Live Markets: Is monetary policy sufficiently restrictive? MS says yes
10/08/2023 18:19
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Main U.S. indexes green, but off highs: Nasdaq now up just
~0.3%
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Cmm svcs leads S&P 500 sector gainers; industrials weakest
group
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Dollar edges down; bitcoin slips; crude off >!%; gold
edges up
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U.S. 10-Year Treasury yield edges up to ~4.03%
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IS MONETARY POLICY SUFFICIENTLY RESTRICTIVE? MS SAYS YES
(1309 EDT/1709 GMT)
July's data confirmed that U.S. inflation is decelerating
from last summer's peak, but the resiliency of the economy so
far is fuelling a debate on whether more tightening is needed.
Federal Reserve Governor Christopher Waller believes that
more hikes are needed before calling an all clear on U.S.
inflation, he said last month.
Morgan Stanley disagrees with this hawkish position,
considering that the current monetary tightening is enough as
its effects on economic activity are long-lasting, thus a large
part of slowdown is yet to come.
The broker highlights that policy lag, the period between
when monetary policy change is implemented and when its impact
is felt, as key.
MS economists note that in a world without monetary policy
lags, the current strong economic activity would be a clear
indicator of lack of policy restraint.
But the fact that monetary policy affects the real economy
with delay, opens the possibility that the mapping between
policy restrictiveness and data prints is distorted.
"Consumption habits change slowly and contracts defining many
economic transactions are not renewed daily, not being affected
by unexpected monetary policy decisions in the near future",
they add.
Therefore, MS does not find clear evidence of shorter lags
resulting from faster hikes.
(Matteo Allievi)
*****
S&P 500 PE HEADS HIGHER AS FED WORRIES FADE (1245 EDT/1645
GMT)
As Wall Street investors become more confident that the
Federal Reserve has completed its aggressive interest rate
hiking cycle, they are likely to turn more of their attention to
whether earnings growth can justify higher and higher stock
prices as the market makes its way toward new peaks.
Investors betting the Fed has finished hiking rates gained
additional confidence on Thursday from data showing headline and
core consumer prices both climbed by 0.2% in July, logging an
annual rise of 3.2% and 4.7%, respectively. Those readings were
lower than economists' estimates.
After rallying in recent months, Wall Street's main indexes
are in striking distance of their previous record highs. The S&P
500 has gained 17% so far in 2023, and is now just over 6% below
its record high close in January 2022.
Second-quarter earnings have mostly come in better than
expected, but analysts' earnings estimates for future quarters
have not increased at the same pace as stock prices.
S&P 500 aggregate earnings for the second quarter are on
track for a 3.8% year/year decline, according to Refinitiv
I/B/E/S through Tuesday morning. That compares to expectations
of a 5.7% second-quarter decline at the start of July.
The S&P 500 is now trading at about 19 times expected
earnings. That's the highest level since March, and above its
10-year average of 18. But it still well below a peak of 23 in
2020.
(Noel Randewich)
*****
CHINA'S ECONOMY MAY CONTINUE TO DOUSE THE INFLATION FIRE
(1130 EDT/1530 GMT)
Last year, China attempted to re-open its economy after
years of pandemic restrictions, and many investors became
worried that the attempt would add fuel to the global inflation
fire.
That didn't prove to be the case, and as Brian Reynolds,
chief markets strategist at Reynolds Strategy, sees it, the most
recent data also indicates that China’s situation is likely to
lead to even lower inflation.
According to Reynolds, the recent drop in China’s exports is
even worse than it seems because this is the time of year when
exports to the West typically jump as retailers ramp up for the
year-end holidays.
Additionally, he says China’s manufacturing firms are
finally accepting just how much of a global glut of goods there
is, and are curbing output, which should result in even more
downward pressure on inflation.
Reynolds also notes that if the manufacturing downturn
continues in China, margin calls on underwater metals' trades
could lead to significantly lower metals prices and, and in
turn, put further downward pressure on inflation.
"For nearly two years, we have highlighted that the shortage
of goods, partly caused by ships sitting at anchor off the U.S.
West Coast, would turn into a glut, bringing inflation back down
as the extent of double- and triple-ordering became clear."
Reynolds' bottom line is that, "Those forces are still
intact and argue for lower inflation in 2024 and perhaps
beyond."
Meanwhile, other analysts and market players are also
weighing in on the China situation.
"China's deflation concerns could turn out to be good news
for global disinflation," J.P.Morgan economists wrote in a note,
noting that declines in China's export prices have benefited the
country's key trading partners.
Dan Boardman-Weston, chief executive officer at BRI Wealth
Management, also notes that if China is now exporting deflation
then that should be good for the inflation issue that a lot of
Western countries are facing.
