Author: marketsp

Afternoon Markets Brief 11-2-2021

Summary and Price Action Rundown

US equities extended their streak of new record highs as upbeat corporate earnings provide further support alongside more positive atmospherics around President Biden’s infrastructure bills. The S&P 500 added 0.4%, registering another all-time high and upping year-to-date returns to 23.3%, while the Nasdaq kept pace despite a drag from Tesla (more below). The Euro Stoxx Index also gained while Asian stocks mostly retreated overnight. Longer-dated Treasury yields held steady while the short end rallied ahead of tomorrow’s consequential Fed decision, with the 10-year Treasury yield closing at 1.55%, which is still on the high side of its 2021 trading range. Meanwhile, a broad dollar index continued its rebound but remained below recent multi-month highs. Oil prices slipped slightly ahead of this week’s OPEC+ meeting, with Brent crude still holding above $84 per barrel.

Latest Headlines Suggest More Progress on Biden Bills

Congressional Democrats continue to make progress on the intricately coordinated two-track infrastructure legislation, with ongoing uncertainty over the prospects for a near-term House vote on both bills. An ETF of US infrastructure-related stocks climbed 0.9% to hit a record high today and extend its gains on the year to 32.3% as optimism over the prospects for the Biden administration’s physical and social infrastructure bills continues to build among equity investors. In a press conference at the climate summit in Glasgow Scotland, President Biden expressed his confidence that centrist Senator Manchin will support the Dems-only reconciliation bill after verifying certain specifics. This comes after Senator Machin asserted yesterday that more time is needed to review the $1.75 trillion social infrastructure package. He again called for the House to vote on the bipartisan infrastructure package, which the liberal wing of the caucus has held up in an effort to get consensus and unequivocal Senate support on the reconciliation bill. Also today, Senate Majority Leader Schumer indicated that Congressional Democrats have worked out a compromise on prescription drug pricing terms that cap out-of-pocket spending at $2,000 per year and outline industry reforms, noting that centrist Senator Sinema is on board. Meanwhile, political commentators are awaiting results in the Virginia governor’s election, which is being cast as something of a litmus test for Democrats’ political fortunes against a Trump-linked candidate. – MPP view: Still no clarity on the timing of the vote, and today’s latest deadline may give way again, but there is a sense of momentum and we think the odds of near-term passage remain relatively high – however, if timeline for a vote slips into mid-November or later, the odds worsen markedly.

Solid Earnings Continue to Buoy Stocks

Third quarter (Q3) results remain broadly upbeat, with the bulk of the reporting concluding this week. Pfizer shares jumped 4.2% today after reporting better than expected profit and revenue for the third quarter. The pharma giant earned $1.42 per share topping estimates and issued an improved full-year forecast on strong demand for both the covid vaccine and other non-covid related treatments. Management reported revenues of $24.1 billion, reflecting 130% operation growth excluding Comirnaty (vaccine) revenue. Pfizer raised full-year guidance for revenues to a range of $81 to $82 billion and adjusted diluted EPS to a range of $4.13 to $4.18, reflecting 94% and 84% year over year growth at the midpoints, respectively. It anticipates Comirnaty revenue of approximately $36 billion, reflecting 2.3 billion doses expected to be delivered in 2021.

Dr. Albert Bourla, Chairman and CEO stated, ““While we are proud of our third quarter financial performance, we are even more proud of what these financial results represent in terms of the positive impact we are having on human lives around the world. For example, more than 75% of the revenues we have recorded up through third-quarter 2021 for Comirnaty have come from supplying countries outside the U.S., and we remain on track to achieve our goal of delivering at least two billion doses to low- and middle-income countries by the end of 2022 — at least one billion to be delivered this year and one billion next year, with the possibility to increase those deliveries if more orders are placed by these countries for 2022.”

Pfizer’s earnings reflect strong growth with and without the Comirnaty revenue. The short-term outlook for vaccine revenue is high as 58% of the US are fully vaccinated and many from the rest of the world, especially in low- and middle-income countries awaiting their doses. Pfizer CFO Frank D’Amelio stated that the company is increasing guidance excluding Comirnaty for the second consecutive quarter, demonstrating the ability to execute on other segments beyond the vaccine.

“We continue to make progress on advancing our internal pipeline across all therapeutic areas while also prudently deploying our capital through partnerships and bolt-on acquisitions to gain access to cutting-edge platforms, science and technologies that could potentially bolster our growth in the latter half of this decade. I am proud of what we have accomplished so far in 2021 and look forward to finishing the year strong.”

Car rental stock Avis Budget surged 108.3% after the company reported a stronger-than-expected third quarter that sparked massive trading volume. The company reported $10.74 in per-share earnings for the third quarter, which was more than $4 above expectations. Avis Budget’s board also authorized an additional $1 billion in share buybacks. Vague comments on the conference call by executives about increasing purchases of electric cars for its fleet appeared to add juice to the rally, as chief executive officer Joseph Ferraro said the company would play a “big role” in the growth of electric cars in the US. Ahead of the earnings report, 20.5% of the float of Avis Budget’s stock was sold short, which is extremely high. When a stock rises, short-sellers are forced to cover their positions by buying shares, creating more upward pressure on the stock price. This is called a “short squeeze.”

