Weekly Market Report: October 25th, 2024

Market Anecdotes

• Q3 S&P 500 earnings season is 37% complete with beat rates and margins of 75% and 5.7%, respectively. Blended earnings growth stands at 3.6% and revenue growth at 4.9%.
• The recent BoA survey data has seen the likelihood of a ‘hard landing’ near its lowest level of the past 18 months with expectations of a ‘no landing’ scenario increasing notably and a clear consensus expectation of a ‘soft landing.’
• Hawkish FedSpeak narratives continued last week with futures markets continuing to moderate expectations of FOMC rate cuts, now down to roughly 1.25% (5 cuts) over the next 12 months.
• 10yr UST yields rose above 4.2% for the first time since the summer as yields continue to grind higher following the September FOMC rate cut.
• The no landing scenario likely implies higher interest rates stemming from increasing inflationary pressures which, history suggests, may present challenges to equity markets.
• Torsten Slok notes that while higher market interest rates would suggest higher corporate debt servicing costs, companies taking steps to lock in low QE and post pandemic rates have seen non-financial corporate net interest payments decrease to near record low levels.
• The dominance of the U.S. stock market relative to non-U.S. stocks has been remarkable, with the former outpacing the latter in eight of the past ten years. Looking at the next 10 years, valuations, currencies, and nominal bond yields may present challenges to a repeat.
•  A long-term look at home affordability from Bianco Research reminded investors that, while first time home buyer affordability today is clearly an outlier, the ultra-low interest rate QE era may not be the best relative comparison.

Economic Release Highlights

• October U.S. flash PMI (C,M,S) registered (54.3, 47.8, 55.3), in line with the consensus forecast and prior month levels.
• October Eurozone flash PMI (C,M,S) registered (49.7, 45.9, 51.2), meeting expectations but the composite survey remained below the 50 expansionary mark.
• Durable Goods Orders declined 0.8% in September, slightly more than the -0.5% spot forecast while the ExTransportation figure beat expectations (0.4% vs -0.1%).
• The final UofM Consumer Sentiment Index was revised up from 69.0 to 70.5 while one-year inflation expectations declined from 2.9% to 2.7%.
• New Home Sales in September registered 738k, slightly above the consensus forecast (718k) and prior month (709k).
• Existing Home Sales in September came in relatively in line with the spot forecast (3.84M vs 3.90M), -1% MoM and -3.7% YoY.

Weekly Market Report: October 18th, 2024

Market Anecdotes

• Early stages of third quarter earnings are getting off to a mixed beginning with above average beats but below average beat margins. Blended earnings and revenue growth rates are currently at 3.4% and 4.7%, respectively.
• Recent price action across small cap U.S. stocks may reflect an increasing probability of the soft landing scenario taking shape.
• Continued strength in various economic reports has taken the Atlanta Fed GDPNow forecast for 3Q GDP up to 3.4%, well above the generally expected potential growth rate of 2.0%-2.5%.
• Pricing across Morningstar high yield distressed bond data reinforces the idea that credit markets do not see reason for concern based on trends in the numbers, size, and quality of issuers in the space.
• Last week markets received details on various support measures from the PBOC, MoF, and Housing Ministry in China that seem to have impacted the domestic stock market more so than the economic growth outlook.
• Eleven Fed speaking engagements last week served to guide markets toward a more hawkish stance with regard to expected future monetary policy moves.
• The ECB delivered what markets were expecting, a third 25 bps rate cut to the refi and deposit rates, taking them down to 3.4% and 3.25% respectively. Meanwhile, the BoJ has retreated from their brief window of hawkish policy, with the Yen weakening accordingly.
• Updates on U.S. election predictions from our research outlets are seeing an increasing likelihood of a Trump victory, heightening the specter of unified control in DC.

Economic Release Highlights

• Retail Sales in September came in above consensus forecasts for Headline (0.4% vs 0.3%), ex-Vehicles (0.5% vs 0.1%), and ex-Vehicles & Gas (0.7% vs 0.3%).
• Industrial Production in September came in below the spot forecast (-0.3% vs -0.1%) and saw both manufacturing output and capacity utilization come in under consensus.
• The Housing Market Index for October registered 43, slightly under the expected forecast of 42.
• Housing Starts (1.354M vs 1.400M) and Permits (1.428M vs 1.500M) both came in slightly below their respective consensus forecasts.

