Weekly Stock Market Report: Earnings to the Rescue

Key Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

Key Drivers for the Week of Oct. 18, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• Massive Goldman Sachs earnings beat boosts investor sentiment, lifts stocks
• Bond yields cheapen on inflation fears, worries of reduced central bank stimulus
• U.S. earnings include: Tesla, Netflix, P&G, J&J, American Airlines, Whirlpool
• U.S. data on industrial production, Philly Fed, housing starts, existing home sales
• Fedspeak from Powell, Williams, Quarles, Waller, Daly, Bostic, Evans, Bullard, Kashkari
• Canada has BoC Business Outlook Survey, housing starts, CPI, and retail sales
• China reports GDP, industrial output, retail sales, fixed investment; Japan trade, CPI
• Eurozone data includes preliminary PMIs, final CPI, current account; German PPI
• UK calendar has CPI, manufacturing and services PMI, consumer confidence

Week Ahead: Earnings to the Rescue

Global equities were generally on the decline in September as a number of headwinds have cut global growth. But stellar Q3 earnings reports from the big U.S. banks, especially Goldman Sachs, and better than expected U.S. retail sales, helped boost investor sentiment.

The major stock index closed higher on the week, with the most firmer on the month. Concurrently, bonds lost ground on the pick up in risk appetite, fears over inflation, and worries over reduced central bank stimulus.

These factors will again be in play this week. The data slate includes key reports from around the world that should continue to evince the various impacts on activity and prices from supply chain disruptions and shortages of labor and materials. There is plenty of central banks speak as well, but we do not expect any to change their tune.

U.S. equities have surged in October, unwinding a lot of the downdraft from September. The Dow is now 4.3% higher for October, and not far from its all-time high, with the S&P 500 and NASDAQ up 3.8% and 3.1% firmer. Meanwhile, Treasuries have lost a lot of ground on inflation fears as “transitory” looks like it will last longer than expected, as well as increasing angst over QE tapering that is morphing into rate hike concerns.

Indeed, the 2-year note tested 0.400% last week — a 0.4-handle has not been seen (closing basis) since March 19, 2020. The 10-year rate challenged 1.64%. The curve didn’t know whether to steepen or flatten and vacillated between 123 bps and 114 bps on the week, versus 129 bps from last Monday.

This week’s slate could leave Treasuries choppy, though the improvement in risk appetite from last last week should sustain the uptrend in stocks near term.

Earnings will feature this week with more banks, but also other key sectors of the economy. IMB leads off Monday, along with State Street, and Albertsons.

Headlining Tuesday are J&J, P&G, Netflix, Philip Morris, Canadian National Railway, Bank of New York Mellon, Ericsson, Travelers, Fifth Third Bancorp, Synchrony Financial, Kansas City Southern, Dover Corp., Halliburton, and Signature Bank.

On Wednesday, all eyes will be on Tesla, along with Verizon, Abbott Labs, Anthem, Lam Research, CSX, Crown Castle, Canadian Pacific Railway, Biogen, Kinder Morgan, Discover Financial Services, PPG, Nasdaq, Equifax, Las Vegas Sands, Baker Hughes, Citizens Financial, and Teledyne.

Thursday has Intel, Danaher Corp., AT&T, SAP, Union Pacific, Snap, Blackstone, Marsh & McLennan, Freeport-McMoran, Chipotle, Dow, Valero Energy, Southwest Airlines, Quest Diagnostics, American Airlines, Whirlpool, and Snap-On. Honeywell, American Express, HCA Healthcare, Roper Technologies, Schlumberger, Barclays, V.F. Corp., Regions Financial, and Seagate Technology are Wrapped up on Friday.

The data calendar includes industrial production, the Philly Fed manufacturing index, housing starts, and existing home sales. Other reports include the NAHB, jobless claims, and the Markit services and composite indexes. September industrial production (Monday) is projected rising 0.2% in September after climbing 0.4% in August. This would be a 7th straight monthly gain, and the 8th for the 9-months year-to-date.