"What we've not really seen yet is a huge amount of stimulus
from the authorities that will maybe start to come through in a
quicker or more meaningful way," said Boardman-Weston.
(Terence Gabriel, Medha Singh)
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BLACKSTONE RAISES OVER $7 BLN FOR "GREEN" PRIVATE CREDIT
INVESTMENTS (1040 EDT/1440 GMT)
Blackstone BX.N on Thursday said it had raised $7.1
billion for its latest private credit fund focused on energy
transition companies.
The fundraise comes at a time when several entities
worldwide have launched a fierce backlash against what they view
as an outsized influence of environmental, social and governance
(ESG) factors in policymaking and investment decisions.
A Republican-led backlash in the U.S. has engulfed major
Wall Street firms like BlackRock BLK.N . In Europe, citizens
struggling with a cost-of-living crisis are resisting attempts
by policymakers looking to expand their net-zero ambitions.
Still, climate reduction goals and other sustainability
metrics remain an important element of investors' playbook. In
the three months ended June, ESG-focused funds welcomed $18
billion of new money even as investment vehicles overall saw $37
billion of outflows, according to research from Morningstar
Direct.
Blackstone's latest fund, Blackstone Green Private Credit
Fund III, falls under the sustainable resources arm of the asset
manager's credit business.
The sustainable resources platform provide private credit to
renewable energy, infrastructure and energy transition
companies.
Asset managers are also doubling down on their private
credit business, to fill the void left by regional banks which
have been tightening lending standards to preserve capital.
(Niket Nishant)
*****
U.S. STOCKS SWIM IN A SEA OF GREEN (1012 EDT/1412 GMT)
Wall Street's main indexes are higher early on Thursday
after milder-than-feared July consumer price data fueled hopes
the Federal Reserve could leave interest rates on hold next
month.
Screens are bright green with all S&P 500 .SPX sectors
higher. Consumer discretionary .SPLRCD , communication services
.SPLRCL , and tech .SPLRCT are posting the biggest gains
among sectors.
The NYSE FANG index .NYFANG is outperforming with a gain
of about 2%.
Stocks are attempting to recover after the S&P 500 lost more
than 3% from its July 27 intraday high into Wednesday's intraday
low.
Of note, on Wednesday, the Nasdaq Composite .IXIC ended
below its rising 50-day moving average for the first time since
March 13. However, with Thursday's early strength, the Composite
is back over this closely watched intermediate-term moving
average, which now resides around 13,750.
Regarding the latest read on inflation, Guy Lebas, chief
fixed income strategist at Janney Montgomery Scott, said:
“Assuming that the August print is somewhere in this
vicinity... I think this largely terminates the rate hike cycle.
There’s always a chance we get reacceleration of inflation
prints after October, but I don’t think that’s going to spur Fed
action.”
Here is a snapshot of where markets stood just after 1000
EDT:
(Terence Gabriel, Karen Brettell)
*****
U.S. STOCK FUTURES HOLD GAINS AFTER CPI (0900 EDT/1300 GMT)
U.S. equity index futures are in positive territory in the
wake of the release of the latest data on U.S. inflation.
The July headline CPI month-over-month was in-line with the
estimate. The year-over-year print came in cooler than expected.
The core month-over-month number was also in-line with the
Reuters Poll. The core year-over-year reading was below the
estimate.
Initial jobless claims came in at 230k vs a 248k estimate:
According to the CME's FedWatch Tool FEDWATCH , the
probability that the FOMC leaves rates unchanged at its
September 19-20 meeting is now around 91% from 87% just prior to
the data coming out. The chance that the Fed lifts rates by
another 25 basis points is now 9% from 13% just before the
numbers were released.
E-mini S&P 500 futures EScv1 are gaining around 0.6%. The
futures were up around 0.5% just before the numbers came out.
Nearly all S&P 500 sector SPDR ETFs are higher in premarket
trade, with tech XLK.P , up about 1%, posting the biggest rise.
The SPDR S&P regional banking ETF KRE.P is gaining around
0.5%.
Regarding the CPI report, Brian Jacobsen, chief economist at
Annex Wealth Management, said:
“Core inflation is drifting lower, but it’s the periphery
that we have to watch. Fuel oil popped 3% for the month. Food
prices are probably set to rise."
Jacobsen added "The noise around the headline number in the
next few months will be a head-fake since the trend is towards
lower inflation, but it will be a communications headache for
the Fed as they’ll need to remind people that there’s a lot of
noise in the data.”
Here is a premarket snapshot shortly before 0900 EDT:
(Terence Gabriel, Chuck Mikolajczak)
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FOR THURSDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)