Weekly Market Report: October 11th, 2024

Market Anecdotes

• U.S. equity markets maintained their positive momentum, thanks in part to a constructive start to earnings season. Elevated global uncertainty and a notable move higher in bond yields have yet to capture investor attention in the short term.
• With third quarter earnings season now underway, companies in the S&P 500 are expected to grow the bottom line by 4.1% but factoring in historical beat margins, FactSet estimates growth rate will be closer to 9.5%-10%.
• Healthy growth dynamics and last week’s warmer than expected CPI report served to reduce odds of another 50 bps rate cut by the Fed next month.
• With the two-year anniversary of the bull market now in the book, Strategas highlighted the historically average performance of large caps (S&P 500 60.8% vs 60%) and historically below average performance of small caps (Russell 2000 29.9% vs 76.9%) with year 3 to be determined.
• BCA’s geopolitical research pointed out a Harris administration is much more likely to be gridlocked than a Trump administration with markets yet to price in the impacts of sharp immigration curbs, major tax cuts, or global trade wars.
• U.S. government spending increased 10% in FY 2024 while tax revenues increased 11% but the deficit increased by $139b, thanks to interest payments on outstanding debt increasing 34%.
• ETF fund flows show retail investors chasing the surge in China’s equity market with nearly $9b of inflows to China funds, well above the next highest inflow of $1.8b to investment grade credit.
• BCA noted China’s aggressive energy independence push toward nuclear energy poses risks to U.S. dominance in the space where China’s installed capacity just over the past 10 years represents nearly 50% of current installed U.S. capacity.
• A follow-up to last week’s musings about survey response rates and the prevalence of multiple job holders relative to its longer-term trend shows in fact, response rates have fallen and levels of multiple job holders are at their highest point dating back to 1995.

Economic Release Highlights

• The September CPI report came in a bit warmer than consensus forecast with YoY readings of Headline (2.4% vs 2.3%) and Core (3.3% vs 3.2%) and MoM readings of Headline (0.2% vs 0.1%) and Core (0.3% vs 0.2%).
• Headline PPI in September rose YoY (1.8% vs 1.6%) and MoM (0% vs 0.2%) while core readings were up YoY (2.0% vs 2.7%) and MoM (0.2% vs 0.2%).
• Consumer Sentiment declined slightly in October to 68.9 from 70.1 while 1-year ahead inflation expectations increased from 2.7% to 2.9%. 
• The September NFIB Small Business Optimism Index was mostly flat versus the prior month at 91.5.

Weekly Market Report: October 4th, 2024

Market Anecdotes

• The strong PMIs and labor report last week moved Fed Funds rate cut expectations decidedly back toward a 25 bps cut on November 7th, triggered a rally in the USD, moved U.S. Treasury yields sharply higher, and the entire Treasury curve last week on constructive economic reports
• The U.S. and Federal Reserve have plenty of company across developed markets as other central banks are pivoting to rate cuts in response to waning inflation and growth concerns.
• U.S. GDP, which has only seen one quarter since Q2 2022 where the economy posted growth below the 2.0- 2.5% long run potential, is bolstering those in the “no-landing” camp.
• A historical look from Market Desk and Ned Davis at prior rate cut cycles and ensuing returns for the S&P 500 reminds how important it is to get the call on the economy correct and that the bull market, at only two years old, is far from dying of old age.
• Conflict in the Middle East was again on full display last week between Israel and her adversaries leading to a surge in oil prices and increasing uncertainty across the region.
• Improving prospects for China on the back of recent stimulus announcements and implications for a weaker USD have placed more attention on developed international equity markets and Europe in particular with relative valuations providing additional support.
• A tentative agreement was reached between dock workers on the East and Gulf coast ports but there was no discernable market reaction given the short duration of the conflict.
• The $1.5t wall of loan maturities across the U.S. commercial real estate market presents a wide array of challenges and opportunities in what will likely be a slow evolving recovery.
• The U.K’s Office of Budget Responsibility published work on the fiscal impact of migrants at different wage/skill levels showing high and middle income migrants are net positive contributors to the government purse whereas the average U.K. resident and low income migrants are net negatives.

Economic Release Highlights

• The September jobs report was a blockbuster with 254,000 new jobs, well above the spot forecast of 132,000 taking unemployment down from 4.2% to 4.1%.
• Average Hourly Earnings grew above estimates for both MoM (0.4% vs 0.3%) and YoY (4.0% vs 3.7%) and Labor Market Participation stayed at 62.7%.
• The August JOLT Survey showed 8.040M job openings, an increase over the prior month’s 7.63M and well above the spot forecast of 7.7M.
• The September ISM Services Index registered 54.9, well above the prior month and consensus forecast where both were 51.1.
• The September ISM Manufacturing Index registered 47.2, unchanged from the prior month and slightly below consensus forecast of 47.6.
• The JPM Global Manufacturing PMI registered 48.8, down from the prior month read of 49.5. The Composite and Services readings both deteriorated from 52.8 to 52.0 and 53.8 to 52.9.

