Federal Reserve Seal

Earnings Carnage

I made an appearance on the TD Ameritrade Network recently to discuss earnings for American Express and energy company Schlumberger that you can see by clicking HERE.

The damage from the Fed’s hawkish policy of interest rate increases is finally showing up in earnings reports. This week we saw earnings from Meta (Facebook), Amazon, Apple and others that show headwinds from higher interest rates that are challenging consumers and causing losses on overseas earnings from a strong US dollar. Many companies project that these conditions will continue for the foreseeable future and Apple even decided to stop providing forward guidance as the environment is too uncertain for them to be comfortable to project Q4 earnings (not a good sign). Anecdotally, most companies are saying they had a good quarter but September was a turning point for the worse.

Interest Rates

US Treasury Yields by www.kiscocap.com
US Treasury Yields

The chart on the right illustrates the dramatic rise in interest rates since August 1st. And now the longer tenors are crossing lower which signals investors believe growth will be challenged next year and that yields will fall. The front end continues an upward slope as the Fed is likely to finish rate increases above 4% by Q2 of next year. The meeting on Wednesday may give us a clue on any changes to their current policy. However, this is a yield curve that could invert in the coming weeks which signals a weakening growth outlook.

Poll of economists.

What the Economist Say…

The chart on the right is based on a survey of economists by the Wall Street Journal. You can see that consensus is building that a recession or a slowdown is on the horizon. Growth has already been weak in 2022 and the the effects of higher interest rates will show up with a 6-12 month lag so the bad news should be reported early next year (or sooner).

The real question is if the economists at the Fed will adjust their outlook at the next meeting. A tough seat to be in as inflation has not shown any signs of abating. My take is that the Fed is under enormous pressure from other central banks (and politicians) to slow down as the strength in the US dollar makes goods and services more expensive to foreigners. Also, oil trades in US dollars so the price of energy rises in other countries when the dollar strengthens (ouch).

The S&P 500

Will the Fed blink on Wednesday? If you look at the chart below you can see the S&P has traded back up to the same price level (3924) as the previous Fed meeting in September. An interesting technical development and the market could drop to new lows or perhaps push up to the August high at 4300. They may get cute with the language in their statement and leave the door open for a pivot without committing to changing anytime soon. Fed Powell has commented on their “resolve” so we will see if the article leaked to the Wall Street Journal last week on a pivot was a false flag or not. Stay tuned.

S&P 500 Futures by www.kiscocap.com

Important Economic Stuff

  • Q3 GDP beat estimates with a +2.6%(+2.4% was expected). Trade also was the main contributor to growth as exports grew (perhaps due to oil and gas). Economists don’t expect the third-quarter rise in exports to endure, given a stronger dollarand weakening global economy. Many point to final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, as a sign of a broader economic slowdown.
US GDP Contributors
  • The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), for September came in as expected at +6.2% compared to 2021. The CORE rate was +5.1%.
  • S&P CoreLogic reported home prices rose +13% YOY in August which is lower than +15.6% pace seen in July and the 5th month in a row of deceleration. 
  • The Bank of Canada made a surprise by raising interest rates only 50bps to 3.75% as 75bps was widely assumed by the market.
  • The European Central Bank (ECB) increased 75bps as expected but there are signs the economists are hesitant with a hawkish policy as worries are high about economic growth.
  • Pending home sales in September fell 10.2% MOM which was much higher than the estimated drop of 4%. Ten of the last eleven months have seen month on month declines and sales are down 30.4% compared to 2021.
Chinese Stock Market - NASDAQ Golden Dragon
  • The five biggest U.S.-listed Chinese companies on Monday lost $52.17 billion in market value after Xi Jinping claimed a third term as China’s leader. As you can see on the adjacent chart, the Chinese stock market has given back much of the gains from the last decade.
  • There are now four regional manufacturing indices that negative which signals the economy is slowing. Specifically, Richmond, Kansas City, New York and Philadelphia.

Earnings Highlights

  • Apple: The iPhone maker reported record revenue in the September quarter, offering a bright spot during a challenging week of earnings reports from tech giants.
  • Intel: The chip maker posted a 20% drop in third-quarter sales and lowered its full-year outlook. It has embarked on an aggressive cost-cutting push including targeted job cuts.
  • Amazon: The e-commerce company projected sales in the current quarter would be far below expectations, sending its stock plunging 13% off hours.
  • A day after reporting dismal earnings, Meta shares lost nearly a quarter of their value, knocking it off the list of the 20 most valuable US companies.
  • Ford Motor: The auto maker swung to a third-quarter loss because of a hefty charge associated with the shutdown of its autonomous-driving venture Argo AI. 
Paul McCarthy of Kisco Capital, LLC

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Paul J. McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.