Dear Friends,
This Wednesday, the Bureau of Economic Analysis released the “advance” estimate of third quarter US Gross Domestic Product data which showed a strong rise at 4.9%. At the same time, core inflation continued to slow to 3.7%. While these figures are encouraging, the equity market is still under pressure from the high level of the 10-year treasury yield. Find out more about the ongoing market dynamics in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. U.S. GDP Grew at 4.9% in Third Quarter
The U.S. economy grew even faster than expected in the third quarter, buoyed by a strong consumer despite 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% annualized 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 is split 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. Markets reacted little to the news, with stocks mixed in early trading and Treasury yields mostly lower.
2. Inflation Trends Keep Fed Rate Hikes on Pause
Inflation’s summer decline slowed last month. Still, inflation has improved enough recently for Federal Reserve officials to hold interest rates steady at their meeting next week. The personal-consumption expenditures price index, the Fed’s preferred inflation gauge, rose 0.4% in September from the prior month, the same pace as in August, the Commerce Department said Friday. But so-called core prices, which exclude volatile food and energy categories, increased 0.3% in September from the prior month, compared with a 0.1% rise in August. Higher prices for services drove the increase.
From a year earlier, overall prices rose 3.4% last month, the same pace as in August. Core prices increased 3.7% in September, compared with 3.8% in August. Fed officials are closely watching underlying price trends to gauge whether they have raised short-term interest rates enough to slow the economy and tame inflation. Underlying inflation remains elevated but has cooled significantly as the Fed over the past 20 months has raised interest rates at the fastest pace in four decades. The Fed last raised rates in July, lifting its benchmark federal funds rate to a range between 5.25% and 5.5%, a 22-year high. A recent run-up in long-term Treasury yields could allow the central bank to stop raising short-term rates so long as inflation continues to decline. Inflation is well below the 40-year peak reached last year. That cooling progress recently stalled, however, indicating the Fed can’t yet declare victory. But Fed Chair Jerome Powell and other Fed officials have signaled they will likely hold rates steady when they meet next week. Officials want to watch how the economy responds to their past hikes in short-term rates and to elevated long-term Treasury yields.
3. European Central Bank Ends Record Run of Rate Increases
The European Central Bank held interest rates steady, ending a historic run of 10 consecutive rate increases as Europe’s currency union teeters on the brink of recession and uncertainty rises around the global economy. Major central banks including the Federal Reserve have paused interest-rate increases after a rapid series of hikes as inflation eases from last year’s multidecade highs. Now investors are watching for signs that policymakers will pivot and start to reduce rates to support economic growth that is faltering outside the U.S. The central bankers’ decisions are complicated by new headwinds facing the global economy, including Israel’s war with Hamas, Russia’s continued war on Ukraine, and high energy prices. A broad rise in global bond yields is also putting downward pressure on growth and inflation. ECB officials agreed Thursday to hold the bank’s deposit rate at 4%, a record high for the institution created in 1998. ECB President Christine Lagarde signaled that eurozone borrowing costs may have peaked as past rate increases increasingly weigh on the region’s housing market and bank lending.
The ECB is in a trickier spot than the Fed because the eurozone’s inflation rate is higher than that of the U.S. while Europe’s economic growth rate is much lower. The eurozone’s economy has stagnated for about a year and business surveys suggest the region could now be in contraction. In contrast, the U.S. economy expanded at a rate of 4.9% in the three months through September, data published Thursday showed, extending the divergence between two of the world’s biggest economic blocs. The ECB also needs to keep an eye on weaker southern European economies such as Italy, where 10-year bond yields recently rose to an 11-year high of around 5%. This increases the cost of servicing the country’s huge public debt and makes fresh deficits more expensive. Inflation across the eurozone declined to 4.3% in September from a peak of more than 10% last year, compared with a 3.7% U.S. inflation rate last month.
4. China Increases Bond Issuance to Help Its Economy
China ramped up efforts to stimulate its beleaguered economy, issuing additional sovereign bonds and raising its budget-deficit target, the first time it revised its budget outside the regular legislative session in more than a decade. The country’s top legislative body approved on Tuesday a plan to raise 1 trillion yuan, equivalent to around $137 billion, in additional sovereign debt, half for use before the end of this year and half for next year, according to the official Xinhua News Agency. Policymakers said the bond issuance was intended for infrastructure projects in the wake of severe flooding and other natural disasters, Xinhua reported. The latest stimulus, which follows a flurry of piecemeal measures such as interest-rate cuts and the lowering of mortgage costs for home buyers, signals that Beijing continues to worry about the weakness of the economic rebound it had counted on after doing away with all pandemic restrictions.
