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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.
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.
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%.
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.
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.
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
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.
Volgende week: Cijferseizoen Q3 barst los
Op Wall Street zal het bruisen met winstverslagen wanneer het cijferseizoen voor Q3 deze week in alle ernst van start gaat. Qua macro-economische data verwachten we de nieuwe Amerikaanse CPI en de notulen van de laatste FOMC-vergadering van de Fed.
Amerikaanse CPI duidt ontwikkeling inflatie
We beginnen met woensdag het rapport over de consumentenprijsindex (CPI), dat de inflatie in de VS meet.
Na de bekendmaking in september van de cijfers van augustus, houden Jerome Powell en zijn collega’s vast aan hun script: dat al die hoge inflatie gewoon van tijdelijke aard is. Zullen de cijfers van woensdag dit onderschrijven?
Ter context: afgaande op de CPI die in september werd gepubliceerd, leek het dat de inflatie in augustus was afgekoeld. De onderliggende prijzen stegen in het laagste tempo in zes maanden. De CPI steeg in totaal met 0,3 procentpunt, na in juli al met 0,5 procentpunt te zijn gestegen. In de twaalf maanden voorafgaand aan augustus bedroeg de CPI 5,3 procent, terwijl er in juli sprake was van 5,4 procent op jaarbasis.
Een aantal bestuursleden van de Fed maakt zich echter geen zorgen.
“Ik ben ervan overtuigd dat dit te hoge prijzen zijn en dat ze zullen dalen naarmate de knelpunten in de toeleveringsketens worden aangepakt,” verklaarde Charles Evans, voorzitter van de Fed in Chicago, tegenover CNBC. “Ik denk dat dit zeker langer kan duren dan we verwachtten, absoluut, daar twijfel ik niet aan. Maar ik denk ook dat het verder stijgen van deze prijzen onwaarschijnlijk is.”
De brandstofprijs blijft echter records breken. Olie en aardgas noteerden vorige week nieuwe toppen. Hogere olieprijzen wijzen doorgaans op hogere invoer- en transportkosten in diverse sectoren, die dit vervolgens op de consument kunnen verhalen – met over de hele linie hogere prijzen tot gevolg. Dat gezegd hebbende, is het mogelijk dat de hoge energiekosten en de gevolgen daarvan pas duidelijker worden in de CPI-resultaten van volgende maand, nog niet in die van woensdag.
FOMC-notulen bieden inzicht in gedachtegang Fed
Woensdag worden ook de notulen van de FOMC-vergadering van september gepubliceerd.
Het is inmiddels een bekend verhaal: de rente blijft laag, afbouw van steunprogramma’s komt binnenkort.
Toch weten we ook dat sommige van de meer opportunistische Fed-leden voor eerder dan verwachte renteverhogingen willen kiezen. De verwachting is dat de rentes volgend jaar worden verhoogd.
Voorzitter Powell waarschuwde eveneens voor de gevaren van het niet verhogen van het Amerikaanse schuldplafond. Minister van Financiën Janet Yellen waarschuwde eind vorige maand dat de Amerikaanse overheid zonder geld zal komen te zitten als er geen actie wordt ondernomen.
In gebreke blijven bij het afbetalen van schulden zou “aanzienlijke schade” toebrengen aan de Amerikaanse economie, aldus Powell. President Biden heeft al gezegd dat het goed mogelijk is dat het schuldplafond wordt verhoogd en de crisis wordt afgewend.
Het grote macro-economische thema is echter de afbouw van het obligatie-opkoopprogramma. Men gaat ervan uit dat de Fed stap voor stap het programma zal afbouwen, tot het eind 2022 volledig is stopgezet.
Het is een goed teken dat de VS hoopt op een snelle terugkeer naar economische normaliteit. De dreiging van nieuwe COVID-19-varianten is echter reëel. Laten we hopen dat er geen volgende besmettingsgolven en bijbehorende lockdowns zullen zijn in 2022, anders zal de Fed weer achter de feiten aanlopen.
Het cijferseizoen gaat weer van start
Tijd om weer naar Wall Street te gaan. De bedrijfsresultaten van de mega caps voor het derde kwartaal zullen het spits afbijten.
Zoals altijd beginnen we met de grootste investeringsbanken, die voor Q2 al bizarre groeicijfers rapporteerden. Kan het momentum worden vastgehouden? Onder andere JPMorgan, Wells Fargo, Citigroup en Goldman Sachs komen deze week aan bod; JPMorgan is woensdag de eerste.
Hoewel verwacht wordt dat de groei vergeleken met Q2 zal zijn afgenomen, is de hoop nog steeds dat Q3 een goed kwartaal was. De Amerikaanse financiële-cijferaanbieder FactSet voorspelt dat S&P500-bedrijven in het derde kwartaal een winstgroei van 27,6 procent zullen boeken: de op twee na hoogste winstgroei op jaarbasis die de index sinds 2010 heeft gerapporteerd.
Daarentegen moeten we de impact van wereldwijde toeleveringsproblemen niet vergeten. Hier was al sprake van in de eerste helft van het jaar, maar de verder toegenomen prijs van grondstoffen en energie zou de cijfers kunnen drukken.
Bedrijven zoals Apple hebben eerder al gewaarschuwd dat de groei aan het einde van het jaar zal vertragen. We zijn benieuwd.
Blijf up-to-date met onze Amerikaanse cijferseizoenkalender en weet welke mega caps er met resultaten komen, zodat u op het juiste moment posities kunt innemen. Daarnaast vindt u hieronder een voorproefje van de bedrijven die deze week met cijfers komen.
Belangrijke economische data
|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|
|1:30pm||USD||Core PPI m/m|
|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.
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.
- 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.
- 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.
- 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.
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.