With 346 of the S&P 500 companies having issued Q3 results, the figures have been impressive, with reporting companies beating sales and earnings estimates at rates of 67.5% and 81.8%, respectively. – MPP view: With Q3 earnings season pretty much in the books, the margin squeeze/bottleneck/input costs/labor shortage dogs didn’t do as much barking as feared and we expect increasing signs of easing some of the snags and shortages over the coming months.

Additional Themes

Sobering Signs from an Economic Sentiment Gauge – The IBD/TIPP Economic Optimism Index in the US fell for the 5th straight month to 43.9 in November, the lowest since September of 2015, and just undercut the prior pandemic low of 44 in July 2020, as the second Covid wave was hitting. With the Delta variant slowing the jobs recovery and inflation fears mounting, household financial stress is spiking and faith in federal economic policies is sinking. The six-month economic outlook index sank 2.7 points to 38.6, the lowest since July 2020. Inflation worries weighed on the personal finances subindex, which fell 2 points to a 14-month low of 51.9, despite the S&P 500 closing the month at a record high. Dimming faith in federal economic policies was the biggest drag, as the federal policies subindex fell 4.2 points to 41.1. That was the lowest since January 2016.

Tesla Shares Dented by Hertz News – In contrast to today’s continued upswing in US equity markets, Tesla shares slid 3.0% today after CEO Elon Musk disclosed on Twitter that no contract had been signed with rental car company Hertz after reports of its intent to buy 100,000 electric vehicles from the carmaker. Musk also downplayed the potential impact of the deal due to demand for Tesla EVs consistently outstripping supply prior to the Hertz news.

Morning Markets Brief 11-3-2021

Summary and Price Action Rundown

Global risk assets are steady as investors await today’s pivotal Federal Reserve decision and look ahead to key US labor market data. S&P 500 futures indicate a slightly lower open after the index added 0.4% yesterday, registering another all-time high and upping year-to-date returns to 23.3%, while the Nasdaq kept pace. EU equities are slightly higher, while Asian stocks were mixed overnight. Longer-dated Treasury yields are holding steady ahead of the Fed, with the 10-year hovering at 1.53%, which is still in the upper half of its 2021 trading range. Meanwhile, the ongoing rebound in the broad dollar index is stalling below its recent year-to-date highs. Crude prices are reversing lower ahead of this week’s OPEC+ output decision, with Brent crude sinking back toward $83 per barrel. President Biden has continued to call on the cartel to up supply in order to restrain crude prices, which are at multi-year highs.

Pivotal Fed Decision Awaited

Treasury markets have steadied in recent days ahead of what market participants expect will be an announcement of the details of the Fed’s plan to reduce its asset purchases (aka quantitative easing or QE) over the coming months. Fed Chair Powell is expected to reveal the timeline and trajectory for the tapering of QE, with the markets pricing in an immediate start to the process at a pace of roughly $15 billion per month. Importantly, communications by Fed Chair Powell and other FOMC members have emphasized that the tapering process is independent of the decision to hike interest rates, given the different preconditions set forth for these policy moves, with the bar being considerably higher for the latter than the former. However, financial markets appear unwilling to accept the Fed’s attempted de-linkage of the two, pricing in rate hikes starting as early as June or July next year, almost immediately upon the anticipated conclusion of the tapering process, with another full rate hike priced in before year-end. This is more aggressive than the median FOMC interest rate projections (aka the “dot plot”) and aligns with the three most hawkish Committee member dots for next year, and the market-implied projection remains on the hawkish side of the median for 2023, before leveling off in 2024. Analysts are pondering whether Fed Chair Powell will attempt to reassert the median dot plot trajectory, similar to the dovish rhetoric on interest rates from European Central Bank President Lagarde this morning (more below) and Reserve Bank of Australia Governor Lowe the prior day. – MPP view: If the Fed wants to push back rate hike expectations and steepen the yield curve, similar to what ECB President Lagarde is doing, they can accomplish this by putting the start date of the taper in December – this would be a signal to the markets that the current dot plot is still operative, and we think this is an attractive and likely policy option. This approach would also help put a floor under the yield curve and show that the Fed hasn’t completely thrown in the towel on its “transitory” thesis, which we think is still a very credible narrative for most of the ongoing price pressures.

We are skeptical that rate hikes will swiftly on the heels of the conclusion of tapering, particularly since we retain the out of consensus view that the Fed Chair position will go to Governor Brainard but also due to our expectation of easing inflation rates over the coming quarters, as public health improvements feed through to improving economic activity.   

