Global Economy & Markets, Weekly Roundup 12/10/21

12/10/2021 - Reports

Global Economy and Markets

Investors’ focus shifts to third quarter earnings season and US inflation
Key Takeaways
Investors will closely monitor the Q3 earnings season which kicks off on October 12th. Consensus anticipates positive EPS annual growth of +27% in Q3, with 2021 S&P500 expected EPS at $199.  Apart from the Q3 results, attention will also focus on companies’ guidance. Inflation and unit costs, as well as supply chain bottlenecks are factors that expected to dominate earnings’ calls.

According to NKE (-6% since Delta wave in July vs -1% for Cons. Discretionary Sector and -8% for Consumer Durables & Apparel Industry), moving products from Asia to North America now takes about 80 days, from 40 days prior to the pandemic. In addition, 10 weeks of production have been lost in Vietnam since mid-July due to Government’s zero tolerance against Covid-19 outbreaks.

Analysts remain optimistic in aggregate for Q3 EPS, albeit to a lesser extent than in Q1 and Q2. Base effects have become more challenging and Q3 US real GDP growth estimates have been revised downwards, to 1.3% qoq saar from 6.1% in July, according to the Atlanta’s Fed model.

Having said that, the 12-month forward Earnings Revision Ratio (ERR), which we calculate as # of EPS upgrades minus # of EPS downgrades over the total # of EPS revisions, has decelerated to near zero suggesting high sensitivity to recent (negative) growth and (positive) inflation developments.

Moreover, consensus has increased earnings estimates in Q3 by +2.7% to $48.4 (July 1st to October 12th), although less so compared with Q1 (+7%) and Q2 (+7%). Over the past 40 quarters, earnings estimates have fallen by -3.7% on average during a quarter.

While earnings downgrades are not devastating for equity markets, disappointing earnings could trigger further volatility given (i) elevated S&P500 valuations with the 12-month forward P/E ratio at 21x (84% percentile since 1990) and (ii) the recent increase in 10-year real interest rates by 30 bps to -0.92% since June, albeit still in negative territory. The S&P500 has sliced through its short-term moving average (ma), testing its 100-day ma, currently 4366.

On the US economy, total nonfarm payrolls rose by 194k, below consensus for +479k, albeit significant positive net revisions for the previous two months took place (+169k). The unemployment rate declined significantly by 0.4 pps to 4.8%. All in all, the US labor market is healing gradually, while the latest data would likely not prevent the Fed’s tapering announcement (November 3rd).  Note that 10-Year US Treasury yields increased by 14 bps to 1.61% wow and financial markets price-in the first FFR interest rate increase in Q3:2022, with household balance sheets in very good shape. 

Attention now turns to the US inflation data for September. CPI is expected stable at 5.3% yoy (0.3% mom vs. 0.5% mom on average in 2021), while the core figure is expected at 4.1% yoy from 4% yoy. On a positive note, concerns regarding the debt ceiling have temporarily subsided as the Senate voted in favor of legislation that would increase the federal debt limit ($28.4 trillion currently) by $480 billion. The Treasury Department estimates the above amount would allow the government to continue borrowing through at least December 3rd.