Stocks up as earnings optimism wins, inflation expectations higher

European stock markets rose in early trade Friday, set to finish the week largely flat after a little wobble but not a huge amount of movement. Churn seems to the be order of the day after a decent run up for the FTSE 100, which hit its best level in about 18 months last Friday. It’s not far off that level this morning.  Bit of a double whammy for UK this morning with the Bank of England chief economist warning inflation will exceed 5% and retail sales falling again. Stagflation vibes but sterling holding on ok and 2yr gilts back off their recent highs, though the wires just flashed the UK 10-year breakeven inflation rate has risen to its highest in 25 years. A GfK report showed consumer inflation expectations jumping to a record high. That’s what the Bank of England is expressly trying to avoid. Asian shares were up as Evergrande repaid a missed dollar interest payment. IHG shares off 2% despite a rebound in bookings thanks to Brits doing more holidaying in the UK, Sainsbury’s also lower as it abandons plans to sell its bank.

 

The S&P 500 closed at a record high and made it seven straight days of gains amid a mood of positivity around earnings. It ends a two-month pullback that saw it decline a modest 6% before recovering. Rates are higher – US 10s at their highest since May at 1.7% and 2s at a year high, curve flatter. The 10yr TIPS breakeven inflation rose above 2.61% to hits its highest since 2012. But investors are shrugging off inflation and expected central bank policy moves because of earnings growth being more positive than thought. Tesla shares rose to a record after earnings beat expectations. Energy and financials lagged, megacap tech did the lifting +1% (FANG+TM up 1%). Again slower growth, higher inflation supports growth stocks as real growth is at a premium. A steep drop for IBM prevented the Dow Jones from rallying.

 

Not a huge move in FX this morning – dollar index around the 93.60 area, major pairs stuck to well-worn levels. GBPUSD is trying to regain 1.38 and make a fresh stab at what looks like a near-term top around 1.3830 – the high of each of the last three days.  

 

Donald Trump + social media + SPAC. It feels like a kind of reassuringly volatile mix. Trump is launching his own social media platform called TRUTH Social. It needs capital letters, of course. I’d maybe even suggest ‘TRUTH! SOCIAL!’ might be more appropriate. Banned by Twitter and Facebook, Trump is taking on the Silicon Valley elite and fake news in the way he knows best. Shares in Digital World Acquisition Corp. (NASDAQ: DWAC), the Spac that merged with the platform company, soared as much as 400% and had to be halted at one point amid very heavy volume. Trump still sells. The stock finished up 357% at $45.50.  

 

I can’t see the majority of people ditching their FB and Twitter accounts for this. But you can see a large chunk of disaffected Americans, chiefly Republican/Trump voters, giving it go. I don’t think this ends the dominance of the other platforms, but tells you a lot about what a lot of people think about the platforms they use. “I created TRUTH Social and TMTG to stand up to the tyranny of Big Tech,” says DT. “We live in a world where the Taliban has a huge presence on Twitter, yet your favorite American President has been silenced. This is unacceptable.” He’s got a point. 

 

If you don’t have a controversial ex-President to back your social media platform, you have to rely on more mundane things like advertising revenues to drive cash flow. So poor Snap shares collapsed overnight as third quarter revenue expectations missed expectations after Apple’s iPhone privacy changes hit the advertising business. Daily active user growth was sluggish and the company warned of the global supply chain problems and labour shortages hitting advertising demand. Shares plunged by more than 21% after hours. Facebook and Twitter both dropped by more than 4% in sympathy.  

 

The Federal Reserve has banned individual stock purchases by top officials and outlined a broader set of restrictions on their investing activities. These will ‘prohibit them from purchasing individual stocks, holding investments in individual bonds, holding investments in agency securities (directly or indirectly), or entering into derivatives’.

The move came as it emerged that Fed officials were warned on March 23rd, 2020, to observe a ‘trading blackout’ for a period of ‘several months’ due to recent and likely upcoming actions by the Fed. The same day, the Fed did its ‘everything it takes’ moment by committing to open-end bond purchases “in the amounts needed to support smooth market functioning”. If you, say, knew the Fed was about to provide the ultimate backstop to the stock market, it would be useful, I assume. I figure that if you owned a tonne of stocks you’d find it valuable to know what the Fed was about to do or not do. Which is why it obviously stinks that Fed members have been allowed to trade individual stocks at all. Messrs Kaplan and Rosengren were trading again within weeks, not months, of the memo date. 

 

If you read the memo a certain way it just sounds like the ethics people were actually just trying to offer some good advice – don’t do any unnecessary selling, we got this: “In light of the rapidly developing nature of recent and likely upcoming (Federal Reserve) System actions, please consider observing a trading blackout and avoid making unnecessary securities transactions for at least the next several months, or until FOMC (Federal Open Market Committee) and Board policy actions return to their regularly scheduled timing.”

Markets primed for US inflation, FOMC minutes, JPM kick off earnings season proper

European stocks were off half a percent this morning in early trade after another fragile day on Wall Street saw selling into the close and another weaker finish. All eyes today on the US CPI inflation number, minutes from the FOMC’s last meeting and the start of earnings season with numbers due out from JPMorgan. Asian equities mixed after Chinese trade data was better than expected.

Markets in Europe turned more positive after the first half-hour but it’s clear sentiment is anaemic The FTSE 100 is chopping around its well-worn range, the DAX is holding on to its 200-day moving average just about. Possible bullish crossover on the MACD needs confirming – big finish required.

