Despite China’s economic growth coming to a standstill, with only 0.2% growth in Q3, the S&P 500 was in rally mode. While stocks grind higher, bond traders are warning of slowing growth in the U.S. ahead. Treasury yields' curves are flattening as the probability for the Fed to increase interest rates rises. Based on the market-implied expectations, traders now think the Fed will raise rates by 25 basis points twice next year.
What To Watch Today
Economy
- 8:30 a.m. ET: Building permits, month-over-month, September (-2.4% expected, 5.6% in August)
- 8:30 a.m. ET: Housing starts, month-over-month, September (-0.2% expected, 3.9% in August)
Earnings
Pre-market
- 6:00 a.m. ET: Synchrony Financial (NYSE:SYF) to report adjusted earnings of $1.49 per share on revenue of $2.5 billion
- 6:30 a.m. ET: Band of New York Mellon (NYSE:BK) to report adjusted earnings of $1.00 per share on revenue of $3.96 billion
- 6:30 a.m. ET: Fifth Third Bancorp (NASDAQ:FITB) to report adjusted earnings of 90 cents per share on revenue of $1.99 billion
- 6:45 a.m. ET: Johnson & Johnson (NYSE:JNJ) to report adjusted earnings of $2.37 per share on revenue of $27.74 billion
- 6:45 a.m. ET: Halliburton (NYSE:HAL) to report adjusted earnings of 28 cents per share on revenue of $3.90 billion
- 6:55 a.m. ET: Procter & Gamble (NYSE:PG) to report adjusted earnings of $1.59 per share on revenue of $19.89 billion
- 6:55 a.m. ET: The Travelers (NYSE:TRV) to report adjusted earnings of $1.94 per share on revenue of $8.61 billion
- 7:00 a.m. ET: Phillip Morris International (NYSE:PM) to report adjusted earnings of $1.56 per share on revenue of $7.99 billion
- 8:00 a.m. ET: Kansas City Southern (NYSE:KSU) to report adjusted earnings of $2.07 per share on revenue of $730.91 million
Post-market
- 4:00 p.m. ET: Netflix (NASDAQ:NFLX) to report adjusted earnings of $2.63 per share on revenue of $7.48 billion
- 4:30 p.m. ET: United Airlines (NASDAQ:UAL) to report adjusted losses of $1.61 per share on revenue of $7.64 billion
S&P 500 In Rally Mode
The S&P 500 started off weakly yesterday morning but rallied all day after briefly reaching the 50-dma moving average for support. We have now completed a bulk of the retracement from the recent lows, and markets are now moving back into the overbought and extended territory.
While we are not ready to start taking profits just yet, it is likely a good bit of the rally has occurred which makes chasing stocks here a bit riskier. We like our positioning currently, and our increased bond exposure provides us with some hedging capabilities if markets do reverse suddenly. Upside remains limited to recent highs where fairly heavy resistance will get encountered.
China’s Economic Growth Is Slowing Rapidly
As shown below, China’s economic growth rate for the third quarter was negligible at +0.2%, bringing the annual growth rate to just 4.9%. While still high, the annual rate is down from 7.9% last quarter. China’s economic slowdown bears watching as they are the marginal driver of global economic growth.
Will You Trade The First Bitcoin ETF?
As noted in our 3-minutes video below, the SEC has approved the first Bitcoin Futures ETF which will open cryptocurrency to a much wider investor base. On the news, Bitcoin moved above $60,000.
Last week, flows into Bitcoin surged in anticipation of the approval, pushing the total cryptocurrency market capitalization to a record of $2.5 Trillion.
We discuss it more here.
The Yield Curve Is Flattening
Equities are recently showing a little hesitation as investors gear up for QE in November. The bond market has been a lot more vocal about more hawkish Fed policy and the implications for growth. Over the last 5 months, as shown below, the Treasury yield curve (30yr-5yr) has collapsed by three-quarters of a percent. Over the last week or two, the rate of flattening picked up markedly.
A yield curve flattening trade should not be surprising. In Taper is Coming, Got Bonds? we wrote:
“The yield curve and yield graphs look similar. Short-term yields were relatively constant during QE while long-term yields rose. In all three QE examples, the yield curve quickly flattened after QE ended.”
The graph below, from the article, shows how the 10yr-2yr yield curve fell rapidly after the three prior episodes of QE ended.
The Earnings Week Ahead
We take a bit of a break this week after last week’s full calendar of important economic data. On the docket is Industrial Production on Monday, Housing and Building Permits on Tuesday, and Jobless Claims on Thursday.
More important for the markets this week will be Fed speeches and earnings. Recently Fed members have become increasingly vocal about their concern for the recent rise in inflation overstaying its welcome. Last week Bostic led the charge saying “inflation is broadening, not transitory.” If others use similar rhetoric, we will see the market continue to price in a quicker pace of QE tapering and rate hikes coming sooner than previously expected.
This will be the first of a few important weeks for corporate earnings as shown below.
Vacant Offices
The graph below, courtesy of Jim Bianco, shows that a majority of employees in eight major cities are still not going back to their offices. While the number of employees going back to their offices will rise, we think it’s likely the number falls well short of pre-pandemic levels. Per Jim Bianco
“What a year at home did was open our eyes to what we are were capable of outside the office and what it was really like in the office. Few were ready to do this pre-pandemic.”
