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November
3
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Week In Review

Employment

Non-farm payrolls rose by 261,000 jobs in October. Revisions to the August and September reports resulted in an additional 90,000 jobs than had been previously reported. The unemployment rate fell from 4.2% to 4.1%. Average hourly earnings fell 0.4%.

Our Take

This month’s numbers were affected by the hurricanes, but looking at the previous two months’ reports together paints a clearer picture. Job growth as reported in the establishment survey is somewhat less than desired, yet the unemployment rate continues to drop, primarily due to reduced labor force participation. Average hourly earnings were disappointing, increasing just 2.4% year-over-year. In the end, October’s employment report was lukewarm at best.


The Fed

President Trump nominated Jerome H. Powell to be the next chairman of the Federal Reserve. Mr. Powell has been serving on the Fed’s board of governors since 2012. Prior to that, he had a career in investment banking and also served as Under Secretary of the Treasury for Domestic Finance under President George H. W. Bush.

Our Take

Mr. Powell is considered a centrist voice at the Fed. During his time as governor, Powell has been a consistent supporter of the Fed ending its accommodative monetary policy at a slow and steady pace. In this respect, his views are not dissimilar from Yellen’s. It is likely his appointment provides monetary policy continuity by adhering to the current framework of gradually normalizing rates and predictably reducing the Fed’s balance sheet. One key area his views may differ from his predecessor is on financial regulation. Chairman Yellen favors additional regulation where Mr. Powell will likely prove to be more open to prudent deregulation.


Tax Reform

The Republicans unveiled their proposed tax reform package. Key elements include lower corporate and individual rates, moving corporate income taxes to a territorial system, eliminating a broad range of itemized deductions, increasing some individual credits and the standard deduction, and phasing out the estate tax. Democrats are unified in opposition to the plan, and the Republicans must enact legislation to implement it on a much accelerated schedule in order to avoid a Democratic filibuster in the Senate.

Our Take

Efforts to reduce tax rates and simplify the tax code are generally pro-growth as long as they do not result in deficits that will drive debt levels too high over the longer run. In order for the Republican plan to be implemented, it will have to get past lobbying efforts by a broad array of interests that will not want to see changes to existing deductions and credits that benefit them.


Municipals

The Republican tax plan released this week calls for a repeal of the tax exemption for advance refunding bonds unless the bonds are callable within three months. Municipalities use advance refunding bonds to refinance existing securities before the securities can be repurchased from bondholders. The proceeds from the sale of the advance refunding bonds are used to purchase government bonds and are held in escrow until the existing securities can be repurchased. In addition to advance refunding bonds, a provision within the plan prevents the use of tax-exempt bonds to build sports stadiums.

Our Take

It is likely that many changes and adjustments will be made to the tax plan. Time will tell if the final tax plan will include this proposal. However, should the final plan include these provisions, expect municipal supply to decrease. Removing the tax exemption for advance refunding bonds would take away state and local governments’ ability to lower its debt service costs.