Dax Chart 13.10.2021

JOLTS: We saw a marked jump in the “quits rate” with 4.3m workers leaving their jobs, with the quits rate increasing to a series high of 2.9%. Tighter labour market, workers gaining bargaining power = higher wages, more persistent inflation pressures.

But… 38% of households across the US report facing serious financial problems in the past few months, a poll from NPR found. Which begs the question – why and how people are not getting back into work and quitting. One will be down to massive asset inflation due to central bank and fiscal policy that has enabled large numbers of particularly older workers to step back sooner than they would have down otherwise. Couple of years left to retire – house now worth an extra 20% and paid off, 401k looking fatter than ever, etc, etc. Number two is something more sinister and damaging – people just do nothing, if they can. Working day in, day out is like hitting your head against a brick wall – you get a headache, you die sooner, and you don’t go back to it once you’ve stopped doing it. Animal spirits – people’s fight to get up and do things they’d prefer not to do – have been squashed by lockdowns.

More signs of inflation: NY Fed said short and medium-term inflation expectations rose to their highest levels since survey began in 2013.

NY Fed inflation expextations 13.10.2021

UoM preliminary report on Friday – will give us the latest inflation expectation figures. This is where expectations stand now. Today’s CPI print is expected to show prices rose 0.4% on the month to maintain the annual rate at 5.4%.

University of Michigan inflation expectations 13.10.2021

The Fed’s Clarida said the bar for tapering was more than met on inflation and all but met on employment. FOMC minutes will tell us more about how much inflation is a worry – we know the taper is coming, the question is how quickly the Fed moves to tame inflation by raising rates.

Watch for a move in gold – it’s been a fairly tight consolidation phase even as rates and the USD have been on the move – the inflation print and FOMC minutes could spur a bigger move. Indicators still favour bulls.

Gold Chart 13.10.2021

US earnings preview: banks kick off the season

Wall Street rolls into earnings season in a bit of funk. The S&P 500 is about 4% off its recent all-time high, whilst the Nasdaq 100 has declined about 6%, as the megacap growth stocks were hit by rising bond yields. S&P 500 companies are expected to deliver earnings growth of 30%, on revenue growth of 14%.

JPMorgan Chase gets earnings season underway with its Q3 numbers scheduled for Oct 13th before the market open. Then on Thursday we hear from Bank of America, Citigroup, Morgan Stanley and Wells Fargo, before Goldman Sachs rounds out the week on Friday. JPMorgan is expected to deliver earnings per share of $3, on revenues of $29.8bn. Note JPM tends to trade lower on the day of earnings even when it beats expectations for revenues and earnings.

Outlook: Nike and FedEx are among a number of companies that have already issued pretty downcast outlook. Supply chain problems are the biggest worry with a majority of companies releasing updates mentioning this. Growth in the US is decelerating – the Atlanta Fed GDPNow model estimates Q3 real GDP growth of just 1.3%. Higher energy costs, rising producer and consumer inflation, supply bottlenecks, labour shortages and rising wages all conspiring to pull the brake on the recovery somewhat. Still, economic growth has not yet given way to contraction and after a global pandemic it will take time to recovery fully.

Trading: Normalisation of financial markets in the wake of the pandemic – ie substantially less volatility than in 2020 – is likely to weigh somewhat on trading revenues, albeit there was some heightened volatility in equity markets towards the end of September as the stock market retreated. Dealmaking remains positive as the recovery from the pandemic and large amounts of excess cash drove business activity.

Costs: The biggest concern right now for stocks is rising costs. Supply-side worries, specifically rising input and labour costs, pose the single largest headline risk for earnings surprises to fall on the downside. The big banks have already raised their forecasts for expenses this year on a number of occasions. It’s not just some of the well-publicized salary hikes for junior bankers that are a concern – tech costs are also soaring.

Interest rates: Low rates remain a headwind but the recent spike in rates on inflation/tapering/tightening expectations may create conditions for a more positive outlook. The 10s2s spread has pushed out to its widest since June. Rising yields in the quarter may have supported some modest sequential net interest income improvement from Q2.

Chart: After flattening from March through to July, the yield curve is steepening once more.

Yield Curve 13.10.2021

Loan demand: Post-pandemic, banks have been struggling to find people to lend to. Commercial/industria loans remain subdued versus a year ago, but there are signs that consumer loan growth is picking up. Fed data shows consumer loan growth has picked up as the economy recovers. However, UBS showed banks were lowering lending requirements in a bid to improve activity, which could impact on the quality, though this is likely a marginal concern given the broad macro tailwinds for growth. Mortgage activity is expected to be substantially down on last year after the 2020 surge in demand for new mortgages and refinancing.

Chart: Consumer loan growth improving

Consumer Loan chart 13.10.2021

Other stocks we are watching

The Hut Group (THG) – tanked 30% yesterday as its capital markets day seems to have been a total bust. Efforts to outline why the stock deserves a high tech multiple and what it’s doing with Ingenuity and provide more clarity over the business seemingly failed in spectacular fashion. The City has totally lost confidence in this company and its founder. No signs of relief for the company as investors give it the cold shoulder. Shares are off another 5% this morning.

Diversified Energy – the latest to get caught in the ESG net – shares plunged 19%, as much as 25% at one point after a Bloomberg report said oil wells were leaking methane. Rebuttal from company seemed to fall on deaf ears. Shares recovering modestly, +3% today.

