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Fed and Market Keep Walking Bullish-Minded Line

Posted November 4, 2021 at 9:45 am
Patrick J. O’Hare

It was clear yesterday that the stock market liked what it heard from the Federal Reserve and Fed Chair Powell. The major indices rallied following the FOMC news and press conference, settling near their best levels of the day and establishing new record closing highs.

The positive bias has persisted this morning.

Currently, the S&P 500 futures are up five points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 51 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are down 12 points and are trading 0.3% above fair value.

The sentiment booster, if you will, is being attributed to the idea that Fed Chair Powell did yet again what he has done in the past: create an impression that the Fed isn’t close to raising the fed funds rate anytime soon. Granted he maintained some optionality, but he has always done that, too. 

What resonated yesterday was the acknowledgment that the FOMC didn’t even have a rate liftoff conversation. The focus was the economy and the tapering decision, the latter of which panned out as suggested: $15 bln less ($10 bln in Treasuries and $5 bln in agency mortgage-backed securities) starting this month.

Purchases will be reduced by another $15 bln in December, and similar reductions are anticipated in each month thereafter, unless economic conditions warrant a change in that schedule.

The Fed chair thought it was possible “maximum employment” could be reached in the second half of 2022 and that inflation could be moving down by the second or third quarter.

The only thought there is that time will tell, but for now, the market looks relatively content with the expected state of affairs.

There certainly hasn’t been any discontent in the overall price action. The major indices are in a breakout mode and have continued to show ongoing resilience to selling efforts.

The same is true this morning, with encouraging earnings news and guidance from Qualcomm (QCOM), and many other companies, helping. That is helping to offset disappointments from the likes of Moderna (MRNA) and Roku (ROKU). The former missed Q3 expectations and cut its FY21 product sales guidance to $15-18 bln from $20 bln. Roku beat the Q3 consensus EPS estimate, but issued Q4 revenue and EBITDA guidance below consensus, citing supply chain issues.

In other developments, the Bank of England left its key policy rate and asset purchase program  unchanged at 0.10% and GBP875 bln, respectively. OPEC+ members are meeting to discuss production quotas, but they are generally expected to stand by their prior stance of increasing output by a modest 400K barrels per day. WTI crude futures are up $1.72, or 2.1%, to $82.58/bbl.

There was a rush of economic news at 8:30 a.m. ET.

  • Initial jobless claims for the week ending October 30 decreased by 14,000 to 269,000 ( consensus 277,000). Continuing claims for the week ending October 23 decreased by 134,000 to 2.105 million.
    • The key takeaway from the report is that the declining level of initial claims fits the script of a labor market that is reportedly brimming with job openings.
  • Q3 Productivity decreased 5.0% ( consensus -1.5%) after increasing 2.4% in the second quarter, and unit labor costs surged 8.3% ( consensus +5.8%) after increasing 1.1% in the second quarter.
    • The key takeaway from the report is that it was the lowest level of productivity since the second quarter of 1981 and reflects the labor cost pressures that are building with the weak productivity.
  • The September trade deficit widened to $80.9 billion ( consensus -$74.8 billion), with exports declining $6.4 billion from August exports and imports increasing $1.7 billion from August imports.
    • The key takeaway from the report is the connection that supply chains issues, transportation bottlenecks, and COVID prevention measures have detracted from global trading activity.

Some of the early momentum in the futures market slowed following the data releases, but there still hasn’t been any concerted selling interest at the index level, presumably because market participants remain satiated by the thought that the Fed is still filling the punch bowl.

Originally Posted on November 4, 2021 – Fed and Market Keep Walking Bullish-Minded Line

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