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Dow slips from a record high on the lingering concern of inflation but recovered

calendar 21/10/2021 - 21:14 UTC

·         Dow Future recovered on upbeat earnings, lower jobless claims, and less hawkish Fed talks

On early Thursday, Dow Future slips from a record high on the lingering concern of inflation but recovered to close almost flat on upbeat earnings, lower jobless claims, and less hawkish Fed talks. The SPX-500 closed 0.3% up touching a new record high of 4542.75, while the NQ-100 also edged up amid a better than expected report card from blue chips like Tesla, HP, Nvidia and Netflix. Also, AT&T beat on earnings and subscriber growth and Blackstone profits nearly doubled. But IBM plunged on lower than expected top-line due to chip shortages, dragging Dow After the closing bell Snap tumbled on subdued revenue and user growth as its advertising business was disrupted by privacy changes Apple introduced earlier this year. Also, Intel plunged on revenue miss and muted guidance. Thus NQ-100 Future stumbled after the closing of the U.S. spot market.

Dow Future surged almost +370 points from Friday’s close to around life time high 35541.00 Wednesday on upbeat earnings, economic data. Dow was also boosted by signs of a moderate BBB (Biden’s Build Back Better) plan with a moderate tax hike. On Wednesday, Dow was further buoyed by a report that corporate, highest personal tax, and capital gain tax may not be increased significantly. But Dow was also undercut as there may be a tax on buybacks and billionaires, while Fed’s latest Beige Book points to hotter inflation, labor shortages.

On late Wednesday, Fed’s October Beige Book highlights:

Overall Economic Activity

·         The U.S. is progressing at almost Goldilocks pace from prior ‘rocket speed’

·         The recent pace of economic growth is affected by supply chain disruptions, labor shortages, rising prices (inflation), and Delta/COVID uncertainty (vaccine hesitancy/mandate)

·         Consumer-facing travel & tourism activity mixed, although recovered remarkably

·         Manufacturing activity is moderately robust

·         The overall economic outlook remained positive with cautious optimism than in previous months

“Economic activity grew at a modest to moderate rate, according to the majority of Federal Reserve Districts. Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19. A majority of Districts indicated positive growth in consumer spending; however, auto sales were widely reported as declining due to low inventory levels and rising prices.

Travel and tourism activity was varied by District with some seeing continued or strengthening leisure travel while others saw declines that coincided with rises in COVID cases and the start of the school year. Manufacturing grew moderately to robustly in most parts of the country, as did trucking and freight. Growth in nonmanufacturing activity ranged from slight to moderate for most Districts. Loan demand was generally reported as flat to modest this period. Residential real estate activity was unchanged or slowed slightly but the market remained healthy, overall. Reports on nonresidential real estate varied across Districts and market segments. Agriculture conditions were mixed and energy markets were little changed, on balance. Outlooks for near-term economic activity remained positive, overall, but some Districts noted increased uncertainty and more cautious optimism than in previous months.”

Employment and Wages

·         The labor market remained tight with a modest to moderate increase in employment amid lingering issues of childcare and vaccinations (mandatory mandate)

·         Wage growth robust amid shortages of the labor force

“Employment increased at a modest to moderate rate in recent weeks, as demand for workers was high, but labor growth was dampened by a low supply of workers. Transportation and technology firms saw particularly low labor supply, while many retail, hospitality, and manufacturing firms cut hours or production because they did not have enough workers. Firms reported high turnover, as workers left for other jobs or retired. Child-care issues and vaccine mandates were widely cited as contributing to the problem, along with COVID-related absences.

Many firms offered increased training to expand the candidate pool. In some cases, firms increased automation to help offset labor shortages. The majority of Districts reported robust wage growth. Firms reported increasing starting wages to attract talent and increasing wages for existing workers to retain them. Many also offered signing and retention bonuses, flexible work schedules, or increased vacation time to incentivize workers to remain in their positions.”