Analysts are lifting their Netflix price targets, partly on the popular “Squid Game.” Netflix will report its third-quarter earnings next week.

La settimana che ci aspetta: In arrivo i dati sugli utili del terzo trimestre

Wall Street si animerà con l’arrivo dei dati sugli utili, quando questa settimana inizierà sul serio la stagione degli utili del terzo trimestre. Per quanto riguarda i dati, arriveranno quelli sull’IPC degli Stati Uniti; inoltre ci saranno novità anche dalla Fed, con le ultime note della riunione del FOMC.

I dati sull’IPC USA: una chiave di lettura dell’inflazione

Per prima cosa, mercoledì sarà reso noto il rapporto sull’indice dei prezzi al consumo, che misura l’inflazione negli Stati Uniti.

Dopo la pubblicazione di settembre relativa ai dati di agosto, Jerome Powell e i suoi colleghi si attengono a quanto stabilito: l’alto livello dell’inflazione è un fenomeno passeggero. I numeri di mercoledì sosterranno questa versione?

Per meglio contestualizzare, l’ultimo rapporto relativo all’IPC pubblicato a settembre ha mostrato che la situazione si era leggermente calmata ad agosto. Fino a quel momento, i prezzi sottostanti erano aumentati al loro tasso più basso da sei mesi. Nel complesso, l’IPC è aumentato dello 0,3% dopo aver guadagnato lo 0,5% a luglio. Nei 12 mesi precedenti ad agosto, l’IPC è aumentato del 5,3% dopo aver toccato il 5,4% su base annua a luglio.

Tuttavia, diversi membri della Fed non sono preoccupati.

“Non mi sento a disagio nel pensare che questi prezzi elevati diminuiranno man mano che verranno affrontati i colli di bottiglia legati all’offerta”, ha affermato alla CNBC Charles Evans, presidente della Fed di Chicago. “Penso che questo periodo potrebbe essere più lungo del previsto, assolutamente, non ci sono dubbi al riguardo. Tuttavia, ritengo che sia improbabile un continuo aumento dei prezzi”.

I prezzi del carburante sono però in aumento. I prezzi di petrolio e gas sono saliti alle stelle la settimana scorsa. L’aumento dei prezzi del petrolio indica generalmente un aumento dei costi diretti di produzione e di trasporto in più settori, che possono quindi ricadere sui consumatori, con un conseguente aumento dei prezzi su tutta la linea. Detto questo, gli elevati costi dell’energia e i relativi effetti a catena potrebbero diventare più chiari nella stampa dell’IPC del mese prossimo e non già su quella di mercoledì.

I verbali della riunione del FOMC forniscono approfondimenti sul pensiero della Fed

Mercoledì ci sarà anche il rilascio dei verbali della riunione del FOMC di settembre.

Ora conosciamo il copione: i tassi devono rimanere bassi, e presto arriverà il tapering.

Detto questo, sappiamo anche che alcuni dei falchi all’interno della Fed prevedono aumenti dei tassi prima del previsto. La sensazione è che tassi più alti potrebbero arrivare l’anno prossimo.

Il presidente Powell ha anche aggiunto la sua voce al coro di quelli che mettono in guardia contro il mancato aumento del tetto del debito. Il segretario al Tesoro Janet Yellen ha avvertito che alla fine di settembre, senza un intervento specifico, il governo degli Stati Uniti potrebbe rimanere senza denaro contante.

Secondo Powell, l’insolvenza sul debito statunitense causerebbe “danni significativi” all’economia del Paese a stelle e strisce. Il presidente Biden ha indicato che esiste la concreta possibilità di un aumento del debito, perciò crisi potrebbe essere evitata.

In termini di direzione dell’economia, tuttavia, il tapering è probabilmente la misura più significativa. Si pensa che la Fed rimuoverà il supporto in modo incrementale fino a cancellarlo completamente entro la fine del 2022.

Si tratta di un segnale forte ad indicare che gli Stati Uniti mirano a tornare rapidamente alla normalità economica. Ma la minaccia di nuove varianti di COVID-19 incombe ancora. Speriamo che non ci sia una nuova variante Delta tale da determinare nuovi lockdown nel 2022, altrimenti la Fed si prenderà ancora una volta la colpa.

La stagione degli utili è ancora qui

Torniamo a Wall Street. Gli utili del terzo trimestre stanno per iniziare ad arrivare dalle aziende a grande capitalizzazione, mentre la stagione degli utili ricomincia questa settimana.

Come sempre, si partirà con le grandi banche d’investimento, che nel secondo trimestre hanno riportato numeri di crescita fantastici. Questo slancio continuerà? JPMorgan, Wells Fargo, Citigroup e Goldman Sachs, tra gli altri, avvieranno la stagione degli utili con il primo rapporto in arrivo da JP nella giornata di mercoledì.

Sebbene la crescita sembri rallentare rispetto ai risultati eccezionali del secondo trimestre del 2021, potremmo ancora avere un trimestre ad alte prestazioni. L’azienda statunitense FactSet, che analizza i dati finanziari, prevede che le società dello S&P500 godranno di una crescita degli utili del terzo trimestre del 27,6%, il terzo tasso di crescita degli utili più alto su base annua riportato dall’indice dal 2010.

