercard, Kellogg, Aetna, American Tower, Archer Daniels Midland, Check Point Software, Cummins, Anadarko, Under Armour, AK Steel, Sony, Steve Madden, Ryanair, U.S. Steel, Electronic Arts, Newfield Exploration, Oshkosh, Mosaic
8:30 a.m. Employment cost index (Q3)
9:00 a.m. S&P/Case-Shiller home prices
9:45 a.m. Chicago PMI
10:00 a.m. Consumer confidence
10:00 a.m. Housing vacancies
Wednesday
October vehicle sales
Earnings: Facebook, Tesla, Kraft Heinz, Honda Motor, Estee Lauder, Clorox, Southern Co, Allergan, FireEye, Pioneer Natural Resources, Brighthouse, Fitbit, Qualcomm, Cheesecake Factory, Shake Shack, GoPro, NY Times, Generac, Marathon Oil
8:15 a.m. ADP employment
9:45 a.m. Markit PMI
10:00 a.m. ISM manufacturing
10:00 a.m. Construction spending
2:00 p.m. FOMC statement
Thursday
Earnings: Apple, Alibaba, DowDupont, AIG, Starbucks, Activision Blizzard, CBS, Tableau Software, Pandora, Allscripts Healthcare, El Pollo Loco, Autonation, Ralph Lauren, Apache, Royal Dutch Shell, Teva, Blue Apron, Credit Suisse, Sanofi, Yum Brands, Wayfair, Genworth Financial
8:30 a.m. Initial claims
8:30 a.m. Productivity and costs
12:20 p.m. New York Fed President William Dudley
6:15 p.m. Atlanta Fed President Raphael Bostic
Friday
Earnings: Berkshire Hathaway, Sotheby's, Bloomin' Brands, Duke Energy, Buckeye Partners, CenterPoint, Madison Square Garden, Pinnacle West
8:30 a.m. Employment
8:30 a.m. International Trade
9:45 a.m. Services PMI
10:00 a.m. ISM nonmanufacturing
10:00 a.m. Factory orders
12:15 p.m. Minneapolis Fed President Neel Kashkari
WATCH: Congressman urges Trump to dump Yellen