First in a Trio of Key US Labor Market Readings Due Today

After two successive months of disappointing nonfarm payroll tallies, this weeks’ string of jobs data for October are expected to yield relatively more encouraging figures. However, today’s estimate of new private sector jobs in October, complied by employment services giant ADP, is seen easing modestly from 568k in September to 400k last month. For context, the ADP jobs reading for September was considerably more upbeat than the nonfarm payroll headline number, which dramatically undershot expectations of 500k with a tepid print of 194k, although the unemployment rate continued to fall faster than anticipated, declining to 4.8%. Friday’s October nonfarm payroll reading is expected to improve to 450k and the unemployment rate is projected to dip to 4.7%. Lastly, tomorrow’s jobless claims total for last week is expected to mark another new low for the pandemic at 275k from the prior week’s 281k.

Meanwhile, overseas, the EU-wide unemployment rate dipped to 7.4% in September, in line with estimates, from 7.5% in August. This is the lowest jobless rate in the bloc since April 2020, though data shows there are still 600K fewer people employed than before the onset of the pandemic. European Central Bank President Lagarde reiterated this morning that the conditions for beginning to hike interest rates are unlikely to be satisfied next year, pushing back on financial market pricing of liftoff by October 2022.

Additional Themes

China’s Service Sector Holds Up – After yesterday’s release of China’s October manufacturing Purchasing Managers’ Index (PMI) reading showed the continued impact of power shortages and other headwinds, remaining in contractionary territory, the non-manufacturing PMI figures overnight reflected ongoing strength. Specifically, China’s official service sector PMI for October beat estimates, registering a solid 53.8 versus expectations of 53.1 and the prior month’s 53.4. For context, PMI readings below 50 denote contraction in the sector’s activity. Later today, US service sector ISM PMIs are expected to show continued strength with a consensus forecast of 62.0 following 61.9 in September. – MPP view: Our expectation is for downbeat manufacturing and property investment growth in China over the next few quarters before the government begins to get more serious about stimulus in the leadup to the National Party Congress next October, where President Xi and the powers that be will want positive atmospherics around his ascent to a historical third term.

Earnings Season Remains Supportive of Stocks – The generally upbeat tone of earnings reporting for the third quarter (Q3) has continued to provide a tailwind to US equities despite US fiscal and monetary uncertainty, as concerns that supply bottlenecks, high input prices, and labor shortages would sap corporate profitability have been generally allayed. Today, CVS, Marriot, and Norwegian Cruise Lines report before the opening bell, while figures from Qualcomm, EA, and Allstate are due after the close. With 363 of the S&P 500 companies having issued Q3 results, the figures have been impressive, with reporting companies beating sales and earnings estimates at rates of 66.9% and 82.1%, respectively. – MPP view: With Q3 earnings season pretty much in the books, the margin squeeze/bottleneck/input costs/labor shortage dogs didn’t do as much barking as feared and we expect increasing signs of easing some of the snags and shortages over the coming months.

Democrats Grope for Consensus as Political Heat Rises – Reports this morning indicate that Congressional Democrats are continuing to bargain over the terms of the reconciliation bill, which needs to pass with an elusive level of nearly unanimous support across the caucus given the lack of GOP support. Specifically, Democrats are said to be considering an expansion of the minimum tax concept from corporations to the wealthy, which would be balanced against the lifting of the state and local tax (SALT) deduction cap imposed by the Trump administration. This comes after news last night that an intraparty compromise had been reached on lowering prescription drug prices. As the votes on both bills in the House, which Democratic leaders had hoped could be held as early as last night, slip further into the future, political developments are raising the temperature on the party. The Trump-linked Republican candidate Glenn Youngkin beat party mainstay Terry McAuliffe in the Virginia governor’s race, while the New Jersey’s gubernatorial election remains too close to call this morning. Democratic candidates had been favored in both races for much of the campaign. – MPP view: On balance, we expect that the disheartening results for Democrats in these gubernatorial races will help focus minds in the caucus on getting these bills over the line, but there is still no clarity on the timing of the House vote. While there remains a sense of momentum and we think the odds of near-term passage remain relatively high, if timeline for a vote slips into mid-November or later, the odds worsen markedly. 

Five Minute Macro 11-3-2021

The Fed’s decision this week is by far the focus of the market as we wait for Friday’s Nonfarm Payroll report. Democrats continue to negotiate over infrastructure and energy prices remain high ahead of the OPEC+ meeting. Finally, earnings season continues to support stocks.

Five Minute Macro 9-20-2021

In this week’s Five Minute Macro, China’s real estate crisis is spilling over into global financial markets. The Fed meets on Wednesday where the focus will be on any guidance for the taper of their balance sheet. Delta keeps growth uneven, while infrastructure negotiations continue and finally, oil prices near highs.

Five Minute Macro 8-2-2021

In this week’s Five Minute Macro, the Fed meeting provides more clarity on taper decisions while the market continues to struggle with Delta fears. The Senate worked through the weekend to finish the infrastructure bill, while risks in China remain elevated and earnings season continues.

 

 

Five Minute Macro 7-19-2021

Growth and the Delta variant fears are driving a market sell-off, which clashes with the Fed’s pivot to tightening discussions. Infrastructure negotiations continue along with earnings season as oil prices fall following OPEC+ production increases.