Weekly Market Report: September 27th, 2024

Market Anecdotes

• China announced a range of measures to support its stock market and economy including lowering mortgage rates, policy rates, and down payment requirements. Additionally, a surprise Politburo meeting addressed fiscal and housing market initiatives and the PBoC expanded allowable collateral for stock market investing. Implications are wide ranging.
• Of note is that oil markets have been on the outside looking in on the rally in global growth sentiment, particularly given this week’s developments in China. Supply side dynamics of OPEC+ and U.S. production are likely culprits to the decline in oil prices to nearly three-year lows.
• The key FOMC policy question with significant implications for equity and bond markets is how fast and how deep does the rate cut cycle develop with data on inflation dynamics and labor market conditions the primary drivers.
• Last week’s bond market reaction to the 50bps FOMC rate cut caught our attention as yields moved slightly higher (inflation risk) as opposed to trending lower (‘behind the curve’ risk).
• Several FOMC speaking engagements last week were focused on defending the 50 bps rate cut due to concern with downside risks to the labor market.
• A potential dockworkers’ strike at 36 U.S. ports receiving over 40% of inbound container volume poses a material short-term risk to supply chains and inflation dynamics.
• Annual BEA data revisions have taken GDP growth notably higher but maybe more importantly, savings rates also notably higher.
• Easier monetary policy and soft landing traction are key contributors to the broader risk on sentiment in markets with soft inflation data and healthy GDP forecasts paving the way.
• The biggest geopolitical concern today is significant escalation in the Middle East including sustained direct or proxy Israel-Iran conflict on which Alpine Macro is placing a 60% likelihood.
• The latest on POTUS election probabilities is best described as trending toward a Harris win but overall, too close to call. Betting markets (52%-47%), FiveThirtyEight polls (48.3%-45.6%), Silver Bulletin (dead heat), and Silver Bulletin (electoral college 53.7%-46.0%) slightly favor Harris.

Economic Release Highlights

• The September release of PCE inflation saw headline (2.2% vs 2.3%) coming in slightly below and core (2.7%) in line. MoM inflation registered 0.1% for both headline and core with the former in line and the latter slightly below estimates.
• Personal income growth of 0.2% and Personal Consumption Expenditures of 0.2% both came in below estimates and registered at the low end of the forecast range.
• September U.S. PMIs (C,M,S) registered 54.4, 47.0, 55.4 where the Composite came in ahead of forecast and relatively in line with prior month while services beat consensus (55.2) and manufacturing missed (48.5).
• Non-U.S. PMIs (C,M,S) in September include Eurozone (48.9, 44.8, 50.5), U.K. (52.9, 51.5, 52.8).
• Durable Goods Orders for August came in above forecast with New Orders (0% vs -2.7%), Ex-Transportation (0.5% vs 0%), and Core Capital Goods (0.2% vs -0.2%) all beating estimates.
• Conference Board Consumer Confidence Index declined to 98.7 in September from 103.3 prior month and well below the spot consensus of 103.0
• The Case-Shiller Home Price Index appreciated 0.3% MoM and 5.9% YoY, in line with forecasts.
• New Home Sales for August of 716k were slightly above the consensus forecast of 700k. Pending Sales grew 0.6%, slightly below consensus estimate of 3.1%

Weekly Market Report: September 20th, 2024

Market Anecdotes

• U.S. equity markets cheered policy developments last week with the S&P marking a new record high as economic soft landing optimism prevailed.
• The Atlanta Fed GDPNow model is currently forecasting 2.9% GDP growth for the third quarter.
• Strategas made note that a key to the soft landing scenario is the need for struggling areas of the economy (manufacturing, housing) to turn up before the softening labor market dries up services spending.
• With the cutting cycle officially underway, markets have more clarity on monetary policy, but we expect questions will persist regarding the overall path of the economy and geopolitics.
• The FOMC ushered in a new era of easing by delivering a notable 50 bps rate cut, leaving markets to handicap exactly where and how fast the target policy rates will go with the median SEP suggesting two more 25bps cuts remaining this year.
• Futures markets were quick to price in a slightly more aggressive pace of easing this year with a 75% probability of getting 75 bps of easing by year end.
• There has been and will continue to be ample debate surrounding what the “neutral” interest rate is for the U.S. economy. Of note is that Powell acknowledged the neutral rate is “probably significantly higher” than what it was pre-pandemic.
• Full cycle easing expectations given the Fed’s estimated neutral rate would see 7 or 8 rate cuts but markets are pricing in closer to 8 or 9 rate cuts over the coming year.
• The PBOC and BoJ conducted policy meetings last week as well with both opting to maintain rates at current levels.

Economic Release Highlights

• Retail Sales grew 0.1% in August, above the spot forecast of -0.3%. Ex-Vehicles (0.1% vs 0.3%) and ExVehicles & Gas (0.2% vs 0.3%) readings both came in slightly below consensus.

• Existing Home Sales in August registered 3.860M, slightly under the spot forecast of 3.90M but within the
  consensus range.

• Housing Starts (1.356M) and Permits (1.475M) both came in slightly above forecasts for August.

• The Housing Market Index registered 41, in line with both the spot consensus (42) and forecast range of 38-
  42.

• Industrial Production in August handily exceeded forecasts (0.8% vs 0.1%) and the consensus range of 0% to
  0.5%.