Originally published by Rivkin
U.S. equity markets declined on Tuesday following disappointing earnings updates from a number of companies as well as a lower than anticipated reading in the consumer confidence index. Well-known names such as 3M, Caterpillar (NYSE:CAT) and Under Armour Inc (NYSE:UA) provided either disappointing earnings or outlook updates. So far 30% of all S&P 500 constituents have provided third quarter updates, of those 75% have beat earnings estimates and 59% surpassing revenue forecasts. Earnings will continue to be at the forefront of investors’ minds this week as another third of companies report, including big names such as Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL).
Both the S&P500 & Nasdaq 100 declined -0.38%, with losses on the S&P500 led by consumer-cyclicals (-1.36%) and basic materials (-1.21%) more than offsetting modest gains in defensive sectors such as utilities (+0.47%) and consumer non-cyclicals (+0.22%). A measure of consumer confidence provided by the U.S. Conference Board declined to 98.6 month-on-month in October from 103.5 in September and estimates for a reading of 101.
The report stated that “consumers’ assessment of current business and employment conditions softened, while optimism regarding the short-term outlook retreated somewhat”. It is completely logical that the upcoming U.S. presidential election is weighing on confidence, similar to what was noted in the manufacturing PMI survey on Monday. This report follows two months of prior gains in consumer confidence and so far the economic data points to fairly strong growth in the fourth quarter.
The U.S. dollar index reversed initial gains after touching the highest intra-day levels since January before closing almost unchanged, down just -0.02%. Bond yields were also little changed, the two-year yield gained +1 basis point to (+0.8564%) and the ten-year yield was unchanged at +1.7595%. The current market implied probability of a rate hike in December rose from 68.0% to 71.4% based on information provided by the FedWatch Tool by CME.
In Europe German survey’s of businesses by IFO with reference to the current business climate and expectations over the next six months surpassed estimates. Month-on-month the current assessment for October increased to 115 from 114.7 previously as forecasts of 114.9. The current business climate rose to 110.5 up from 109.5 in September while future expectations also rose to 106.1 against estimates to remain unchanged at 104.5.
ECB president Mario Draghi reiterated his call for other policy makers to do more with the tools available to them to help the EU economic recovery. Speaking in Germany pushing back on criticism his ultra-loose monetary policy causes inequality and punishes savers he stated that fiscal and structural policy were needed to address the root cause of excess saving over investment. Specific issues that need to be addressed include an aging population, excess savings and slower productivity growth which have all contributed to three decades of declining rates.
In the U.K. the GBP/USD reversed initial losses of up to -1.3% to finish -0.28% lower following comments from Bank of England Governor Mark Carney. In front of lawmakers he stated that “there are limits to the willingness of the Monetary Policy Committee to look through an overshoot of inflation”. Carney had previously stated that the BOE was willing to look through higher inflation in the near-term to add more stimulus to shield the economy from any negative effects of the Brexit. This follows data last week that showed both the headline and core consumer prices rose more than expected as a result of an 18% decline in the Pound since late June, which has helped push the FTSE100 index to all-time highs shown on the first chart below.
Perhaps one reason the Pound was fully unable to reverse all the initial declines was continued speculation as to whether Carney will continue to serve his full term as Governor through until 2021 or depart in 2018 as scheduled with his decision due by the end of the year. Carney has been seen as “the only adult in the room” and praised from his swift and decisive actions to shore up confidence following the Brexit referendum. Deciding to remain through the full term which would see him remain well past Brexit negotiations are likely to end, would be seen as a positive sign by the market.
Locally the Australian Bureau of Statistics will release quarterly inflation data at 11:30am AEDT. Forecasts are for an expansion of +0.5% (QoQ Q3) up from the +0.4% previously. Year-on-year inflation is expected to be +1.1% up from 1% the previous quarter however well below the RBA’s 2-3% inflation target. The second chart below highlights the pickup following a deflationary scare for the March quarter which saw the RBA act immediately to lower rates by 25 basis points.What we will be looking for in today’s inflation readings is further confirmation inflation is trending in the right direction or at least remaining stable around +0.5%.
New RBA Governor Phillip Lowe has publicly stated that the RBA are “not inflation nutters” and that more factors than just inflation are considered. At a recent speech at an event hosted by Citi Group he stated that “achieving the quickest return of inflation back to 2½ per cent would be unlikely to be in the public interest if it came at the cost of a weakening of balance sheets and an unsustainable build-up of leverage in response to historically low interest rates”. This clearly gives the impression that the RBA is in no hurry to act, unless something dramatic happens. Relating to today’s inflation figures it would take quite a disappointing reading to prompt the RBA to act urgently, likely a reading to close or below zero.
The S&P/ASX 200 index closed +0.63% higher on Tuesday and the Australia dollar gained +0.51%. Meanwhile we can expect a softer start to trading this morning with ASX SPI200 futures down 12 points in overnight trading.
Data releases:
- Australian Consumer Prices (QoQ & YoY Q3) 11:30am AEDT
- German GfK Consumer Confidence Survey (MoM Nov) 5:00pm AEDT
- U.S. Advance Trade Balance & Wholesale Inventories (MoM Sep) 11:30pm AEDT
- U.S. Markit Service & Composite PMI (MoM Oct) 12:45am AEDT
- U.S. New Home Sales (MoM Sep) 1:00am AEDT
- U.S. Crude Oil Inventories (Oct 21st) 1:30am AEDT