The appearance of central banks in haste to tighten austerity, which had continued in the UK, Canada, Australia, etc., was stopped (temporarily) in Europe on the 28th (local time).
The European Central Bank (ECB) decided to keep the key interest rate unchanged after the monetary policy meeting on the same day and keep the bond purchase rate at the current moderately low level. ECB President Christine Lagarde said, “Unless inflation is maintained at the medium-term target of 2%, there will be no rate hike, and this requirement will not be met in the near future.”
However, President Lagarde has also changed his tone slightly on inflation. “We only talked about three things today: inflation, inflation and inflation,” he said. The ECB also removed the statement from its policy statement last month that “long-term inflation expectations continued to rise, but this is far from our 2% target.”
Germany’s inflation soared 4.5% on that day, sending two-year government bonds to record highs. The central bank has raised the benchmark interest rate. The yields on the 20-year and 30-year U.S. Treasury bonds also inverted on the same day. A Wall Street official explained, “Only the interest rate on new 20-year bonds is higher than that of 30-year bonds.
The mood in New York stocks improved a bit as the ECB cut off the austerity relays of central banks.
The worrying US economic indicators were not bad either. Gross domestic product (GDP) growth in the third quarter was 2% per annum, far short of the 2Q (6.7%) and Wall Street expectations (2.8%). This is due to the spread of delta mutations and supply chain disruption. Personal consumption expenditure, which surged 12% in the second quarter, was the biggest, growing only 1.6% (annual rate) in the third quarter. This is due to the reduction in expenses such as travel and eating out. In particular, consumption of automobiles, which were short of inventory due to a shortage of semiconductors, had a decisive effect.
The third-quarter GDP contribution of automobiles and parts consumption was -2.4%, the second lowest since the second quarter of 1980. It is analyzed that if normal consumption of automobiles and parts had taken place, the GDP in the third quarter would have reached 4%. Wall Street also predicted that the growth rate of the fourth quarter would rebound as the spread of the delta mutation has slowed and consumption increases during the year-end shopping season.
After the actual GDP figures came out, the yield on the 10-year U.S. Treasury bond actually rose. If the economy is bad, the interest rate should come down, but it rose by 2.9bp to 1.57% a year. TS Lombard said, “There is no disappointment compared to the concerns about stagflation. The core personal consumption expenditure (PCE) price in the third quarter rose by 4.5% from the previous quarter, which is lower than the second quarter (6.1%). It will slow down.”
Weekly unemployment benefits claims continue to decline. Last week (October 17-23), the number of claims was 281,000, a decrease of 10,000 from the previous week, setting a new low since the pandemic. The estimate was 290,000.
An infrastructure bill that will stimulate the economy next year has also been outlined. On the same day, President Joe Biden proposed a new framework that reduced the size of the Democratic-led infrastructure budget (social welfare package) from $3.5 trillion to $1.75 trillion, half the size. Paid family leave and free college education were abolished, and the medical budget was reduced. On the other hand, $555 billion of financial resources for responding to climate change were preserved.
The corporate tax increase plan was abolished in line with the decrease in the budget. Instead, it has decided to wait for funding, such as a ‘15% minimum tax’ and additional income tax on high-income earners over $10 million.
President Biden is pushing the $1.2 trillion nonpartisan infrastructure bill along with this budget. “We desperately need a vote on these two bills,” Biden said. “It’s no exaggeration to say that this will determine what a congressional majority and my presidency will be going forward.”
A Wall Street official said, “The amount of $1.75 trillion is a reasonable size.”
But it’s still a ‘framework’. Democratic Progressive Leader Primilla Jayapal of Washington State said today that “there are too many opposition votes to pass the infrastructure bill.”
The major New York stock indexes opened with gains in the 0.3-0.5% range, and the gains continued to grow. The Dow rose 0.68%, the S&P 500 rose 0.98%, and the Nasdaq rose 1.39% to close at 15448.12. The Nasdaq, which had been lagging behind in its all-time highs, rose to an all-time high again. On that day, all 11 sectors of the S&P 500 rose indiscriminately.
Dozens of companies posted good third-quarter results that day, which also warmed the market today. The previous day, Microsoft and Alphabet reported earnings that far exceeded Wall Street’s expectations, and their stock prices hit an all-time high. I did. Ford surged 8.6% on the day. Merck also beat expectations by 20 cents with EPS of $1.75. In particular, if the oral treatment for Corona is sold, sales of 5 to 7 billion dollars will be generated next year, and the earnings forecast was also raised, up 6.1%. In addition to Ford and Merck, there are many other companies that raised their forecasts based on their good results on the day, such as Northrop Grumman, WPP Group, Sony, Carrier, and Sirius XM.