Nel terzo trimestre ci saranno da affrontare anche ostacoli alla catena di approvvigionamento, che sono stati presenti per tutta la prima metà dell’anno; tuttavia, con l’aumento dei prezzi delle materie prime e dell’energia, potremmo assistere a un rallentamento dei risultati.

Di certo, aziende del calibro di Apple hanno avvertito che la crescita delle vendite subirà un rallentamento verso la fine dell’anno. Vedremo cosà succederà.

Il nostro calendario della stagione degli utili negli Stati Uniti ti terrà aggiornato su quali aziende a grande capitalizzazione riferiranno sui propri utili, così che potrai pianificare le tue operazioni in base ai rapporti sugli utili di questo trimestre. Di seguito troverai anche un elenco delle aziende che riferiranno questa settimana.

I principali dati economici

Date  Time (GMT+1  Asset  Event 
Tue Oct-12  10:00am  EUR  ZEW Economic Sentiment 
  10:00am  EUR  German ZEW Economic Sentiment 
  3:00pm  USD  JOLTS Job Openings 
       
  6:01pm  USD  10-y Bond Auction 
Wed Oct-13  1:30pm  USD  CPI m/m 
  1:30pm  USD  Core CPI m/m 
  6:01pm  USD  30-y Bond Auction 
  7:00pm  USD  FOMC Meeting Minutes 
       
Thu Oct-14  1:30am  AUD  Employment Change 
  1:30am  AUD  Unemployment Rate 
  1:30pm  USD  PPI m/m 
  1:30pm  USD  Core PPI m/m 
  1:30pm  USD  Unemployment Claims 
  4:00pm  USD  Crude Oil Inventories 
       
Fri Oct-15  1:30pm  USD  Core Retail Sales m/m 
  1:30pm  USD  Retail Sales m/m 
  1:30pm  USD  Empire State Manufacturing Index 
  3:00pm  USD  Prelim UoM Consumer Sentiment 
  Tentative  USD  Treasury Currency Report 

 

Key earnings data 

Wed 13 Oct  Thu 14 Oct  Fri 15 Oct 
JPMorgan Chase & Co (JPM) PMO  Bank of America Corp (BAC) PMO  Goldman Sachs Group Inc (GS) PMO 
     
Wells Fargo & Co (WFC) E  Citigroup Inc (C) PMO  Goldman Sachs Group Inc (GS) PMO 
     
  Morgan Stanley (MS) PMO   

 

US nonfarm payrolls miss the mark for the second consecutive month

Another weak jobs report shows job growth starting to stale in the world’s largest economy.

Nonfarm payrolls

US economy added 194,000 jobs in September

US jobs growth slowed two months in a row according to today’s nonfarm payrolls report.

Nonfarm payrolls rose by 194,000 in September, falling way below the Dow Jones estimate of 500,000. The latest stats from the US Labour Department create a more pessimistic picture about the US economy than first thought.

A large drop off in government employment may be behind this latest jobs miss. Government payrolls showed a 123,000 drop, although private payrolls increased by 317,000.

Despite the drop, the unemployment rate continues to edge lower. Today’s report puts it at 4.8%. The share of the labour market held by part-time workers working limited hours due to economic reasons fell to 8.5%.

There are a couple of other small positives to take away from this jobs report. For example, the Labour Force Participation Rate fell slightly to 61.6% from 61.7%. Average hourly earnings rose 4.6% on a year-by-year basis, in line with expectations.

Leisure and hospitality was once more the report’s saving grace. 74,000 new roles were created in this sector in September. Professional and business services contributed 60,000 new positions while retail added an additional 56,000.

Markets show mixed reactions to weak nonfarm payrolls print

Dow Jones futures initially stayed fairly flat when the jobs report landed. S&P 500 futures were rose 0.2%. Nasdaq 100 futures rose 0.58%. The 10-year Treasury yield was around 1.57%.

The Dollar Index dropped slightly, losing 0.15%, staying at around the 94.15 level.

Gold futures were up 1.44%, pushing the precious metal to $1,781.

Perhaps the most important reaction to gauge will the Federal Reserve. The Fed always watches jobs data with an eagle eye, but it’s taken on renewed importance with tapering talk fresh in the air.

The US’s Central Bank has indicated it is ready to start scaling back its massive financial stimulus. Markets expected first tapering to be announced in November at the earliest. Inflation has already soared past the Fed’s 2% target, so it makes sense.

But the jobs market is still a hot button topic for Fed council members. Officials have said they still see the labour sector way below full employment levels. As such, no rate hikes are expected to come this year. Market analysts say a hike is most likely to come in November 2022.

Mixed start for European equities ahead of NFP

Mixed start in Europe after another positive session on Wall Street as the US Senate approved raising the debt ceiling until December. Treasury yields are higher, with the 10yr hitting 1.6%, which may cool megacap tech’s recovery. All eyes today on the nonfarm payrolls report and what this means for the Fed and tapering. 

 

Whilst European bourses are mainly in the red the FTSE 100 is trying to break above 7,100, but as noted yesterday there is moving average congestion to clear out the way just underneath this and it’s still firmly within the range of the last 6 months. The S&P 500 was up 0.83% on Thursday and has now recovered a chunk of the Monday gap and is now just 3% or so off its all-time high. Momentum just flipping in favour of bulls (we note bullish MACD crossover for futures) – has the supply chain-stagflation worry peaked? Maybe, but rising rates could undermine the big weighted tech sector in the near-term and it is unclear whether there is enough appetite among investors to go more overweight cyclicals when the macro outlook still seems somewhat cloudy in terms of growth, policy and inflation. Next week is earnings season so we either get more bullish conference calls for the coming quarters or a bit of sandbagging re supply chain issues, inflation – for the index a lot will depend on whether the C-suite is confident or cautious about their outlooks.

