Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: The market thumbed its nose at the nominally dovish ECB meeting as rate hike expectations for next year soared to new highs for the cycle despite protestations from ECB President Lagarde that the market was wrong to price rate hikes and that inflation would fall back next year. Elsewhere, weak Amazon results have US equity futures in the dumps overnight and next week brings a bonanza of US macro risks, with a flurry of data and an FOMC meeting. Tanking Chinese coal and lower global gas prices also receiving some attention.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities closed at a new record yesterday but equity futures are edging lower today on mixed technology earnings from Apple and Amazon cementing that profit margins have peaked for now. Companies will feel the heat going forward with all input costs rising from wages, financing, and commodities including energy. However, the VIX forward curve still suggests low nervousness among equity investors over the near-term future. The 4,560 level in the S&P 500 futures is a critical pivot point for today’s trading which will determine which way we go.
EURUSD – the rally yesterday in EURUSD despite ECB president Lagarde putting up a bit of a fight against market expectations for rate hikes next year and laying out the case for inflation declining made quite a statement - and by closing yesterday clear of the local lines of resistance above 1.1650 points the needle back higher for a potentially major reversal that takes the pair back into the range up toward 1.1900. Next week will likely prove a critical one for the coming month as the FOMC meets and we have a flurry of important US data, but this close points the action higher unless rejected quickly in the coming couple of sessions.
AUDUSD – the US dollar was weak yesterday as the markets are pricing in nearly every global central bank to get moving on interest rate tightening, even the RBA, which supposedly has a yield control target out into 2024, one that it has loudly ignored in recent days as the market is pricing in that the RBA will have to make a dramatic shift of guidance soon on when it might abandon that yield curve control and loosen up the timeframe for when it might hike rates, something it has said may not be likely until 2024 previously, but the market pricing a move already by the middle of next year. The RBA meets Tuesday. AUDUSD traded back to new local highs late yesterday and is bumping up against the 200-day moving average near 0.7550, and a move above 0.7600 would neutralize the entire episode of weakness since the June FOMC meeting. (The next FOMC is next Wednesday).
Crude oil (OILUKDEC21 & OILUSDEC21) trades flat led by WTI which is on course for a monthly gain of around 10%. This following a small two-day correction that quickly ran out steam given the focus on tight market conditions as consumption continues to outpace supply. The tightness can be seen in the very elevated time spreads, especially in WTI where dwindling stocks at Cushing, the delivery hub for WTI, has resulted in a very elevated spot price relative to the following months. OPEC+ meet next week and with their own estimates pointing to a daily supply deficit of more than 1 million barrels this quarter, the market will be looking for more than usual 400,000 barrels per day in December.
Natural gas prices in the US (NATGASUSDEC21) tumbled back below $6/MMBtu after a big stockpile build while over in Europe, the Dutch TTF benchmark slumped by 11% to $25.7/MMBtu, lowest in a month, in anticipation of increased Russian supplies next month. Following positive Nord Stream 2 comments from the German Economy Ministry on Tuesday, President Putin ordered Gazprom to start filling its EU storage sites, which are currently 70% below last year's level. Higher gas flows from Norway and the halving of coal prices in China during the past ten days also adding to the downward pressure on gas. In the US, another strong injection into storage could see stock levels enter the peak winter demand months close to its five-year average.
What is going on?
Apple’s revenue fell short of expectations as supply chain issues held back production even more than expected and cost the company some $6bn as the company forecast higher costs for coming critical holiday quarter. The supply constraints led to iPhone sales of $38.9bn vs est. $41.6bn, but the higher mix of high margin services and subscriptions saved the EPS number at $1.24 vs est. $1.24. Shares were down 3% in extended trading. Analysts estimates for revenue growth the next couple of quarters look very muted with FY22 Q2 (ending 31 Mar) expected to show revenue growth of 0.8% y/y.
Third straight quarter of negative free cash flow from Amazon. We have to go back to Q3 2000 to find another period of three straight quarter of negative free cash flows. Amazon shares were down 4% in extended trading as higher costs and supply constraints led to disappointing result with Q3 EPS of $6.12 vs est. $8.96 as wages and inflation added around $2bn extra in costs and will likely continue in Q4. But the market was the most disappointed over the Q4 revenue guidance of $130bn-140bn vs est. $142bn which is an unusually large prediction for Amazon showing how volatile the environment is for e-commerce. AWS did better than expected ending the quarter with Microsoft and Amazon winning the cloud computing fight over Google.
Facebooks rebrands as Meta. This is probably the biggest shake-up in the modern history of corporates and unlike Google’s rebranding into Alphabet, which was nothing more than a corporate structure exercise, this rebranding is a totally new focus on the company. Meta wants to dominate the future of augmented reality and virtual reality as it sees this becoming a new computing platform in the future. Part of this new direction is higher capex and lower profitability short-term as Meta will be rolling out new VR headsets including a new high-end VR headset called Cambria, and then photos have leaked of a new watch to compete against Apple.
ECB meeting sees higher rate expectations despite Lagarde’s protestations. At the ECB press conference, ECB president Lagarde insisted that the banks forecasts and outlook suggest that, while inflation will prove more persistent than originally expected, it will fall back next year and that the market pricing of rate hikes next year was incorrect. Even as she did so, rate expectations actually rose sharply in the wake of yesterday's meeting, suggesting that the market believes that the ECB will have to cave on inflationary risks and adjust its inflation forecasts significantly higher at the December meeting after projecting in September that inflation would fall back to 1.7% in 2022 and 1.5% in 2023.
Germany CPI hits 4.5% year-on-year in the preliminary October estimate, a new cycle high and vs. 4.4% expected and 4.1% in September. The month-on-month figure was +0.5% vs. +0.4% expected.
US economic growth slowed in Q3, according to the first estimate of GDP for the quarter, which came in at a 2.0% annualized rate versus expectations for 2.6%. The spin is that supply bottlenecks restrained spending, although momentum was seen on the services side of the economy. The GDP price index for the quarter only dipped back to a 5.7% annualized rate versus 6.1% in Q2 and versus +5.3% expected.
What are we watching next?
The US dollar on tilt ahead of key week for US data and an FOMC meeting. This week has seen a massive repricing of global central bank policy intentions, with rates rising rapidly at the short end of the curve nearly everywhere – even for the ECB despite Lagarde’s pushback yesterday, as noted above. With the weaker US dollar coming into today, it seems the market is pricing for the Fed to remain behind the curve even if rate hike expectations also rise for the US as they are doing elsewhere. In any case, next week looks critical for further developments in the US dollar, which looks on the edge of a major tumble if it can’t find support here. Besides important US data today (Sep. PCE Inflation) and next week, including the ISM surveys for Manufacturing Monday and Services on Wednesday, we also have an FOMC meeting that will see the Fed kick off its tapering of asset purchases and then Friday brings the October payrolls and earnings data.
Earnings Watch – Today’s key focus is Exxon Mobil and Chevron which we expect to deliver strong earnings and cash flows. As we wrote yesterday in our equity update, energy companies seem to be reluctant of increasing their capex despite a strong outlook, so we expect Exxon Mobil and Chevron to come out and increase their dividends and/or buybacks of own shares.
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
0800 – Germany Q3 GDP Estimate
0800 – Norway Oct. Unemployment Rate
0830 – UK Sep. Mortgage Approvals
0900 – Euro Zone Oct. CPI Estimate
0900 – Euro Zone Q3 GDP Estimate
1230 – Canada Aug. GDP
1230 – US Sep. PCE Inflation
1345 – US Oct. Chicago PMI
1400 – US Oct. Final University of Michigan Sentiment
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