Last week’s November employment report was strong in every category, including the number of jobs added, unemployment rate and average hourly earnings. The economy added 266,000 jobs for the month versus an expected 180,000, while October’s report was revised higher. Average hourly earnings increased to 3.1% year over year and the unemployment rate fell to 3.5%, its lowest level since 1969. The strength of the consumer and lower interest rates continue to support risk asset outperformance.
The Bank for International Settlements (BIS) released an interesting report on the September repo crunch that impacted markets. The BIS is best thought of as the “central bank for central banks” around the globe. According to the BIS, the pressure in the repo market was caused by four large banks in the U.S. owning Treasuries that exceeded their deposits at the Federal Reserve (Fed). The problem was exacerbated when hedge funds that use repo to finance investments were quickly looking for liquidity and, as a result, the market got pinched because the Treasuries are less liquid than money on deposit at the Fed. The conclusion of the report is that the issue still exists despite the Fed’s balance sheet expansion through the purchase of Treasuries.
Given the Fed’s balance sheet increase and lowering of interest rates this year, I believe the old adage of “Don’t fight the Fed” very much applies in this market. The current monetary backdrop and fundamental economic performance of U.S. markets are positioned to produce positive returns for the next several quarters, despite geopolitical and trade instability.
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