Part of the problem is a mounting debt burden for local governments in more areas of the country and a real-estate crisis that shows little sign of abating. Beijing has so far avoided offering support to households to help the economy transition into one more driven by consumption, in large part because of leader Xi Jinping’s focus on ideology and reluctance to resort to handouts to consumers. Stocks in Hong Kong and mainland China rose in early Wednesday trading following the news. The Hang Seng Index gained 2.3%, snapping a four-day losing streak, while the CSI 300 index of the largest companies listed in Shanghai or Shenzhen rose 0.9%. Both benchmarks are still in the red for the year. While many economists puzzled over the timing of the announcement as growth in recent weeks has appeared to stabilize, they viewed the new debt issuance as incremental in nature and said it wouldn’t be enough to reverse longstanding headwinds for the economy such as a lack of demand from businesses and consumers. The 1 trillion yuan of sovereign bonds make up less than 1% of China’s gross domestic product. By comparison, the stimulus China launched in the 2008 global financial crisis accounted for more than 12% of its GDP at the time.
5. Your Heat Bill Might Be Lower Than Last Year’s
Cheaper heating bills are in the forecast this winter for millions of Americans. Ample stockpiles of natural gas and expectations for a warmer-than-normal winter have forecasters from Wall Street to Washington calling for gas to cost much less than last year, when big utility bills busted household budgets, shocked business owners and helped drive inflation. U.S. households that heat with natural gas, about 60 million of them, should expect their bills this winter to be about $601, on average, according to the Energy Information Administration. That is 21% lower than last winter when the average residential gas expense between Nov. 1 and March 31 amounted to $764.
“Even if this winter is colder than forecast, we still expect households heated by natural gas to pay less for heat this winter,” said EIA Administrator Joe DeCarolis. Natural gas prices also influence winter power bills for the 56 million households warmed with electric heat, since gas is the main fuel burned to generate power these days. The EIA expects such households, predominantly in the South and the West, to pay $1,060 for electricity this winter, about the same as last winter. Households that use heating oil, typically in the Northeast, should expect to pay a little more than last year, thanks to factors playing out in the volatile global diesel market. Propane-burning homes—about six million, mostly in the rural north—will probably cost about the same to keep warm as last year, unless colder-than-forecast weather eats too quickly into stockpiles. November gas futures ended Tuesday at $2.971 per million British thermal units, 34% less than a year ago. Unlike it was last year, the volume of gas in storage is at a 5.1% surplus to the five-year average, according to EIA data. A year ago, domestic inventories were 5.2% below average, drained by exports to Europe and a sweltering summer at home that had air conditioners running full blast.
6. Upcoming Biden-Xi Summit
China’s foreign minister opened meetings with the Biden administration national security team to brighten the way for a summit between their leaders and keep in check the gamut of issues driving the countries’ tensions. On the lengthy agenda for the meetings that began Thursday are two hot spots. Secretary of State Antony Blinken, who held talks with Chinese Foreign Minister Wang Yi, said he wants to enlist Beijing’s help in keeping the Israel-Hamas war from widening. China’s harassment of Philippine ships trying to resupply a South China Sea outpost also drew a sharp warning from President Biden this week not to attack a U.S. ally.
Despite those differences, a key thing to watch Friday is whether Wang gets to see Biden. Both governments have been trying to stabilize their contentious relations for months. Early in that effort, Blinken got an audience with Chinese leader Xi Jinping in Beijing in June in a fence-mending signal. Biden seeing Wang would reciprocate the gesture, and, officials and China specialists said, would be another marker that both sides are on track for a summit next month. The Biden-Xi summit is almost certain to take place alongside a gathering of Asia-Pacific leaders in San Francisco, some U.S. officials said. If it occurs, the meeting would be their first face-to-face talks in a year, repairing what U.S. and Chinese officials see as an indispensable channel to manage their countries’ fractious global rivalry and try to forge cooperation amid deep distrust. U.S. officials privately say that Wang’s trip is intended to set up a Biden-Xi summit but that they don’t expect Beijing to confirm Xi’s participation until shortly before the Asia-Pacific Economic Cooperation forum meeting in mid-November. China’s Foreign Ministry has also sidestepped questions on whether Xi will attend the APEC forum and whether Wang will meet Biden.
