Economic releases, particularly the U.S. Employment Report, were on the stronger side this past week. The equity markets experienced a mixed reaction since the stronger economic data increased the likelihood of an earlier-than-expected tapering of the Fed's bond purchase program. Interest rates rose, but corporate and high yield spreads were little changed. The U.S. dollar was stronger, but oil and metal commodity prices were lower on the week.

Perspective:

The equity markets have entered into a region where good news on the economy is bad news for the markets because that news will allow the Fed to commence tapering its bond purchases. According to the tables above and to the right, the S&P has gained more than 24% year-to-date. The S&P 500's price to earnings valuation has risen to nearly 19 times historic earnings and 16 times projected earnings. While not yet "irrationally exhuberent," the markets are surely fully valued. The fixed income markets have a better link to economic activity than equity markets. In fact, the fixed income markets, along with this week's U.S. employment report, suggest that the economy is firming.

This week in New Orleans, President Barack Obama argued for more infrastructure spending to spur economic activity. The government has two types of tools to influence economic activity: fiscal policy and monetary policy. Infrastructure spending would be in the fiscal policy tool box. The Federal Reserve carries the monetary policy tool box. Unfortunately, as made clear by the failure to avoid sequesture, we have no fiscal policy, only a fiscal result — the difference between spending and taxation. The only effective economic policy is the monetary policy managed by the Federal Reserve. Members of Congress want more direct oversight of the Fed; they want the Fed to be managed by the forces that have failed to implement an effective fiscal policy. We need an independent Fed to be able to implement sometimes unpopular, but necessary, monetary policy decisions. We can't afford to allow the monetary policy be held hostage to extreme forces on either side of the aisle.

Economic Releases:

The U.S. Employment Report for October was stronger than expected. Non-farm Payrolls (blue in the chart) increased 204,000 and Private Payrolls (red in the chart) increased 212,000; both were beyond the range of expectations. Furthermore, net revisions for August and September were up another 60,000. Manufacturing Payrolls (green in the chart) increased 19,000. In other employment news, the headline Unemployment Rate increased a tick to 7.3%. The Average Hourly Earnings increased +0.1%. The Average Workweek remained 34.4 hours. The weekly Initial Jobless Claims fell to 336,000, which lowered the four-week average of Claims to 348,250. Continuing Claims rose 4,000 to 2.868 million, but the four-week average of Claims slipped to 2.866 million.

Other Economic Releases

In the U.S., third quarter GDP rose 2.8% on the back of stronger inventory gains; the good news of the above expectations GDP growth was tempered by the source of those games, since final demand slowed. Personal Income and Consumer Spending increased +0.5% amd +0.2% respectively in September; Personal Income was better than the range of expectations in September and August's PI was revised a tick higher to +0.5% as well. The ISM Services Purchasing Managers' Index gained a point, well into the expansion zone, to 55.4 in October. On the softer side, the University of Michigan's Consumer Sentiment Index slipped a point to 72.0 preliminarily for November. Factory Orders rose 1.7% in September after falling -0.1% in August.

The European Central Bank met and lowered its benchmark rate 25 basis points to 0.25%; this was the first cut in the refinance rate since May. The Markit PMI Composite and Services for the EU slipped to 51.9 and 51.6 respectively in October; the Manufacturing PMI gained 2 ticks to 51.3. Germany's Composite PMI remained unchanged at 53.2 while its Services PMI fell a point to 52.9; Germany's Manufacturing PMI rose a half point to 51.7 in October. Germany's Industrial Production fell -0.9%, but Manufacturing Orders rose 3.3% in September. France's PMI Composite remained at 50.5; its Services slipped a tick to 50.9; France's PMI Manufacturing Index fell a half point further into the contraction zone, to 49.1 in October. France's Industrial Production fell -0.5% in September.

China's Industrial Production rose +0.86% and Retail Sales rose 1.19% in October.

Equities Markets:

Equity markets across the globe were mixed to lower on the week. The stronger economic data, particularly the U.S. employment report, was offset by the accompanying increased likelihood that the the stronger jobs market could allow the Fed to start its tapering of bond purchases earlier.

Bond Markets:

Higher interest rates took their cue from the stronger economic data coming out of the U.S. Emerging market credit spreads widened, but high yield credit spreads narrowed on the week.

Currencies & Commodities:

The U.S. dollar gained against the Yen, Looney and Euro, but fell against the Pound on the week. Oil and Metals commodity prices fell on the week.