 

Inflation nation: We can keep banging on about inflation, but it’s well understood now. Even the Bank of England has woken up – BoE chief economist Pill warned that inflation looks to be more persistent than originally anticipated. UK inflation expectations have hit 4% for the first time since 2008 – soaring gas and fuel bills not helping. “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4 per cent into 2022 second quarter.” said Pill. Tax hikes and labour shortages also featuring in the inflationary mix. There was a rumour doing the round yesterday that BoE’s Broadbent has “taken Nov off the table”. However, with inflation racing higher it’s clear the Bank should be acting to hike in Nov to get ahead. Markets currently pricing a first 25bps rate hike fully by Feb 2022, another 70bps by the end of that year. 

 

Nonfarm payrolls watch: US employers are expected to have added 490k jobs in September, up from 235k in August, which was a big miss on the forecast. NFPs are important and could be market moving later since the Fed has explicitly tied tapering + subsequent rates lift-off to the labour market. A weak number could just dissuade the Fed from announcing its taper in Nov, but I see this as a low-risk outcome. More likely is steady progress on jobs (ADP was strong on Wed) and the November taper announcement to follow. The persistence of inflation and rising fuel costs in particular has changed the equation for the Fed entirely. Benign inflation that we were used to is no longer to be counted on to provide cover for trying to juice the labour market. The problem is not demand side, it’s supply side. Central banks are seeing rising inflationary pressures that are proving more persistent than thought. Slowing economic growth and risks to the outlook stem from the supply side not the demand side – so pumping the demand side even further into a supply side crisis is not helping matters much. 

The US Debt Ceiling: The Only Way Is Up

With Democratic lawmakers currently working to pass a multi-trillion dollar infrastructure bill, Republican senators have rediscovered their fiscal conservatism, which appeared to temporarily desert them during the Trump era. Given their minority status in both Congressional chambers, McConnell and co are relying on a tool that served them well under the Obama administration – the debt ceiling.

Republicans are demanding that Democrats reduce the scale of their planned infrastructure bill, whose price tag could be as high as $3.5 trillion. Without cooperation on that issue, Republican senators say they will refuse to cooperate on the issue of the debt ceiling. With Senate Majority Leader Schumer already ruling out the use of the reconciliation workaround, which allows for a simple majority for a bill to pass, the only path to resolution on this issue is through a normal Senate vote. This is critical, given the 60-vote requirement for regular bills to pass in the Senate – any debt ceiling resolution will require at least 10 red-state senators to break ranks and vote aye. The achievement of 60 votes is made yet more difficult by the potential for moderate Democrats to join their Republican colleagues in blocking action on the debt ceiling, with Joe Manchin having previously expressed his discomfort with the national debt.

Secretary Yellen now says that the US is likely to hit its debt ceiling on the 18th of October, meaning the federal government will be unable to fulfil its financial obligations after this date unless the ceiling is raised or suspended. This latter point is crucial and has been somewhat muddied by Republican spin on this issue. In reality, the debt ceiling is not about new government spending at all, it is about the government’s ability to fulfil spending promises that it has already made. Such obligations include both welfare payments and the maintenance of the national debt, meaning the potential economic consequences of this saga go far beyond the passage or non-passage of Biden’s infrastructure plan.

This is not the first time that Republican lawmakers have employed such a strategy, using it in both 2011 and 2013 to extract concessions from President Obama. In both of these cases, the concessions achieved were relatively minor, and the Republicans were eventually forced to settle for a moral victory at best. On top of that, the Democrats were able to avoid the bulk of the political backlash, with only 31% of the country saying that they were to blame for the crisis in 2011. So why use such a tactic again, given that it appears on the surface to have been so unsuccessful in times past?

  • Firstly, the political landscape has shifted drastically since episodes one and two of this trilogy. President Biden is a far less formidable political adversary than his former boss, particularly with regards to charisma and control over the media narrative. McConnell will be betting that his party can do a better job of deflecting blame towards the Democrats now they don’t have to compete with Obama’s overwhelming political celebrity. This strategy already appears to be paying off, with just 16% of poll respondents blaming the Republicans for the potential default.
  • Secondly, let us not forget who the intended audience of this political stunt really is – the Republican base. Having the support of even just 31% of the country is more than enough to achieve success in US elections given their historically low turnout, especially in the midterms which are now on the horizon. Turnout will be key in 2022 and this savvy political ploy will increase Republican chances of breaking the Democratic stranglehold on Washington next year by enticing conservative voters to the polls.

With all of this being said, the actual probability of US debt default is virtually zero. This Republican routine would be much more convincing if we hadn’t seen it twice before already. Does anyone really believe that it is a coincidence that all three debt crises have come in the year prior to a midterm election? Or that lawmakers (and their donors) with combined stock portfolios in the billions would seriously allow the devastating economic damage such a default would guarantee? The final nail in the coffin for the convincingness of such a threat is the Republican voters themselves. One of the best-kept secrets in Washington is that red states receive far more in net federal spending per capita than blue states. Whilst conservative voters may love the idea of national fiscal responsibility in theory, they are far more attached to personal financial solvency in practice. If the Republicans actually allowed this debacle to get to a point where the government stopped sending welfare checks, it would be their voters who would suffer the most, and the potential political benefits of this gambit would be nowhere to be seen.

