Investors are already discounting another hike of 75 basis points at the next meetings of the ECB and the Federal Reserve
Most of the stock markets managed to end last week in positive despite the fact that the inflation data for the month of September continue to show levels four times higher than desired. Investors are already pricing in another 75 basis point hike at upcoming ECB and Federal Reserve meetings. The economy continues to show signs of progressive economic deterioration and the equity markets have not fully adjusted to this environment.
The truth is that it is becoming increasingly difficult to justify the rebounds, last week there was speculation that some algorithms might trigger purchases when the S&P 500 lost just 50% of its post-COVID rise. There was also talk of several hedge funds unwinding short positions ahead of Thursday’s inflation data. The market remains bearish and until there is more clarity on how long the current rate hike cycle will last, it will be difficult to establish a possible floor.
The most important data was September inflation in the US, despite falling for the third consecutive month, it exceeded expectations 8.2% vs. 8.1% and is still far from the Federal Reserve’s target. After the publication of the data, 99% of investors are discounting a rise of 75 basis points at the November meeting and close to 60% are betting on another rise of 75 points in December. Core inflation continues to rise and marked a new maximum of the last 40 years at 6.6%.
The inflation rate reached a record in Germany during the month of September at 10%. The rise in prices was once again led by energy and food prices. The German country continues to suffer from high energy dependence on Russia and this week announced a new energy aid package worth between 150,000 and 200,000 million. In Spain, the revised figure for September fell to 8.9% from 10% led by food.
The median forecast profit among S&P500 companies is 7.6% and revenue is 8%. Last quarter a 6% was expected and it ended up being 8%, while sales grew by 13%. The strength of the dollar will continue to be decisive for this improvement, compared to the same quarter of last year it has risen 16%. Banking is one of the sectors in the S&P 500 that could see the biggest drop in profits. On the one hand, uncertainty is reducing the number of business operations and on the other, the recent rate hikes could pick up non-performing loans and make provisioning necessary.
Last Friday ended the extraordinary program of buying bonds from the Bank of England aimed at curbing the falls in bonds and the pound. It seems that the government is heeding the recommendations and is considering modifying a large part of the tax cuts. Truss dismissed her finance minister from her and in recent hours there is even speculation that members of her own party will force her to resign.
It is shown that to combat inflation, coordinated action between the government and the central bank is needed. The problem with massively lowering taxes right now is that you increase consumption capacity, so you can cause an extension of inflation pressures. Something similar happens in the US with the labor market, as long as it remains so strong it is difficult for inflation to fall since workers can demand salary increases or change jobs for more money to compensate for the rise in prices.
Featured Events
- China’s third quarter GDP will be released on Tuesday , where it is expected to pick up to 3.4% from 0.4% in the second quarter. The real estate crisis and the blockades to curb contagion continue to move the Asian giant away from its 4.5% target. The ZEW of investor confidence in Germany will also be published , where a new drop is expected to -66.0 points, one of the lowest records in history.
- On Wednesday the revised data on inflation in the Euro Zone is published , where 10% is expected. US housing data is also published , both building permits and second-hand sales. The rise in rates is cooling the housing market, mortgage rates are at their highest since 2008.
- This week the number of companies that will present results accelerates, among the most prominent in the US are Bank of America, J&J, United Airlines, Tesla, Netflix, AT&T, Verizon and American Express. In Spain, CIE Automotive, Viscofan and Vidrala will present their accounts.
- This week we could see a new intervention in Japan , after the yen reached 150 in its cross with the dollar for the first time in the last 32 years.
- This Monday the Vice President of the ECB Luis de Guindos will speak, on Tuesday Neel Kashkari and on Wednesday Charles Evans and James Bullard of the Fed.
Action of the week: Netflix
The market consensus expects revenue of $7.85 billion and earnings per share of $2.17. But perhaps the most relevant data will be the number of subscribers , after falling in the first part of the year for the first time in the last decade. This time an increase of 1.1 million is expected, which could allow it to recover most of the subscribers lost in the first months of the course.
The shares of the streaming platform have fallen 64% since the beginning of the year, dragged down by the change in habits after the pandemic and the increase in competition. In recent months, Netflix has worked to boost its profits by trying to cut costs and seek new sources of income such as pursuing shared accounts and offering a cheaper type of account, but with advertising.
Netflix’s goal is to capture around 40 million customers with this type of account within a year, which could bring it $6.7 billion. The strength of the dollar could help improve its results, since 60% of its income is from the US war. Although we still see many doubts about the value, it is one of the great technology companies that could be closer to its ground.
In recent weeks it has moved in a range between $250 and $214. The most relevant supports are found at first at $204 and in a second case at $170. In the case of breaking above, the next target would be $330, although we could see a first step at $300.
