Stocks rally, Biden scramble, no surprises from ECB, US data, bitcoin rebounds

US stocks continue to rise as the economy shows it was able to take the delta variant hit in the third quarter.  Optimism is high that earnings reports from Apple and Amazon will show they are navigating through supply chain issues but are still able to get their products out.  This earnings season has shown the US consumer is strong and has been able to handle the recent wave of price increases.

ECB meeting a non-event

The euro rallied after the ECB signaled that inflation is not likely to drop as quickly as they forecasted.  The ECB did not deliver any surprises: rates were kept steady, PEPP is likely to end in March, and policymakers will try to delay rate hike expectations.

Biden

President Biden’s last act before the midterm elections is turning into a scramble that will have him fall short on delivering on many of his campaign promises.  Biden’s framework on social spending and climate initiative will be a lot smaller than anticipated but it is still a win.  The USD 1.75 trillion social spending and climate bill alongside the infrastructure package will expand early childhood education, create millions of jobs, tackle climate change, and expand health coverage.  Biden will not deliver on his campaign promise of making a federal paid family and medical leave system or roll back President Trump’s tax cuts.

Democrats will use taxes to pay for Biden’s plan and it is unclear if progressives in the House and centrist senators will sign off on the deal.  The spending framework would include a 15% minimum tax on corporations, a 5% tax on incomes above USD 10 million, and 1% surtax on stock buybacks.

US Data

The delta variant impact was felt in the third quarter, but all signs are pointing to the recovery to gain steam going forward.  The third quarter had to deal with ending stimulus payments, persistent supply chain issues, and a COVID shock that led to weaker consumer spending.  Personal consumption rose 1.6% as Americans struggled to find goods due to supply chain issues.  Third-quarter GDP was 2.0%, a deceleration that was widely priced in.  The GDP deflator index remained elevated at 5.7%.  The fourth quarter will be strong as all signs show demand will rebound, some businesses were able to replenish inventories, and COVID cases continue to trend lower.

The Q3 advance Core PCE reading rose 4.5% as expected but traders will care more about tomorrow’s September PCE deflator readings.

Weekly jobless claims showed the economy is on the right track after making a new pandemic low as employers continue to have difficulty filling vacancies.  Claims are getting closer to pre-pandemic levels and that is a good sign for the labor market recovery.

Pending home sales in September posted a downside surprise but traders will shrug this release off given the healthy flow of mortgage applications over the past few months.  Pending homes sales dropped an unexpected 2.3% in September, which was much worse than the 0.5% consensus estimate.  Mortgage rates were on a strong upswing, jumping to 3.14% the highest level since early April.  The housing market is cooling but still remains strong despite expensive home prices, higher rates, and limited supplies.

Manufacturing activity in the 10^th district rebounded sharply.  The Kansas City Fed manufacturing index rose to 31, higher than the 20 consensus estimate and 22 prior reading.  The report highlighted rising costs, strong demand, and labor market progress.  Supply chain issues are getting worse as now 95% of firms reported challenges, up from the 89% seen in July.  The majority of manufacturers (56%) are not optimistic about a return to normal with material prices and deliveries until 6 to 12 months.  Just over one-third expect the issues to last 12 months.

Bitcoin

The dip was short-lived for bitcoin, a welcome sign that this consolidation phase could ultimately lead to higher prices.  Bitcoin promotion is entering an annoying phase that will do little in attracting mainstream interest.  Gimmicks from celebrities are not good news for the crypto space as it will draw attention away from more important developments such as ethereum’s successful upgrade implementation.

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