This is not to say that no economic damage will be done or that no panic will occur. In 2011 a resolution was agreed just two days before the debt ceiling was due to be reached and resulted in a US credit rating downgrade and the loss of 1.2 million jobs by 2015. Rather, the very worst fears of the financial markets will not be realised – the debt ceiling will be raised and the infrastructure bill will pass in one form or another. But it’s going to get very messy and very noisy before we get there.

Outcomes:

  1. The panic and political manoeuvring will continue, and may even stretch beyond the October 18th date stated by Yellen, if the Treasury gets creative with their accounting. This uncertainty will hit markets and the real economy but this is a sacrifice Republicans are willing to make. McConnell looks set to trade a few points in the S&P 500 for a few points at the polls in the midterms – a bit of a bargain in political terms.
  2. Moderate Democrats will use this pressure as leverage against the left in their own party who are pushing for the headline $3.5 trillion bill to be realised. This will lead to further infighting among the Democrats which the left will likely lose, meaning a smaller infrastructure package than initially intended.
  3. The chances of the Democrats maintaining or expanding their control in Washington just went down.

Stocks firm in Europe after US selloff

The rise in global bond yields that’s been gathering pace since the delayed reaction to last week’s Fed meeting saw US indices finally crack properly. Mega cap growth took a pounding, sending the Nasdaq down 2.8%, whilst the heavy weighting of these stocks on the S&P 500 sent the broader market lower by 2%. Jay Powell, facing scrutiny from lawmakers in Congress, said inflation could stay “elevated” for longer than previously predicted. Investors are also paying close attention to events in Washington as Republicans once again blocked efforts to raise the debt ceiling and avoid a government shutdown and potential default. European stock markets were firmer in early trade, tracking the middle of the recent ranges. The FTSE 100 continues to trade in a range of a little over 100pts.

Next rose 2.5% as it once again raised its full-year outlook. In the six months to July, brand full-price sales were +8.8% versus 2019 and +62% against 2020. Profit before tax rose to £347m, up +5.9% versus 2019. Full-price sales in the last eight weeks were up +20% versus 2019, which management said ‘materially’ exceeded expectations. The strong outrun means Next is raising full-price sales guidance for the rest of the year to be up +10% versus 2019. And its forecast profit before tax has been raised to £800m, up +6.9% versus 2019 and +£36m ahead of previous guidance of £764m.

The dollar is making new highs, hitting its best since Nov 2020 even as the bond selling takes a pause. US 10yr rates have edged back to around 1.51%. Elsewhere, Citi cited Evergrande as it cut its China 2022 GDP forecast to 4.9% from 5.5%. A key gauge of long-term Eurozone inflation expectations rose to the highest since 2015.

Sterling moved to fresh YTD lows, with GBPUSD touching the 1.350 support. Some have pinned this on fuel (lorry driver) shortages and panic buying. Others have raised the stagflation klaxon because of the fuel problems. This looks like finding a narrative to suit the price action. Nothing changed yesterday relative to the day before. Much like we saw in the bond and equity markets, things move. And cable maybe is seeing a flushing out of some weak hands post the BoE hawkishness. What we have seen is the way sterling moves in a risk-on, risk-off fashion and yesterday was clearly risk off. Expectations for the BoE to raise rates before the Fed may create problems if the BoE has to walk that back in the face of a tougher economic backdrop. Clearly, bulls were caught in a bit of a trap last week and we need to see a bottom formed before we get excited again.

GBP USD Chart 29.09.2021

Stocks ease back at the open, oil and yields higher still

Yields are popping, as a bond market selloff that started last week in the wake of the Fed meeting gathers steam. US 20yr and 30yr paper is yielding the most since July, both above 2%, whilst the benchmark 10yr note has jumped above the psychologically important 1.5% level to 1.53%, its highest since June. Bets on central banks tightening monetary policy more swiftly than previously thought are fuelling the selling in rates as investors also focus in on the wrangling in Washington over the US debt ceiling. Whether we are talking reflation or stagflation, the ‘flation part of the equation is clear and yields need to rise as a corollary. If the Fed is buying $120bn a month in debt today, but buying less tomorrow, it makes sense that rates will inevitably rise.

Senate Republicans on Monday were true to their word and blocked a House bill that would avert a government shutdown and potential default on US debt. Democrats have until Friday to pass legislation that will avoid a shutdown, whilst it’s likely that the debt ceiling must be raised by the middle of October to prevent the US government defaulting on its debt. This pantomime must play out, but it seems impossible that the debt ceiling won’t be raised. A shutdown is possible, however default is unthinkable. Two Fed officials warned of extreme market reaction in the event of a default. Whilst this extreme tail risk is in any way ‘on the table’, Treasuries can expect to go through a period of further volatility.

And with rates on the rise the reflation-value play in the stock market is back on. Energy and financials and stocks tied to the reopening of the economy did well, mega-cap tech and growth was generally weaker as yields rose. Real estate, healthcare and utilities stocks also fell. That mix left the Dow higher but the S&P 500 and Nasdaq lower for the day. We await to see whether the rotation stardust can power further returns for the broad market – as happened at points earlier this year – or if the heavy weighting of the mega cap tech names will weigh further still. European stock markets are a touch lighter in early trade following Monday’s session which was a story of declining risk appetite throughout the session after a pop at the open. Oil keeps heading in one direction, with WTI above $76 and Brent touching $80.

