Futures in the United States are trading flat, while those in Europe are down, after disappointing production data in the United States. Despite strong third-quarter earnings, stock traders are concerned that interest rates will rise sooner than expected in order to keep rising consumer prices in check. Today, investors will be paying close attention to what Fed officials, such as Michelle Bowman, have to say about the Federal Reserve’s massive stimulus and how the central bank plans to curb inflation in the coming months.
In yesterday’s session, the Dow Jones Industrial Average dropped 0.10%, while the S&P 500 index jumped 0.34%. The Nasdaq, the tech-savvy index, rose 0.84%, and the Russell 2000, the small-cap index, surged.
Stock Market
Inflation is expected to be the primary driver of markets and the economy in the future, which is why stock traders are highly sensitive to changes in interest rates, which have been fairly modest. Companies were still reeling from unprecedented lockdowns and a surge in demand for goods and services when rising fuel prices appeared out of nowhere. Oil prices have already reached multi-year highs as a result of an impending power crisis caused by a natural gas shortage. Investors should closely look at the earnings of companies to see how rising energy and raw material costs are impacting margins.
Having said that, stock markets have proven to be extremely resilient to a significant pullback in recent months, even as we are seeing fundamentals decaying. The direction of stock market indices will largely be determined by retail sales and manufacturers’ abilities to push through and effectively manage supply chain issues in order to narrow the supply-demand gap. Investors should look at PMI reports to see how companies anticipate consumers will behave in the short term and how manufacturers will respond.
Economic Reports
Investors should note that industrial production numbers were released yesterday and came in below expectations. Because of semiconductor shortages around the globe, production in September slumped to its lowest in seven months and the supply of motor vehicles took a massive beating. The effects of Hurricane Ida took a toll on the supply of mines and adversely affected oil prices. Although repercussions caused by the hurricane will eventually subside, rising input and labour costs are likely to drag down production over the next few months.
Production dipped 0.7% in September, while a 0.1% rise was expected. Manufacturing output was also revised in August from a 0.2% surge, previously reported, to a 0.4% decline. The drop in manufacturing activity was because non-essential businesses were forced to close down operations due to an uptick in coronavirus cases. However, manufacturing activity has recovered from the rock-bottom levels seen last year and has risen 4.8% compared to the same in September 2020.
The manufacturing sector constitutes 12% of the U.S. economy and currently it is facing difficulty refilling stockpiles, which drained massively during the first half of 2021 because of a steep rise in demand for commodities. The pandemic has propelled consumers to spend more on commodities rather than services. The resurgence of coronavirus cases has hindered consumers’ rotation back to services such as dining out and travel, dragging supply chains down.
Earnings Season
The earnings for Netflix and Johnson & Johnson are due to be released today. The earnings of Netflix are especially important as the company could set the tone for technology stocks moving onwards. The paid net subscribers are expected to have jumped to 3.84 million, while the company itself forecasted a rise of 3.5 million. The subscriber guidance for the fourth quarter is also expected to be 8.5 million, the highest since the first quarter of 2019.
Similarly, the earnings of Johnson & Johnson are expected to be fuelled by a rapidly expanding healthcare sector. EPS is expected to be $2.37 in the third quarter, while it was $2.2 in the same quarter last year. Revenue is projected to rise 12.1%, on a year-over-year basis, to $23.62 billion.
Cryptocurrencies
Today is the day that crypto traders have so eagerly been waiting for, as the ProShares Bitcoin Strategy ETF is now ready to invest in bitcoin futures and, according to preliminary disclosure, will be traded on the Chicago Mercantile Exchange (CME). In July, Profunds launched a mutual fund based on bitcoin futures. Many investors, however, believe that demand for bitcoin futures will be lower than expected, as was the case when bitcoin futures were listed on CME in 2017 and Coinbase was listed on the Nasdaq index. Having said that, it is unlikely that markets will experience a selloff similar to the one before because markets have evolved, and individuals now have a better understanding of how digital assets could benefit traditional finance.
Oil
Oil prices pulled back after touching multi-year highs on Monday after industrial output in China and U.S. for September fell, tempering early enthusiasm about surging demand. Manufacturing activity has declined because of rising fuel prices, supply chain constraints, and recurrent coronavirus waves. Economic growth in the third quarter of China dropped to its lowest level since 2021. On the supply side, the Prime Minister of Japan, Fumio Kishida, stated that Japan will request its oil producers to enhance oil supply to cushion the blow of rising energy costs to companies.
Gold
Treasury yields have risen in response to expectations of an increase in interest rates as consumer prices continue to rise. As a result, gold prices fell because higher yields increase the opportunity cost of holding gold, making it less appealing to investors. Investors should expect gold prices to fall unless markets begin to factor in the risks and bad news associated with financial markets, which may be warranted if central banks begin tapering while economic recovery remains sluggish.
Asian Pacific Markets
The minutes for Australia’s monetary policy meeting in October showed that the Reserve Bank of Australia expects the Australian economy to rebound and ultimately grow in the last quarter of 2021, and recover to pre pandemic levels by the second quarter of 2022. As of 12.23 a.m. EST, the Nikkei hopped 0.80% and the Shanghai index jumped 0.70%. The Hang Seng index, in Hong Kong, rose 0.18%. The ASX 200 index climbed 0.28% and the Seoul Kospi surged 0.65%.