Financial Markets
1. S&P 500 Ends Lower, Enters a Correction
The Dow Jones Industrial Average lower on Friday and pushed the S&P 500 into correction territory. The 30-stock Dow fell 366.71 points, or 1.12% to close at 32,417.59. The S&P 500 slipped 0.48% to finish the session at 4,117.37, closing 10.3% lower from this year’s peak on July 31. The Dow was pressured by declines in JPMorgan Chase after CEO Jamie Dimon said he planned to sell 1 million shares next year. The Nasdaq Composite held 0.38% higher to 12,643.01, thanks to shares of Amazon. Amazon added more than 6% after the e-commerce giant trounced analysts’ expectations for revenue and earnings in the third quarter. Other Mega cap tech stocks such as Microsoft followed Amazon shares higher.
All three major averages registered steep weekly losses. The Dow and S&P 500 are down 2.1% and 2.5%, respectively, for the week. The Nasdaq fell 2.6% in that time, dragged down by sharp weekly declines in Meta Platforms and Google-parent company Alphabet. The week was marked with even bigger swings under the surface for everything from technology heavyweights to oil giants. Alphabet’s earnings disappointed investors, sending the stock down almost 10% for the week, the worst showing since November. Chevron lost more than 13%, the worst weekly decline in more than a year after the company reported quarterly earnings that were sharply lower than a year earlier.
2. Bond Rout Drives 10-Year Treasury Yield to 5%
A deepening selloff in the U.S. bond market drove the yield on the 10-year U.S. Treasury note to 5% for the first time in 16 years, marking a milestone that has rattled stocks, lifted mortgage rates, and fueled persistent fears of an economic slowdown. A critical driver of U.S. borrowing costs, the 10-year yield rose as high as 5.021% in early morning trading on Monday, up from roughly 3.8% at the start of the year. It then reversed course and settled at 4.836% after the long-awaited breach of 5% stoked fresh buying interest. Yields, which rise when bond prices fall, have climbed since the start of 2022 when investors began worrying in earnest that the Federal Reserve might raise interest rates to fight inflation. In recent weeks, though, the selloff has only grown more intense and potentially destabilizing, with the 10-year yield jumping at times more than 0.1 percentage point a day and investors scrambling for explanations. The lack of clarity has only added to investors’ anxieties, reflected by declines in stocks that have pulled major indexes off their summer highs.
Many investors and analysts argue that high yields make sense given signs that a resilient U.S. economy can withstand much higher interest rates than previously believed. Investor expectations for higher rates drive down the prices of Treasurys and push up yields because investors anticipate that new bonds will offer larger interest payments. Others, though, worry that yields have become unmoored from the outlook for Fed policy and are responding to more unpredictable factors, such as souring sentiment about the size of the federal budget deficit and the government’s willingness to address it. The two theories imply different outcomes. If falling bond prices are justified by the strong economy, concerns about a 5% yield on the 10-year may prove just as fleeting as when the yield reached other milestones, dating back to early 2022 when it jumped to 2.5% from 1.5%. Investors and economists pay close attention to Treasury yields, and the 10-year yield in particular, because they set a floor on the interest rates across the economy, including those on mortgages and corporate debt. For investors, yields also represent a risk-free return that they can get by holding government bonds to maturity—an important benchmark for determining the prices of riskier assets such as stocks.
3. Amazon Stock Rallies After Profit and Revenue Beat Expectations
Amazon.com shares rallied after the tech giant reported stronger-than-expected quarterly results. Here are some key numbers, versus Wall Street expectations: Revenue of $143.1 billion, vs. analysts’ expectations of $141.5 billion. The company had guided investors toward a range of $138 billion to $143 billion.Net income of $9.88 billion vs. an expected $6.05 billion. Amazon Web Services revenue rose 12% on the year to $23.1 billion. The company guided fourth-quarter sales from $160 billion to $167 billion. Analysts were looking for $167.1 billion. Amazon stock (AMZN) rose around 8% in early trading to roughly $129. It fell in Thursday’s regular session amid a pullback in Mega cap technology stocks. Amazon is the latest of the “Magnificent Seven”—the Big Tech companies that have helped power the market higher this year—to report this week.