Time to redo the dot plot: Whilst the Fed has started to sound a tad more willing to raise rates, two of its most hawkish members are on the way out. Boston Fed chief Eric Rosengren and Dallas Fed boss Robert Kaplan announced they will be stepping down shortly. “Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve’s execution of that vital work,” Kaplan said in a statement. “For that reason, I have decided to retire.”

This does three things. One, it draws a line under the recent trading disclosure furore. It shows that the Fed under Powell won’t suspect behaviour. Two, it’s going to lower the chances of the insider trading story scuppering Powell’s renomination as Fed chair. Three, it removes two of the more hawkish members from the committee, which could have some implications for monetary policy depending on who replaces them. In the meantime vice presidents Meredith Black (Dallas) and Kenneth Montgomery (Boston) will stand in as interim presidents.
Powell and Yellen testify before a Senate Banking Committee today – the timing of Kaplan and Rosengren stepping down should allow Powell to easily bat away some potentially touch questions over their trading. We also have the Fed’s Evans, Bostic and Bowman on the tape later.

Rising Treasury yields offered support to the US dollar. EUR/USD is down to 1.1670 area, through some big Fib zones and near to the key support at 1.1664-66, while USD/JPY above 111.30 with the YTDS high at 111.64-66. Dollar index is north of 93.60 and towards the very top of the range of the last 11 months – big test here to see if the dollar is going to exert more strength into the back end of the year.

EURUSD Chart 28.09.2021

Gold struggling, making new lows this morning with rates on the march.

Gold Chart 28.09.2021

La settimana che ci aspetta: I dati sulla PCE degli Stati Uniti accelereranno la decisione di tapering della Fed?

All’ordine del giorno questa settimana: Il mondo politico salutiamo Angela Merkel, e la Germania dovrà affrontare il futuro senza la sua leadership per la prima volta da più di un decennio. Vedremo anche una serie di pubblicazioni di importanti dati dagli Stati Uniti, tra cui l’indice di inflazione preferito dalla Fed e le statistiche sul PIL canadese. Calerà di nuovo?

Sappiamo bene che la Fed adora i dati sulla spesa per i consumi personali (PCE, Personal Consumption Spending). La spesa per consumi personali è il suo indice preferito per calcolare l’inflazione, e potrebbe portare la Fed ad anticipare il tanto discusso tapering, in base all’andamento dei dati di agosto.

Il mercato è ampiamente concorde sul fatto che la Fed inizierà a ritirare il suo sostegno economico a novembre o dicembre, quindi la questione si sposta sul possibile aumento vertiginoso dei tassi. La Fed ha già aumentato al 3,7% la sua previsione di inflazione PCE di base per il 2021, dal 3% di giugno: si rendono conto che la questione si sta facendo scottante. Il presidente Powell ha anche già praticamente annunciato che la Fed inizierà il tapering quest’anno. La domanda ora è se la Fed dovrà rivedere queste previsioni ancora più al rialzo, e cosa potrebbe significare per il percorso di rialzo dei tassi di interesse. Se questa settimana vedremo una lettura superiore alle aspettative, sorgeranno preoccupazioni in questo senso.

Ovviamente, sono in gioco altri fattori esterni. Va inoltre sottolineato che il balzo dello 0,4% di luglio è stato in linea con le aspettative, con un rallentamento rispetto alle cifre di giugno.

A luglio il tasso di inflazione complessivo ha raggiunto il 4,2%. Passando ai dati sull’indice dei prezzi al consumo riportati di recente, ad agosto il costo dei beni di consumo è cresciuto del 5,3%. Si tratta di un risultato in linea con le previsioni. Questo dato può anche essere un indicatore di ciò che avverrà con i dati sulla spesa per i consumi personali.

La Fed ha dichiarato di voler lasciare che l’inflazione superi l’obiettivo del 2%, in quanto considera che gli attuali alti livelli siano “transitori”.

Gli Stati Uniti, come praticamente tutte le principali economie, stanno uscendo dalla fase pandemica e stanno cercando di ritrovare una parvenza di normalità. Potrebbe darsi che l’inflazione continui a surriscaldare il mondo economico prima di esaurirsi nel 2022 e svanire.

I dati più recenti sulla spesa per i consumi personali verranno resi noti venerdì.

A tutto ciò è legata la fiducia dei consumatori statunitensi. Com’è logico, prezzi più alti indicano un calo della fiducia dei consumatori. Questo è stato visto nei dati di agosto, e potrebbe essere lo stesso martedì pomeriggio, quando vedremo i dati relativi al mese di settembre.

Ad agosto, la fiducia dei consumatori è scesa ai minimi da sei mesi. L’indice del Conference Board, dopo la lettura di luglio pari a 125,1, è stato rivisto al ribasso a 113,8 punti.

“Le preoccupazioni legate alla variante Delta, e in misura minore, all’aumento dei prezzi del gas e del cibo, hanno portato a una visione meno favorevole delle attuali condizioni economiche e delle prospettive di crescita sul breve termine”, ha affermato per spiegare il calo Lynn Franco, direttrice senior degli indicatori economici presso il Conference Board.

