As good as it gets?

There isn’t adequate time and space to cover in detail what has transpired since yesterday’s close, so we will take the nutshell route here.

• There has been a flood of earnings news, including results from Dow components IBM (IBM), Merck (MRK), and Honeywell (HON). Those results, however, have been largely overshadowed by a report and outlook from Meta Platforms (META) that has undercut its stock.
• Israel conducted a raid on Gaza to prepare for the “next stages” of war.
• The ECB left its key interest rates unchanged, as expected, after ten consecutive increases.
• Ford (F) and the UAW have reached a tentative agreement on a new contract.
• The 10-yr note yield flirted again with 5.00%.
• There have been four economic releases ahead of the open: the Advance Q3 GDP Report, Weekly Initial and Continuing Jobless Claims, September Durable Goods Orders, and the September Adv. Intl. Trade in Goods, Retail Inventories, and Wholesale Inventories Report (more on these in a bit).

Currently, the S&P 500 futures are down 12 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 75 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average future are up nine points and are trading in-line with fair value.

That’s a stark improvement from earlier when things looked a lot worse, but Treasury yields took a turn lower after the release of the aforementioned data. It is a peculiar move given that the data were generally good. In fact, the Q3 GDP report was phenomenal from a growth standpoint. Alas, the 10-yr note yield, at 4.97% ahead of the releases, has dropped to 4.91% in their wake.

Looking at the data (in a nutshell):

• Real GDP increased at an annual rate of 4.9% (Briefing.com consensus 4.0%) following a 2.1% increase in the second quarter. Personal spending jumped 4.0% and accounted for 2.69 percentage points of growth.  The GDP Chain Deflator was up 3.5% (Briefing.com consensus 2.7%) following a 1.7% increase in the second quarter.
  • The key takeaway from the report is that the Q3 GDP report was nearly every bit as much as what the Atlanta Fed GDPNow model estimated it would be, which is to say economic activity surged in the third quarter on the back of the consumer, shedding some objective light on why the Fed remains inclined to keep rates high for longer.
• Initial jobless claims for the week ending October 21 increased by 10,000 to 210,000 (Briefing.com consensus 210,000). Continuing jobless claims for the week ending October 14 increased by 63,000 to 1.790 million.
  • The key takeaway from the report is that the level of initial jobless claims does not suggest the labor market is weakening in a material way at this juncture.
• Durable goods orders jumped 4.7% month-over-month in September (Briefing.com consensus 1.5%) following a downwardly revised 0.1% decline (from 0.2%) in August. Excluding transportation, durable goods orders rose 0.5% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.5% increase (from 0.4%) in August.
  • The key takeaway from the report is that business spending continued to increase, evidenced by the 0.6% increase in nondefense capital goods orders excluding aircraft.
• The Advance Intl. Trade in Goods deficit widened to $85.8 billion in September from $84.6 billion in August. Advance Retail Inventories increased 0.9% on the heels of a 1.1% increase in August. Advance Wholesale Inventories were flat after declining 0.1% in August.

The equity futures market is tracking the Treasury market, which is perhaps being governed by some short-covering activity after what we would consider to be a round of pretty solid economic data. Accordingly, one needs to be on the lookout for a reversal of the knee-jerk action.

We can only surmise that the Treasury market is operating under the assumption that this is as good as it will get growth-wise for a long time, so it is pressing some bets on the peak rate theory. In any case, the initial response has made a huge difference for the equity market, which was starting at much larger losses at the open prior to the release of the data.

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Originally Posted October 26, 2023 – As good as it gets?