The e-commerce titan’s third-quarter results late Thursday seemed to paint a mixed picture on that front. Total revenue of $143.1 billion was up 13% from the same period last year, which exceeded the 11% growth Wall Street was expecting. And operating income soared, hitting a record $11.2 billion compared with $2.5 billion in last year’s third quarter—exceeding analysts’ consensus target by nearly half. That was helped by sharp growth in advertising and third-party seller services—both of which offer superior profit margins compared with Amazon’s more typical retail sales. But AI is now the dominant theme across the tech industry, which made the results for Amazon’s AWS cloud-computing business even more closely watched than normal. Revenue there of $23.1 billion was about 1% short of Wall Street’s targets, and the growth rate of 12% year over year was flat with what AWS logged in the second quarter. That suggested the company is still seeing many of its customers undertake what it calls “cost optimizations” to reduce their spending. And that contrasted poorly with results two days earlier from Microsoft—Amazon’s biggest competitor in the cloud—which reported that its Azure service accelerated its pace of revenue growth by 3 percentage points during the same quarter.
4. Intel Sees Budding PC Recovery, AI Boost Despite Dropping Sales
Intel’s revenue and profits fell in its latest quarter as weak personal computer and server sales damped the market for its chips. Still, shares of the chip maker rose about 6% in after-hours trading on Thursday as the company’s results and outlook topped analyst expectations amid signs that a PC recovery is starting to take hold and interest in artificial intelligence computation is growing. Before the results, the stock had risen 23% for the year, slightly below the PHLX Semiconductor Index.
The results are some of the strongest yet for Chief Executive Pat Gelsinger, who is more than two years into a turnaround aimed at rebuilding Intel into a chip-making powerhouse. He aims to catch up with Asian competitors in making the fastest-performing chips as well as increasing the production of chips for other companies alongside Intel’s own products. The company’s $14.2 billion in third-quarter sales were 8% below the year-earlier period but above Wall Street forecasts in a survey of analysts by FactSet. Net income of $310 million was sharply lower but also above expectations. The company’s shares rose more than 6% in after-hours trading. Intel has been hit hard in recent quarters by a slowdown in the market for personal computers, where its central processors are ubiquitous. A shortage of chips during the pandemic, when people rushed to buy computers to work and learn from home, turned into a glut of inventory when demand for those devices tapered over the past year. Under Gelsinger, Intel has embarked on new chip plant projects in Ohio, Arizona, Germany, and other places that together could cost hundreds of billions of dollars if fully built out. Gelsinger is also spending to catch up in chip-making technology and is building a new business making chips on contract for outsiders. On Thursday, Gelsinger said his plan to fast-track chip development was on schedule, adding that Intel had signed up two new customers during the third quarter for the most advanced manufacturing it offers in its contract chip-making business.
5. 3M Boosts Year-End Earnings Guidance
3M boosted its earnings forecast after a stronger-than-expected quarter, saying efforts to improve performance and control costs are bearing fruit. The Minnesota-based company reported adjusted earnings per share of $2.68 for the third quarter, higher than its guidance and predictions by analysts surveyed by FactSet. Adjusted sales came in at $8.02 billion, also outpacing expectations. 3M said it now expects its year-end earnings per share to be between $8.95 and $9.15, better than its previous guidance of $8.60 to $9.10. Factoring in one-time charges, the company reported a loss of about $2 billion, or $3.74 a share, for the quarter. They include a pretax charge of $4.2 billion related to its $6 billion settlement over military earplugs that thousands of veterans alleged left them with hearing damage.
Investors initially were upbeat earlier this year after the company settled litigation related to the earplugs and agreed to pay as much as $12.5 billion to resolve some claims over the “forever chemicals” known as PFAS. The enthusiasm was short-lived, and since last month, when 3M Chief Financial Officer Monish Patolawala told an investor conference that a “slow growth environment” would continue in 2024, the share price has declined 20%. It closed Monday at $85.60, the lowest since 2012. The company is betting big on a restructuring that has eliminated thousands of jobs and will see its best-performing unit, healthcare, spun off into a new, stand-alone company next year. It is also trying to reduce uncertainty regarding its legal exposure. The company still faces an investigation in Belgium, where water emissions from a company plant allegedly contained PFAS at a level 10 times higher than the legal limit. 3M said in a regulatory filing that it continues to engage with the authorities.
Sources:
(1) www.bloomberg.com
(2) www.factset.com
(3) www.wsj.com
(4) www.bea.gov
(5) www.reuters.com
(6) www.cnbc.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
Recent Comments