Market Observations - Nov 3

U.S. Thursday Market Wrap: Best Day Ever – well, since June.

Falling interest rates continue to provide stock market bulls with the tailwind to battle back, as many tech stocks pop despite mixed earnings results.

The Dow added 564 points or 1.7%, the S&P gained 1.89%, and the Nasdaq climbed 1.7%. All eleven S&P sectors closed green. Real estate +3.10% led, and consumer staples +1.30% lagged. Investors bought up U.S. 10-year Treasury’s, causing yields to drop, the 10y settling around 4.66%.

Internationally, the Bank of England voted 6-3 to keep rates at 5.25% for the second straight meeting. Like in the U.S., inflation is still elevated, but the committee believes policy may be restrictive enough to bring it down. Meanwhile, Brazil cut its interest rate for the third straight meeting to 12.25% as it looks to balance inflation and economic growth.

U.S. labor costs experienced a surprise decline during the third quarter as the labor market slowly softens. Factory orders posted their sharpest rise since early 2021, up 2.8% in September.

Peloton soared 13% despite reporting a wider-than-expected first-quarter loss as it continues struggling to convert new users into paid subscribers. Its holiday forecast was also weak.

Electric truck maker Nikola shares jumped 11% despite reporting a wider-than-anticipated quarterly loss due to its recent recall. It’s estimated to spend $61.8 million to replace battery packs on the trucks but has more cash than last quarter and nearly 300 orders for its latest model.

Apple is the latest tech giant to report results. But despite beating on most metrics, the stock fell after hours.

The company topped earnings and revenue estimates, driven by strength in its iPhone and services businesses.?Gross margin also expanded in the quarter, more than 70 bps above Wall Street’s outlook. However, the company’s Mac and Wearables divisions missed as discretionary spending on these items remains soft among consumers. Within services, Tim Cook said that?“every main service hit a record,”?which is great to hear about its higher-margin business. It’s also sitting on a $162.1 billion cash pile, will pay a $0.24 per share dividend this month, and returned $25 billion to shareholders during the quarter by repurchasing shares and paying dividends. But things weren’t all great for the business. For example, the Greater China area (its third largest market) is seeing increased competition and revenues essentially flat YoY at $15.08 billion. Additionally, its Mac and iPad businesses remain under pressure vs. strong 2022 comparable. Analysts are unsure if the release of M3 chips and a product refresh will be enough to grow again.

Looking ahead, the company did not provide formal guidance but expects total revenues to be flat YoY during its holiday quarter. Analysts had expected 4.5% YoY growth, though its gross profit margin and EBIT forecasts exceeded analyst expectations. Nonetheless, with the company experiencing its fourth straight quarter of YoY revenue declines, investors remain concerned about its ability to grow at its size and in the current economic environment.

The U.S. dollar has been confined to narrow ranges today as the market awaits the October employment report. Barring a significant upside surprise, we suspect the dollar is more likely to extend this week’s losses. The Dollar Index is off about 0.5% this week. Within the narrow ranges, it is sporting a slightly softer profile against nearly all the G10 currencies. It is also lower against most emerging market currencies, but tight ranges dominate.

Similarly, benchmark 10-year yields in Europe are narrowly mixed. They are mostly 10-13 bps lower this week, though the benchmark Gilt yield is off 17 bps. The 10-year U.S. Treasury yield, which was flirting with 5.0% recently, is near 4.65%, off 24 bps this week, ahead of the jobs report.

Asia Pacific and European equities are higher today. Hong Kong and mainland shares that trade there jumped more than 2% to lead the region.

Europe’s SXXP is pushing gently higher to extend its recovery into a 5th consecutive session.

After yesterday’s sharp advance, U.S. index futures are off to a little heavier start today.

December WTI extended yesterday’s recovery slightly but remained within Wednesday’s range (~$80.30-$83.40). Gold is also consolidating inside the midweek range (~$1982-$1990).

China’s Caixin services and composite October PMI were reported. Recall that the official and Caixin manufacturing PMIs converged at 49.5. The Caixin services PMI rose to 50.4 from 50.2 (the official non-manufacturing PMI fell to 50.6 from 51.7). The Caixin composite fell to 50.0 from 50.9. The official composite was 50.7 (down from 52.0 in September). In some important ways, it does not matter. Beijing is engaged in two simultaneous movements. More support for the economy and more control for the Chinese Communist Party.

The Bank of England left policy steady (6-3 vote), as widely expected. It offered a more sad economic outlook. It now looks for Q3 GDP, which will be reported on November 10, to be flat (in August, it projected 0.4% growth) and for the economy to grow by 0.1% in Q4. The BOE sees the economy stagnant next year rather than growth by 0.5%, as it anticipated three months ago. Bank of England Governor Bailey warned of a sharp fall in October CPI. U.K. inflation is the highest in the G7. Recall that in October 2022, CPI jumped by 2.0%. As this drops out of the 12-month comparison, the headline rate can fall toward 5.2% or so. It will be reported on November 15. Bailey argues it is too early to consider rate cuts, but not for the swaps market, which has almost a quarter-point cut discounted for August 2024. Separately, the final services and composite PMI were slightly better, with the preliminary readings of 49.5 (from 49.2 initially) and 48.7 (from 48.6), respectively.

The U.S. reported a 4.7% rise in Q3 productivity (after the upwardly revised 3.6% in Q2) and a 0.8% decline in unit labor costs vs. the median forecast for 0.3%. It illustrates another dimension, and an important one at that, of the labor market besides the number of people working or collecting unemployment benefits. To Fed Chair Powell’s point that while the PCE deflator, which the Fed targets, is a fair measure of inflation, the state of the labor market cannot be captured in a single number. Also, consider weekly initial jobless claims at 217k are low by any reckoning, but continuing claims rose for the sixth consecutive week and at nearly 1.82m are the highest since April.

Today’s nonfarm payroll report is front and center. The 336k increase in September was a bit of a statistical fluke and overstated the strength of U.S. job growth. The guesstimate is for a 180k increase today. Of course, the September gain is subject to revisions today. As noted when the data was published, on a seasonally adjusted basis, the U.S. lost full-time jobs every month in Q3, though the BLS says that almost 800k jobs were created after a little more than 600k in Q2. Through September, job growth has averaged 266k a month. In the first nine months of 2022, the average monthly job gain was 438k. Average hourly earnings (which capture some imagination but is why productivity is important and why unit labor costs are a better reflection of competitiveness) may have slowed to a 4% year-over-year pace. If true, it would be the slowest rise in June 2021.

Crypto Market Rundown:

The global crypto market cap is $1.28T, a 2.61% decrease over the last day.

BTC is currently trading at $34,393 (-2.38% in the past 24 hours, but up 0.62% in the past hour).

Trust Wallet Token (TWT +8.82%), ApeCoin (APE +6.32%), THORChain (RUNE +3.04%) were the top gainers (top 100 by market cap).

Conflux (CFX -10.21%), Solana (SOL -9.29%), and PancakeSwap (CAKE -8.60%) endured the largest losses in the past day.

The top traded assets on Uphold Ascent this week were XRP, BTC, FIL, KAS, and LINK.

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