Market Recon Wednesday

Good Morning,

Chinese Data.

China’s National Bureau of Statistics did indeed report that miss for September Industrial Production that we spoke of yesterday. It was difficult to see that one item shaping up differently after Chinese exports suffered the way they have over the last two months. That however, was not enough to fully rattle world markets thanks to a slight beat for Chinese Retail sales, and a remarkably stable Chinese GDP.  Though over time, the rate of growth has come in, any economy the size of China’s that prints y/y growth at 6.7% for three quarters in a row most likely is not properly measuring it’s size. Global markets are mixed to lower in response, but not in any clearly defined fashion.

Trader Focus.

Pricing these markets has become increasingly tricky. Recent macro-economic data has been sporadic to positive. The September numbers to this point seem to be an improvement over August. Both ISM’s printed in expansion, with the service sector particularly strong. Retail sales were impressive as well. On the “not so hot” side, job quality and wage growth remain roadblocks to national success, and Industrial production remains near long-term lows. The Atlanta Fed is now tracking Q3 GDP at 1.9%, which will be adjusted after today’s September Housing Starts hit the tape (Give them a couple of hours). The bottom line is that nothing has happened to change the December rate hike narrative. My concern in that space is that so many Fed speakers have been talking this up for so long, that the quarter point increase may be close to priced in already. With almost two months to go until that hike is realistic, the US Dollar runs the risk of becoming over-valued, and yields on Treasuries may become artificially skewed to the high side.

Going Forward.

All of that said, Q3 earnings are off to a better start than many expected. It’s very early, so we’re not marking the score-book just yet, but there are a lot of outright beats being printed on the revenue side, with plenty of accompanying y/y revenue numbers that are just as impressive. The risk to Q4 earnings, getting way ahead of myself, will be the very risk just mentioned. That is the potential of an over-prepared marketplace to overshoot proper valuations for the currency exchange, and debt markets…….  and then there’s oil. The place to hide in that environment will likely be the small caps. The pain that they might be experience due to higher interest rates may just pair off against their aggregate lack of exposure to exchange rates.

 

Macro

08:30 – Housing Starts (September): Expecting 1.175M, August 1.142 SAAR.

08:30 – Housing Permits (September): Expecting 1.165M, August 1.139M SAAR. This is an item that has been rather stable all year. That said, August was the weakest month in this space since March. Home-builder optimism spiked in September, and held most of the ground gained for October. That optimism has been seen in New Home Sales data. it’s time to start seeing more of it here.

08:45 – Fed Speaker: San Francisco Fed Pres. John Williams is set to speak from Newark, New Jersey. The topic is diversity. That said, Williams, recently hawkish, will not vote until 2018, though he is well known in economic circles to have Chair Yellen’s ear. A Q&A session is expected after today’s speech.

10:30 – Oil Inventories (Weekly): Expecting -800k, Last Week +4.9M barrels.

10:30 – Gasoline Stocks (Weekly): Expecting -350k, Last Week -1.9M barrels. The API data, released every Tuesday night has become a better predictor than the consensus expectations that are compiled earlier in the week. Last night, API “surprised” again with some large numbers. The American Petroleum Institute reported a draw of 3.8M barrels for Oil Inventories, and a second straight sharp decline in Gasoline Stocks (2.3M barrels). WTI Crude has spiked in response, and is now trading close to $51.

13:30 – Fed Speaker: Dallas Fed Pres. Robert Kaplan, who will not have a policy vote until January will speak from Fort Worth. Kaplan, who keeps a rater low profile is on record favoring a rate hike in the near term, though he does not see the economy overheating. Neither do I. A Q&A session is scheduled for after this event.

14:00 – Beige Book: This item certainly can move the marketplace. It’s basically a check-up of economic anecdotal evidence compiled Fed regional district by Fed regional district that is released two weeks prior to every FOMC policy meeting. Given that we’ve seen some positive data (ISM Services, Retail Sales), and some not really horrible data (ISM Manufacturing, Industrial Production, Jobs, CPI), there is cause to believe that this Beige Book might contain some muted optimism.

19:45 – Fed Speaker: New York Fed Pres. William Dudley is scheduled to speak on economic history in New York City. New York has a permanent spot at the FOMC table, and Dudley has repeatedly stated that he expects to see a rate hike this year. FYI, I am currently tracking three speeches scheduled for tomorrow by William Dudley alone.

Wednesday’s Earnings Highlights

Before the Open: ABT (.58), HAL (-.07), MS (.63), STJ (1.01), USB (.83)

After the Close: AXP (.95), EBAY (.44), MAT (.71), URI (2.44)