Gold struggling, making new lows this morning with rates on the march.
Volgende week: Geven de Amerikaanse consumptiecijfers de Fed het laatste zetje?
Deze week op de agenda: We nemen afscheid van Angela Merkel, nu Duitsland voor het eerst in meer dan tien jaar een toekomst zonder haar leiderschap tegemoet gaat. Ook kunnen we een groot aantal belangrijke cijfers verwachten, waaronder de voorkeursinflatie van de Fed en het Canadese bbp. Doen we opnieuw een stap terug?
We weten allemaal dat de Fed houdt van PCE-cijfers. Personal Consumption Expenditures, of persoonlijke consumptieve bestedingen, zijn de favoriete inflatiemaatstaaf van de Fed – en zou de afbouw van het obligatie-opkoopprogramma concreet kunnen maken, afhankelijk van de cijfers voor augustus.
Over de gehele breedte van de markt wordt aangenomen dat de Fed in november of december haar economische steunmaatregelen zal gaan afbouwen. De vraag is nu of de rentes ook gaan stijgen. De Fed heeft de verwachte kerninflatie voor 2021 al bijgesteld van 3 procent in juni naar 3,7 procent nu – de economie draait op volle toeren. Voorzitter Powell heeft aangegeven dat de Fed zo goed als zeker nog dit jaar met afbouwen zal beginnen. De vraag is nu of de Fed haar verwachtingen verder opwaarts heeft bijgesteld en wat dit kan betekenen voor de voorziene renteverhogingen. Mocht de inflatie hoger zijn dan algemeen wordt aangenomen, dan zouden renteverhogingen zeker niet ondenkbaar zijn.
Natuurlijk spelen er ook andere factoren mee. We mogen ook niet vergeten dat de toename in juli van 0,4 procent in lijn was met de verwachtingen en wees op afkoeling ten opzichte van juni.
In juli bedroeg de algemene inflatie 4,2 procent. Afgaande op de consumentenprijsindex die onlangs werd gerapporteerd, namen de kosten van consumptiegoederen in augustus toe met 5,3 procent. Dit lag in lijn met de verwachtingen. Ook kan het een voorproefje zijn van waar de PCE-cijfers op zullen wijzen.
De Fed laat naar verluidt weten het geen ramp te vinden om de inflatie boven het streefcijfer van 2 procent te laten uitkomen, omdat de huidige hoge inflatie nog altijd als tijdelijk wordt beschouwd.
Net als alle andere grote economieën laat ook de VS de pandemie langzaam achter zich en wordt er geprobeerd weer enige vorm van normaliteit te vinden. Het zou kunnen dat de hoge inflatie nog even de tanden zet in de economie, om in 2022 weer weg te ebben.
Op vrijdag verwachten we de nieuwste PCE-cijfers.
Nauw verwant daaraan is het Amerikaanse consumentenvertrouwen. Het is logisch om aan te nemen dat hogere prijzen resulteren in een lager consumentenvertrouwen. Dit werd al gereflecteerd in de cijfers van augustus, en zou zomaar ook het geval kunnen zijn wanneer we dinsdagmiddag de cijfers van september krijgen.
In augustus daalde het consumentenvertrouwen tot het laagste punt in zes maanden. De index van de Conference Board daalde tot 113,8 punten – in juli stond de index nog op 125,1.
“Zorgen over de deltavariant en in mindere mate over hoge gas- en voedselprijzen resulteerden in een minder positieve blik op de huidige economische situatie en groeikansen op korte termijn,” aldus Lynn Franco, senior-directeur economische indicatoren van de Conference Board, in een verklaring over de dip.
Sinds de start van de pandemie zijn er in de VS al meer dan 39 miljoen besmettingen met COVID-19 geregistreerd.
Buiten de VS sluit Duitsland het hoofdstuk van Angela Merkel als bondskanselier. Na zestien jaar vindt Merkel het genoeg geweest, wat de verkiezingen van vandaag extra interessant maakt.
Aan het einde van de dag zal Duitsland een nieuwe bondskanselier hebben. SPD-leider Olaf Scholz was lang de gedoodverfde winnaar met een straatlengte voorsprong op rivalen van de CDU en de Groenen.
Desondanks zullen de Groenen, die op koers liggen om hun beste verkiezingsresultaat ooit te behalen, waarschijnlijk de voornaamste partner worden in een coalitie met de SPD.
Onze macro-economisch en politiek expert Helen Thomas heeft onlangs de Duitse bondsverkiezingen geduid. Zullen haar voorspellingen uitkomen?
Over verkiezingen gesproken: de Canadezen hebben onlangs gestemd voor een nieuwe golf van politieke veranderingen, waarbij premier Trudeau voor een derde termijn het land zal besturen. Van een liberale meerderheid in het parlement is geen sprake meer, wat tot interessante economische ontwikkelingen zou kunnen leiden.
De nieuwe bbp-cijfers van Canada worden deze maand gepubliceerd, na een eerdere daling van 1,1 procent op maandbasis. Schattingen gaan uit van 2,5 procent groei, dus zelfs met een nieuw verkiezingsmandaat zal Trudeau weer dezelfde uitdagingen moeten aanpakken.
Het economisch herstel zal “dezelfde mate van buitengewone steun” blijven vereisen, aldus de gouverneur van de Canadese centrale bank, Tiff Macklem. Er wordt geen wijziging van het economisch beleid verwacht, ondanks de tegenvallende bbp-cijfers van vorige maand. Misschien zal er deze week een omkering plaatsvinden, of zal de situatie in de nasleep van de verkiezingen juist vertroebelen?
Belangrijke economische data
|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|
|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.
GBPUSD is holding most of yesterday’s gains but has just pared back a touch to trade at 1.3710 after hitting 1.3750.