Stronger against all odds?

Thoughts of the Day

Despite soaring interest rates, the US economy surprises with a robust +4.9% annualized GDP growth in Q3, surpassing expectations (PREV +2.1%, EXP 4.3%-4.7%). Questions arise regarding the impact of war, geopolitics and inflation, yet no definitive answers emerge. Given the high uncertainty, it is advisable to invest and trade accordingly. We remain highly dependent on data.

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Day Ahead

The US PCE Price Index, the Fed’s preferred measure of inflation, for September is expected to show that prices rose +3.4% YoY, slightly lesser than +3.5% previous. The core index is expected to show slower growth of +3.7%, compared to +3.9% in August. The US University of Michigan data is expected to show a revised print of 63 for consumer sentiment (compared to 68.1 previously) and +3.8% for the inflation expectations component (compared to +3.2% previously).

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What Happened Yesterday

Market Movements as of New York Close 26 Oct 23
  • The ECB maintained interest rates at 4.5% in its monetary policy decision as expected, noting that the latest data continued to point to inflation slowly coming down to its 2% target. The ECB noted that effects of past rate hikes are trickling into the economy and they are maintaining a data-dependent approach for now and stressed that now is not the time for forward guidance. 
  • The US Treasury Yield curve inversion widened to 0.16% as the US 2-year bond yield fell -0.06% to 5.02 while the US 10-year bond yield decreased -0.09 to 4.86%.
  • The US stock futures plunged in early Asian hours following Meta’s earnings. It then traded sideways through the rest of the Asian trading session and the early London trading session. The S&P 500 futures then traded +0.38% higher on the back of the better than expected US GDP data (see headline 1).
  • The US stock market opened slightly lower from Wednesday and traded on the weaker side despite an attempt to claw back higher at midday (which ultimately failed with markets reversing the attempt). Consequently, the S&P 500 closed the day lower at -1.18% (high: -0.08%, low: -1.41%), the Dow fell -0.76% (high: +0.21%, low: -0.88%) while the Nasdaq dropped -1.89% (high: -0.06%, low: -2.25%).
  • [Earnings] Amazon.com (NASDAQ: AMZN, -1.50% on the day and +5.36% aftermarket) Earnings: 94 cents vs 58 cents expected, Revenue: $143.1 billion vs $141.4 billion expected. The stock rallied as Amazon managed to report an operating margin of 7.8%, the highest since it reached a record of 8.2% in early 2021.

    Amazon stock price traded volatilely after hours with an initial spike of +4.48% to 125.38 following the earnings result. However, it then tumbled 5.45% from the highs to a low of 118.55. It then reversed course once again and started trading towards the 126 level. The Nasdaq futures exhibited similar price action and is currently +0.76% higher on the day.
  • The crypto market relented slightly following days of positive price action from bitcoin. Bitcoin is down -1.03% but Ether still managed to eke out a +0.98% gain.
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Headlines & Market Impact

U.S. GDP grew at a 4.9% annual pace in the third quarter, better than expected

Notable Snippet: The U.S. economy grew even faster than expected in the third quarter, buoyed by a strong consumer in spite of higher interest rates, ongoing inflation pressures, and a variety of other domestic and global headwinds.

Gross domestic product, a measure of all goods and services produced in the U.S., rose at a seasonally adjusted 4.9% annualised pace in the July-through-September period, up from an unrevised 2.1% pace in the second quarter, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been looking for a 4.7% acceleration in real GDP, which also is adjusted for inflation.

The sharp increase came due to contributions from consumer spending, increased inventories, exports, residential investment and government spending.

Consumer spending, as measured by personal consumption expenditures, increased 4% for the quarter after rising just 0.8% in Q2, and was responsible for 2.7 percentage points of the total GDP increase. Inventories contributed 1.3 percentage points. Gross private domestic investment surged 8.4% and government spending and investment jumped 4.6%.

Spending at the consumer level split fairly evenly between goods and services, with the two measures up 4.8% and 3.6%, respectively.

The GDP increase marked the biggest gain since the fourth quarter of 2021.

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Yellen: Possible long-term yields will come down, but ‘no one knows for sure’

Notable Snippet: U.S. Treasury Secretary Janet Yellen on Thursday said the sharp rise in long-term bond yields is reflective of confidence in the U.S. economy and expectations that interest rates will be higher for longer as a result.

Yellen, in a televised interview with Bloomberg, said it was also possible that yields on longer-dated bonds will come down, but “no one knows for sure.”

What we think: Uncertainty remains high as odds of a recession or economic downturn are mounting. “No one knows for sure” is basically saying that anything can happen. 

US House Republicans eye stopgap funding measure to head off shutdown risk

Notable Snippet:  Republicans in the U.S. House of Representatives on Thursday were debating their next move on how to avert a partial government shutdown next month, with one prominent lawmaker saying they needed to agree quickly on a “path forward.”

Newly installed Speaker Mike Johnson was floating the possibility of extending funding through mid-January or mid-April to give lawmakers more time to negotiate 12 separate bills funding the government through the fiscal year that ends Sept. 30, 2024.

Multiple Republicans agreed they wanted to avert the risk of a partial government shutdown on Nov. 17, after party infighting brought the U.S. to the brink of that early this month, headed off only by a bipartisan deal that led to the ouster of Johnson’s predecessor, Kevin McCarthy, which left the chamber leaderless for three weeks.

Less than a month ago, intra-party fighting among Republicans brought the federal government within hours of a partial shutdown, with hardline Republicans rejecting a $1.59 trillion discretionary spending limit Biden and Johnson’s predecessor Kevin McCarthy had agreed on, instead calling for an additional $120 billion in cuts.

Notably, Johnson on Sept. 30 voted against the temporary spending bill that averted an Oct. 1 shutdown.

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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