US Open – Fed, Earnings, Oil, Gold

US stocks are poised for a softer open ahead of the start of the two-day Fed meeting.  The path to yesterday’s run to record high territory was a bumpy one, but trade progress and a wrath of stimulus paved the way. 

This week the focus will fall on the first reading of third quarter GDP, the Fed decision, which comes with a third consecutive rate firmly priced in, earnings, and the nonfarm payroll report.  With the economy in deceleration mode, a softer GDP print will only keep the door open wide open for the Fed to also deliver a cut at the December meeting, although, the final catalyst for a fourth-rate cut would come from the latest update with trade wars. 

Fed

The Fed is pretty much guaranteed to deliver another rate cut that will help continue to narrow that interest rate differential with its other major trading partners.  Fed Chair Powell will likely maintain his stance that this a third cut of a mid-cycle adjustment.  In 1995-96 and in 1998, the Fed’s other two most recent mid-cycle easings saw the Fed deliver 75 basis points in rate cuts to keep their respective expansion cycles going.  Powell has made comparisons to this period for the Fed and they may ultimately allow themselves a December meeting to stay on hold and wait to see how the downside risks have evolved. 

The loonie could end of having the best week, as the Bank of Canada will keep rates steady, a move that will help take away the carry advantage that US has benefited from over the years. The BOC has not cut rates since 2015 and expectations are high for them to remain on hold for quite some time.

Earnings

The next big rally in US equities will likely come from earnings and not the Fed.  This is the third busiest week of earnings and after this week we will see results from 80% of S&P 500 companies.  This week’s results will focus on tech.  Yesterday, Google saw spending on cloud business hurt profits, but investing in a key future business should eventually be viewed as a positive.   Apple reports on Wednesday and expectations are already pricing in a full-year profit and sales decline for the second time since 2001.  Facebook, the social networking giant is expected to deliver another strong quarter.  

NFP

This should be a messy employment number as the GM strike will impact the October reading by 50,000 jobs.  Temporary jobs could see a decline as we start to see some declines in Census hiring.  Markets are already pricing in a sub-100K nonfarm payroll headline number and we should not be surprised if we see the lowest reading of the year. 

Oil

Oil prices are drifting lower as questions grow about the future of deeper cuts by OPEC + and as US stockpiles in Oklahoma appear to have grown from last week.  Russian Deputy Energy Minister Sorokin noted that the OPEC + mechanism is not infinitely efficient as limits exist on how much each country can do.  While other oil-producing members seemed open to the idea of deeper production cuts, the Russians seem less willing to commit this far advance of the December 5-6th meetings. 

Crude will likely remain supported throughout the rest of the year on trade optimism, a slower velocity in US production growth and eventual Russian support for deeper OPEC + production cuts. 

Gold

Gold is doing a great job weathering the storm that is fresh record highs in US equities, trade optimism, an easing of no-deal Brexit risks and a much better than expected earnings season.  Gold is becoming a growing part of investor portfolios as investors many investors remain skeptical on the global outlook and as central banks flood the financial system with stimulus. 

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