We expect increases of 0.3% for manufacturing and 1.0% for mining, but a -1.5% drop for utilities. The vehicle assembly rate should tick down to a 9.4 mln pace from 9.5 mln in August, with big headwinds from ongoing semiconductor shortages.

Mining output should continue to rise, alongside the uptrend in the Baker-Hughes rig count. Capacity utilization should rise to 76.5% from 76.4% in August. The Philly Fed index (Thursday), is seen slipping -8.7 ticks to 22.0 in October, erasing much of the 11.3 point bounce to 30.7 in September, from 19.4 in August. The index has averaged 30.7 over the last six months and was at a 48-year high of 50.2 in April.

September housing starts are expected to climb to a 1.630 mln pace in September after bouncing 3.9% to 1.615 mln in August after falling -6.2% to 1.554 mln in July. Starts were at a 15-year high of 1.725 mln in March. Permits are expected to improve to 1.724 mln after surging 5.6% to from 1.721 mln in August, versus a 15-year high of 1.883 mln in January. Existing home sales (Thursday) are expected to jump 1.2% to a 5.950 mln pace in September following the -2.0% drop to 5.880 mln in August. Sales were at a 14-year high of 6.860 mln last October.

Fedspeak will be an interesting market dynamic. The New York Fed conducted a survey for consumer expectations that now shows expectations for the 1-year inflation rate to be 5.31%. The upper bound of this survey also indicates that at least 25% of respondents believe inflation will be at least 8.7% one year from now, while 3-year inflation expectations have increased to 4.19%, marking another high.

Money managers are also looking at the Treasury yield curve’s potential to continue to flatten, which historically means that investors are betting on recession. According to a Bloomberg article out this morning, Asset Management One’s Akira Takei warned that “There is a good chance that the U.S. will enter recession [over the next year]. The curve is still too steep.”

The Beige Book is also on the schedule (Wednesday). Chair Powell is on tap (Friday, 11ET). He will be on a panel discussing post-covid policy and financial stability challenges (sponsored by South Africa’s central bank). NY Fed’s Williams, one of the three key policymakers, is in a moderated discussion (Thursday) hosted by the China 40 Forum. Governor Quarles speaks on financial stability (Monday), but his position as VC of Supervision expired on Wednesday. He will also speak on the economic outlook (Wednesday).

The nonvoting dove Kashkari discusses financial inclusion (Monday). The dovish Daly, though she favors QE tapering soon, gives opening remarks (Tuesday) and speaks on the climate change (Friday). Governor Waller (Tuesday, Thursday) discusses the economic outlook. Bostic (Tuesday) discuses long term unemployment, and Barkin (Tuesday) speaks to the South Carolina Chamber of Commerce. Bostic, Kashkari, Evans, and Bullard (Wednesday) all take part in an event on racism and the economy.

US Politically – Congress has some movement to pass a smaller spending bill, but we think that the bill will be no more than $1.5 trillion. It will likely require Republican support on the House side, which is yet to be seen.

The Canadian calendar is lively this week, with a relatively busy schedule of data releases and events. Housing starts kick-off (Monday) and are seen edging up to 265k in September from the 260k pace in August.

Inflation expectations will be front and center in the BoC’s Business Outlook Survey for Q3 (Monday) as price pressure continues to escalate amid supply disruptions and strong consumer demand. On that note, we’ll get the latest on CPI with the release of the September report (Wednesday), expected to show an acceleration to a 4.4% pace (y/y, nsa) from the lofty 4.1% clip in August. CPI is seen rising 0.2% (m/m, nsa) in September after the matching 0.2% gain in August.

The week ends with retail sales (Friday), anticipated to rebound 1.0% in August after the -0.6% decline in July, while the ex-autos aggregate bounces 1.5%, more than reversing the -1.0% drop in July. BoC Deputy Governor Lane participates in a panel discussion (Monday) on “Harnessing innovation for the public interest.”