Facebook rose 1.5% in December as it changed its name to Meta and decided to focus on the metaverse. Tesla also surged 3.8% on the same day. The gamma quiz continues as stock call option purchases explode. According to the Chicago Options Exchange (CBOE), Tesla options traded at $900 billion as of Wednesday this week. Half of the money traded on the US stock options market. The largest number of call options traded is that Tesla stock will reach $1,100 and $1200, and the $2,000 bet is also significant. This option has a 29-day expiration. A Wall Street official said, “The third quarter results were flawless, and even the ‘big short’ Michael Burry raised his hands and said that no one would sell Tesla stock any longer. This optimism is encouraging speculative call option purchases. “He said.
As companies performed well, Apple and Amazon, which were scheduled to announce their earnings after the close of the market, also rose more than 2% during the market, leading the market uptrend. They closed up 2.5% and 1.59%, respectively. However, the actual results released after 4pm are disappointing. The repercussions of the supply chain disruptions we feared are evident at Apple and Amazon.
Apple reported third-quarter revenue of $83.4 billion and EPS of $1.24. EPS was in line with Wall Street expectations, but sales fell far short of expectations of $84.7 billion. This is because sales of iPhones, iPads, and MacBooks were lower than expected due to a shortage of parts such as semiconductor shortages. Sales of its core product, the iPhone, came in at $38.8 billion, well below the $41.5 billion expected. Tim Cook, Apple’s CEO, had a better explanation. “Despite larger-than-expected supply constraints, we performed very well in the third quarter. We will face more severe supply constraints in the fourth quarter. But we expect solid sales growth compared to the same period last year.” The fourth quarter is more difficult. Apple’s chief financial officer, Luca Maestir, said: “We warned that the disruption caused by a processor shortage this summer would affect the iPhone family, but it was worse than expected. Supply constraints reduced potential revenue by $6 billion over the last quarter. And it’s going to get worse this quarter.”
Amazon’s revenue and sales both fell far short of expectations. Revenue was $110.8 billion (expected $111.6 billion) and EPS was only $6.12 (expected $8.92). It also predicted that fourth-quarter revenue would be between $130 billion and $140 billion, up 4-12 percent from the same period last year. That’s less than Wall Street’s estimate of $142.1 billion. Andy Jesse said he expects to cost ‘billions of dollars’ in the fourth quarter due to labor shortages, rising employee wages, global supply chain constraints, and rising freight and transportation costs.
However, Amazon Web Services (AWS) still made huge profits. It generated an operating profit of $4.88 billion in the third quarter. Operating profit in the e-commerce segment is more than five times that of $880 million.
What is different from the second quarter of this earnings season is that if the earnings are bad or the forecast is lowered, the stock price will plummet without question. Bloomberg News reported last week, “The stock prices of companies that reported worse-than-expected earnings plunged 4.3 percent on the day of the announcement, the largest in five years.” An official from Wall Street said, “In the early stages of the economic cycle, stock prices of all companies rise indiscriminately due to the liquidity supply from the central bank, but when the economy enters the mid-cycle, when the economy passes the peak, differentiation between companies that make money and companies that cannot make money is clearly made. “, explained.
According to CNBC, GM and Ford, two major mountain ranges in the US auto industry, both reported their third-quarter earnings on the 27th exceeded Wall Street expectations (GM’s EPS of $1.52 was 96 cents higher than expected). However, Ford surged 8.7% on the same day to record a 52-week high, and GM closed at 0.028% flat. This appears to be because Ford raised its future earnings forecasts, while GM maintained its previous forecasts. Ford expected semiconductor supply to improve in the third quarter, but GM warned that production could drop by another 200,000 units in the second half due to a semiconductor shortage.
The stock prices of rivals in the logistics industry, FedEx and UPS, are also at odds. UPS’s stock price is rising day by day as its 3Q EPS recorded $2.71 per share, exceeding the Wall Street estimate of $2.55. However, FedEx’s stock price plummeted if the EPS was only $4.37 and fell short of the expected $4.97 due to the effects of soaring inflation and a rise in wages due to the labor shortage.
The Nasdaq hit an all-time high on that day, but eBay (-6.76%) and Twilo (-17.57%), which performed poorly, plunged.
BlackRock analyzed that the reason the stock market showed a correction in September was because the stock price was differentiated according to the differentiated performance of companies. The anxiety factor was that there were no factors other than interest rates, but interest rates stayed below 1.5%.
BlackRock’s chief portfolio manager, Russ Costerich, said: “Interest rates are going to go up a bit, with no spikes, and inflation will continue in the short term. And the Fed will (finally) start shifting its accommodative monetary policy. That’s not a sign of death for the stock market either, but unless financial conditions ease further, corporate earnings rather than valuations will drive the market, which in an era of increasing cost pressures will be more important to earnings, cash flow and sustainable margins than interest rates. That’s why we need to focus more.”
New York = Correspondent Hyunseok Kim [email protected]