Is the US economy strong or is it weakening?

Thoughts of the Day

Despite rising US mortgage rates, new single-family home sales surged by 12.3% in September, marking the biggest increase since August 2022. This unexpected resilience in the real estate market amid economic uncertainties prompts caution as the Federal Reserve’s stance remains uncertain.

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Day Ahead

The ECB is expected to maintain interest rates at 4.5% in its monetary policy decision. Its message on likely policy steps ahead will be closely monitored.

The advanced print for the US GDP for Q3 will be released with a +4.3% growth rate expected, compared to +2.1% in Q2.

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What Happened Yesterday

Market Movements as of New York Close 25 Oct 23
  • The Bank of Canada kept interest rates unchanged at 5% in its monetary policy meeting as expected, highlighting that future policy decisions will be data dependent. The central bank noted that the past hikes are already limiting economic activity and limiting price increases and cautioned against overtightening.
  • US New Home Sales surprised markers with a higher than expected print of 0.759 million (vs 0.68 million expected), a large increase from 0.676 million in August. The month of month growth rate came in at +12.3%, compared to August’s contraction of -8.2%. This caused upward pressure on US bond yields as it seems that the real estate market remains resilient despite higher mortgage rates. 
  • The US Treasury Yield curve inversion narrowed to 0.13% as the US 2-year bond yield rose +0.06% to 5.08 while the US 10-year bond yield increased +0.12 to 4.95%.
  • Trading of the US stock futures was slightly weak through the Asian and London trading hours. The S&P 500 futures were just slightly down by -0.37% before the New York session began.
  • The US stock market opened lower from Tuesday and traded weak through the New York session as investors were bogged down by pessimism from Google’s earnings the day before. Consequently, the S&P 500 closed the day lower at -1.43% (high: -0.36%, low: -1.56%), the Dow fell -0.32% (high: +0.38%, low: -0.46%) while the Nasdaq plunged -2.47% (high: -0.69%, low: -2.60%).
  • [Earnings] Meta Platforms (NASDAQ: META, -4.17% on the day and -3.35% aftermarket) Earnings: $4.39 vs $3.63 expected, Revenue: $34.15 billion vs $33.56 billion expected, Daily active users (DAUs): 2.09 billion vs 2.07 billion expected. The stock suffered following the earnings report as Meta cut back guidance for Q4 due to possible reduced ad spending as a result of the Middle East conflict.

    Meta stock price initially rose +4.4% in reaction to the earnings release but fell -7.4% from the highs following the remarks about future guidance. The Nasdaq futures fell -0.96% following the earnings at the time of writing.
  • The crypto market continues to be supported by the optimism from hopes of a Bitcoin ETF approval with Bitcoin up +1.78% while Ether just inched higher by +0.1%.
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Headlines & Market Impact

BlackRock bitcoin ETF added to eligibility file, says clearing house DTCC

Notable Snippet: BlackRock’s (BLK.N) proposed bitcoin exchange-traded fund (ETF) was added to a clearing-house eligibility file in August, but the move is not indicative of any regulatory approval, clearing house DTCC said.

Speculation that BlackRock or a number of other pending bitcoin ETF applicants would succeed has sent bitcoin on its biggest two-day rally for seven months.

Traders had noticed it on a list on the website of DTCC, a post-trade settlement house that according to its annual report processed some $2.5 quadrillion in trades across asset classes in 2022.

The clearing house said the list was its eligibility file, which includes active and potential ETFs and that Blackrock’s iShares Bitcoin Trust ETF was added in August as “standard practice…in preparation for the launch of a new ETF”.

“Appearing on the list is not indicative of an outcome for any outstanding regulatory or other approval processes,” a spokesperson for the company said by email.

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Japan finmin says he is watching yen moves with ‘sense of urgency’

Notable Snippet: Japanese finance minister Shunichi Suzuki maintained a warning to investors against selling the yen on Thursday, saying authorities were closely watching moves after the currency fell beyond 150 yen against the dollar.

“I’m watching market moves with a sense of urgency, as before,” Suzuki told reporters at his ministry, when asked about renewed weakness in the yen.

The dollar rose to 150.32 yen, its highest since October last year when Japan last intervened in the market to support the local currency. The greenback last traded at 150.08 yen.

The 150 yen line is perceived by investors as a danger zone that may trigger intervention. Suzuki made no comments about intervention.

Pressure is mounting on the Bank of Japan to change its bond yield control as global interest rates rise. A hike to an existing yield cap set just three months ago is being discussed as a possibility in the run-up to next week’s policy meeting, Reuters cited sources as saying this week.

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Meta widens revenue guidance range because of Middle East unpredictability

Notable Snippet:  The $3.5 billion range ($36.5 billion to $40 billion) compares to a $2.5 billion range the company typically offers in its quarterly revenue forecast. Susan Li, Meta’s finance chief, told analysts on the earnings call that the reason for the change is the unpredictability in the Middle East due to the Israel-Hamas war.

“We have observed softer ads in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook,” Li said on the call. “It’s hard for us to attribute demand softness directly to any specific geopolitical event.”

Li said Meta doesn’t have “material direct exposure to Israel,” but she noted that historically the company has “seen broader demand softness follow other regional conflicts in the past, such as in the Ukraine war,” after Russia invaded its neighbour in early 2022.

At the mid-point of its guidance range, Meta would be expecting revenue of $38.25 billion, compared to the average analyst estimate of $38.85 billion, according to LSEG, formerly known as Refinitiv. For the third quarter, Meta beat on the top and bottom lines, boosting its shares in extended trading on Wednesday.

Meta’s commentary surrounding the Middle East conflict, which escalated this month after Hamas attacked Israel, follows cautionary statements from Snap

 on Tuesday.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord