Choking on an apple

Asian markets were handed a Wall Street hospital pass this morning as Apple and Amazon both missed quarterly earnings expectations in after-market announcements. Rising labour costs, rising input costs, supply chain disruptions, semi-conductor disruptions were all rolled out as the usual suspects. Starbucks left investors underwhelmed as well, and the company has quickly announced a giant stock buy-back to placate those choking on their free-trade lattes.

US Advance GDP underperforms

That capped a tough session for US data with Adv Q3 US GDP disappointing. A look under the bonnet reveals the same reasons as above plus the recent delta wave for the downside miss, but consumer spending is holding up nicely and most forecasters are picking Q4 to rebound. It should not be enough to knock the FOMC off their tapering announcement next week. US Initial Jobless Claims also fell once again to 281,000, and the trend is raising hopes that the US labour squeeze will alleviate in the coming months. President Biden’s spending negotiations within his own party remains a dog’s breakfast, but progress is being made allegedly and in totality, was enough to move Wall Street higher until the after-market kidney punches from Apple and Amazon.

It was a rather odd night with US yields across the curve rising along with stocks, although the latter was on expectations of strong results from Apple and Amazon. The US dollar took a bath though and this time the blame can be laid at the door of the European Central Bank. The ECB sought to dampen rate-hiking concerns post its policy meeting but did finally admit that inflation is looking transitory for longer. That wasn’t enough to dampen hiking expectations and Eurozone yields moved higher and the euro rallied strongly. That was enough to spark a run for the exit door by US dollar longs across the G-10 space about-face.

Another central bank that is struggling a little on the credibility front is the Reserve Bank of Australia. Their target rate for April 2024 Commonwealth Government Bonds is 0.10%, but it declined to intervene yesterday as rates hit 0.50%. And have not done a special auction today either, resulting in the yield racing higher to 0.74% this morning. Monday is its next scheduled operation and markets down under will be on tenterhooks. In the meantime, they are gleefully pricing in an about-face from the RBA on its ultra-dovish guidance and that should keep the Australian dollar a favourite into the weekend. Their rate-hiking position isn’t being helped by Reserve Bank of New Zealand Governor Orr stating the obvious that monetary policy easing globally had done what it could and run its course.

My main takeout is that far from being just a US FOMC story now, a winding down of the ham-fisted QE largesse is quickly spreading to other parts of the developed world with EM heavyweights Brazil and Russia already well ahead of the game, having started hiking rates already. Markets have already priced in a 15bps hike by the Bank of England next month. My base case is that markets continue to under-price the Fed taper and that higher US yields and US dollars are on the way, it just may not be the one-way traffic I previously envisaged.

China’s state planner continued to talk down coal prices today, saying they had more room to fall. A story is also circulating from an energy research house called Energy Intelligence that OPEC+ might see room to move on increasing production at its meeting next week. Energy prices remain rock solid today though, and that doesn’t bode well for the longevity of China’s attempt to talk down coal prices. I’m sure Scott Morrison would take that call from Beijing.

South Korean Industrial Production and Manufacturing disappointed as they fell into negative territory today. The same supply chain/pandemic issues assailing the rest of the world are likely to blame but pleasingly, Retail Sales MoM for September recovered to 2.50%, suggesting the worst of the virus woes are behind them for now. Japan Industrial Production MoM for Sep plummeted to -5.40% and it seems to be a trend amongst major industrialised nations that pandemic/supply-chain/semiconductor/rising material costs are eroding the pace of the recovery. Thankfully, markets and consumers seem forgiving of all of the above as out of their control, and consumers seem happy to pay rising prices. Tokyo CPI rose just 0.10% YOY in October, and we can be assured that the BOJ and ECB will be QE-ing for years to come in monetary policy mediocrity, long after the rest of the world has moved on. Neither of them got out of that rabbit hole after the GFC, and they’re not going to now. Try not to get bullish euros and yen on a longer-term horizon.

Eurozone Flash Inflation data this afternoon will have been subsumed by the ECB commentary yesterday, although with markets having rate-hike itchy trigger fingers, a print above 3.50% YoY for Oct could spur another round of euro strength. Even after the Eurozone bond sell-off yesterday, Greece and Italy can still fund in the 10-year tenor at 1.0%. The prosecution rests.

US Personal Income and Spending, Employment Cost Index and Michigan Consumer Sentiment will carry rather more weight with markets. High prints may see the Fed taper trade priced into the end of the week, with stocks lower and a higher US dollar, especially above the one-two punch from Apple and Amazon. Still, depending on your point of view, you could interpret it bullishly or bearishly, as intra-day sentiment and the risk appetite of the FOMO gnomes of Wall Street continue to rule intra-day volatility. Some actual concrete progress on the US spending bills instead of empty rhetoric could give a pleasant boost to markets in the end of the week as well.

Otherwise, the key events to watch out for in the coming week are the FOMC, the Bank of England, and let’s not forget OPEC+ on the 4 November.

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