·         Inflation remained elevated amid rising demand, supply bottlenecks, higher raw material/commodity/energy costs, and labor shortages

·         Producers are passing higher input costs to consumers due to higher demand and lower supply; i.e. producers gained pricing power

·         Inflation expectations remained high, although some also expect it to moderate in the next 12-months

“Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks. Price pressures also arose from increased transportation and labor constraints as well as commodity shortages. Prices of steel, electronic components, and freight costs rose markedly this period. Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand. Expectations for future price growth varied with some expecting price to remain high or increase further while others expected prices to moderate over the next 12 months.”

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Now talking about inflation expectations, on Thursday St. Louis Fed economic data (FRED) shows that the 5-year breakeven inflation rate was at 2.77% (as of Wednesday), the highest level since Apr’05, and up from a pandemic low of 0.16% in Mar’20. Meanwhile, U.S. 5Y TIPS breakeven inflation reaches 2.92%, the highest on record, while U.S. jobless claims slipped to a new low.

Fed is set for liftoff by Dec’22 after the completion of QE tapering by June-Sep’22 timeline. Now the question is whether Fed will opt for one or two rate hikes in H2-2022. Fed is already behind the inflation curve. Thus Fed will primarily judge the maximum employment mandate for its liftoff decision. On Thursday all focus was also on U.S. jobless claims, which serves as a proxy for the unemployment trend.

The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) slips to 290K in the week ending 16th October, from upwardly revised 296K in the previous week, lower than the market expectations of 300K and the lowest since Mar’20 (pre-COVID).

The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while (more than a week under UI), further dropped to 2481K (fresh post COVID low) in the week ending 9th October, from an upwardly revised 2603K a week before and below the market expectations of 2550K.

The number of Americans applying for financial help from the PUA scheme, which covers uninsured workers that do not qualify for initial claims (under UI), decreased to 2.338K in the week ending 16th October, from an upwardly revised 21.894K in the previous period.

Overall, depending on actual seasonal/PUA adjustment/reconciliation, the nominal number of employed persons in the U.S. may reach 155000K goal post (household survey including self-employed persons), which should be aligned with the primary condition for Fed’s standard of substantial further progress on maximum employment. But as the October NFP job report will be available only on 5th November, two days after Fed’s 2-3rd November meeting, Powell/Fed may take another excuse to delay the QE tapering announcement to December’21 meeting with a fresh SOEP (Summary of Economic Projections-dot-plots). The Fed will now prepare the market from QE tapering to tightening (liftoff/gradual rate hikes and QT-Quantitative Tightening/Balance sheet asset/QE bond/reinvestment reductions).

On Thursday, Fed’s Bostic said:

·         Disruptions, high Inflation expected to last into next year

·         Seeing no signs of damage, to continue watching closely

·         Trimming asset purchases is the first step--to watch and see how the economy and markets respond

·         Raising rates late Q3 or early Q4 of 2022 is a possibility-- I was thinking late third, maybe early 4th quarter for 2022

·         Currently no signs of risk for the housing market

·         I've adjusted my expectations moving forward

·         We'll see where things develop--I'll keep an open mind. We talk a lot about data dependence and I'm going to lean into that in H1

·         We are not seeing signs of damaging inflation, we will keep watching closely

·         We are not seeing momentum in inflation that might be difficult but will keep looking

·         We're not seeing risks of a run in housing

·         If we can resolve supply chain and labor shortages, growth can rebound quickly

·         Our experience from the pandemic has frankly surprised to the upside

·         The disruptions are going to last longer than we expected. The labor markets are not going to get to equilibrium as quickly as we hoped, but demand was also going to stay high and that combination was going to mean we’re going to have inflationary pressures. The more I talk to folks, it’s becoming clearer and clearer this is going to last into 2022

Bottom line:

On late Thursday, Dow Future recovered as the Atlanta Fed President Bostic hints at only one rate hike in 2022 against growing market expectations of two.

Technically, whatever may be the narrative, DJ-30 now has to sustain over 35575-625 zone for a further rally; otherwise, it may slip for a healthy correction; mid/long term TGT: 36450-41000


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