Finora negli Stati Uniti sono stati registrati oltre 39 milioni di casi di COVID-19 nel corso della pandemia.

Fuori dagli Stati Uniti, la Germania volta pagina dopo l’ultimo mandato di Angela Merkel come Cancelliere. Dopo 16 anni, la Merkel fa un passo indietro, e le nuove elezioni hanno il sapore di entusiasmanti cambiamenti.

Per la fine di oggi, la Germania avrà un nuovo cancelliere. Olaf Scholz, leader della SPD, è il favorito nella corsa alle elezioni, e pare in grado di superare i rivali della CDU e dei Verdi.

Detto questo, si pensa che i Verdi, che inizialmente erano sulla buona strada per ottenere il loro migliore risultato prima che i tedeschi andassero al voto, potrebbero diventare il principale alleato della SPD in una nuova coalizione.

La nostra esperta di macroeconomia e di politica Helen Thomas aveva dato un’anticipazione sulle ultime elezioni federali tedesche. Le sue previsioni si sono rivelate corrette?

Parlando di elezioni, i canadesi sono andati di recente alle urne con un’aria di nuovi cambiamenti politici, e il primo ministro Trudeau è riuscito a tenere le redini per un terzo mandato. I liberali non hanno raggiunto la maggioranza, il che potrebbe rendere interessanti le mosse economiche della nazione.

Questo mese verranno pubblicate le cifre del PIL mensile del Canada, dopo una contrazione dell’1,1%. Le stime aveano previsto una crescita del 2,5%, quindi anche con le elezioni anticipate che hanno visto Trudeau mantenere il potere, le sfide di ieri saranno le stesse che il paese dovrà affrontare nel prossimo futuro.

Tiff Macklem, governatore della banca del Canada, sostiene che la ripresa economica “continuerà a richiedere lo stesso straordinario livello di sostegno”. Non sono previste modifiche alla politica economica, nonostante la fiacchezza del PIL mostrata a partire dal mese scorso. Forse questo mese assisteremo ad un’inversione di tendenza o ad una confusione causate dal fervore elettorale.

I principali dati economici

Date  Time (GMT+1)  Asset  Event 
Sun 26-Sep  All Day  EUR  German Federal Elections 
       
Tue 28-Sep  2.30am  AUD  Core Retail Sales m/m 
  3.00pm  USD  CB Consumer Confidence 
       
Wed 29-Sep  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 30-Sep  2.00am  CNH  China Manufacturing PMI 
  1.30pm  CAD  GDP m/m 
       
Fri 01-Oct  8.55am  EUR  German Final Manufactuing PMI 
  1.30pm  USD  Core PCE Index m/m 
  3.00pm  USD  ISM Manufacturing PMI 

 

Yields and central banks on the move

Central banks on the move: Norway’s central bank became the first in the G10 to raise rates after the pandemic, Turkey’s central bank – an outlier – lowered rates (to 18%), whilst the Bank of England and Federal Reserve sat on their hands but indicated they too are about to start moving. Yields are on the move too as bonds sell off on tightening expectations. Something has clearly changed and positioning on rates is shifting. US 10yr yields jumped to 1.44%, posting their biggest one-day gain since March, whilst 30yr bond yields jumped the most in a single day since March 2020. European bond yields are also marching higher.

Although the Fed and BoE remain fairly cautious and the dogma of transitory inflation persists, they’re starting to move beyond pandemic-era emergency mode. Investors see this and are moving too – rates steepening again as they did earlier this year. As we noted yesterday morning, whilst the initial reaction to the Fed’s announcement on Wednesday saw the yield curve flatten, the steepening as the long end picks up is the natural response to the Fed turning more hawkish – it was not just earlier for lift-off but also more hikes in 2023/24. Investors are also betting on higher inflation for longer. US inflation expectations ticked higher too, hitting a month high, helping gold to fend off the move in nominal rates to trade around $1,750, having put in a near-term low at $1,737. The dollar also made a strong move lower yesterday, adding further support.

Stocks rallied on Wall Street, mega cap growth just underperforming a bit as yields rose, helping financials do well. The S&P 500 recovered the 50-day SMA at 4,437 and closed above at 4,448.98. Small caps outperformed with the Russell 2000 picking up almost 2% as reflation trade thinking resurfaced. Energy was the top performer on the S&P 500 again as crude oil (Nov) broke through $73, whilst Brent is testing a 3-year high. Natural gas is back above $5 this morning.

Stocks trade weaker in the early part of the session in Europe as investors digest the selloff in global bonds and look ahead to the uncertainty of the German election on Sunday, which may be a factor for the DAX today. Helen Thomas of BlondeMoney has an excellent preview on the topic for us. The FTSE 100 sits around 7,050, slap in the middle of the range it’s treaded since April. AstraZeneca shares rose 3% as its Lynparza cancer drug performed well in its PROpel Phase III trials. Shares in Hong Kong fell over 1% with Evergrande down 13% as it apparently missed a deadline for an interest payment of $83.5m on an offshore bond.

The US dollar is drifting higher this morning after yesterday’s selloff with near-term momentum positive having briefly hit its highest since Aug 20th. Tweeted yesterday about topping pattern for USD and yesterday’s (just about) outside day candle could be the reversal signal.

Dollar Index 24.09.2021

GBPUSD is holding most of yesterday’s gains but has just pared back a touch to trade at 1.3710 after hitting 1.3750.

GBPUSD Chart 24.09.2021

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