North American Morning Briefing : Investors to Assess Heavy Slate of Earnings

10/14/2021 | 05:54am

MARKET WRAPS

Watch For:

Weekly Jobless Claims; PPI for September; EIA Weekly Petroleum Status Report; Canada Manufacturing Survey for August; results from Bank of America, Citigroup, Morgan Stanley, UnitedHealth, Wells Fargo

Opening Call:

Stock futures rose ahead of a wave of earnings, including from major banks, which investors will use to assess how companies are positioned to deal with risks including inflation and higher energy prices.

"Can companies weather those risks or was the entire rally only fueled by ultraloose monetary policy?" said Carsten Brzeski, ING's global head of macro research. Investors are looking to see "where are we in terms of the post-lockdown cycle and also to get some insights into how solid earnings and companies are going into this tapering period and this era of somewhat higher interest rates."

Data include jobless claims for the week ended Oct. 9, which are forecast to fall for a second consecutive week when figures are released at 8:30 a.m. ET, according to economists surveyed by The Wall Street Journal.

Overseas, the pan-continental Stoxx Europe 600 added 0.7%, while indexes in Asia closed with mixed performance.

Stocks to Watch:

Deere workers represented by the United Auto Workers union went on strike after an agreement over wages and benefits couldn't be reached with the agricultural equipment giant. The strike began around midnight Central time.

Workers earlier this week rejected a new, six-year collective bargaining agreement. The UAW said 90% of its members voted against the contract proposal, which would have provided workers with immediate raises of 5% to 6%.

The contract, which also included improved benefits, would have covered more than 10,000 workers at 14 facilities across the United States, according to Deere.

Deere said operations would keep running while talks with the union continued, but added it couldn't estimate when the strike might end.

"We are determined to reach an agreement with the UAW that would put every employee in a better economic position and continue to make them the highest paid employees in the agriculture and construction industries, " said Brad Morris, Deere vice president of labor relations, in a statement early Thursday.

Forex:

The dollar continued to weaken in Europe and although the market largely shrugged off the higher-than-expected CPI reading, inflation fears haven't gone away, said DBS. It noted that data due later Thursday may show PPI surged 8.7% on year in September. However, DBS said there is still room for the USD Index to rise further toward 96.00 in the coming months.

Unicredit said a drop in the 10-year Treasury-German Bund yield spread below 170 basis points was also likely to be contributing to the dollar's decline.

"EUR/USD is showing resilience again re-approaching the 1.16 handle but has to break above 1.1650 to reduce selling pressure in a more convincing way."

Sterling's gains on speculation about an imminent U.K. interest-rate rise are expected to be limited, reflecting concerns about the nation's particularly severe supply chain issues, labor shortages and high inflation, said Commerzbank.

Many of the supply shortages that the world is experiencing reflect pent-up demand in the wake of coronavirus so are expected to be temporary but this view doesn't apply to the U.K. due to Brexit, said Commerzbank's Ulrich Leuchtmann. The U.K. also faces further political and economic risks from its stubborn position in post-Brexit negotiations, he added.

"Those make a stronger sterling impossible, despite rapid Bank of England rate hikes."

The Turkish lira fell to a record low versus the dollar after President Recep Tayyip Erdogan fired three central bank officials. Erdogan removed deputy governors Ugur Namik Kucuk and Semih Tumen along with Monetary Policy Committee member Adullah Yavas.

"Erdogan believes that cutting interest rates causes inflation to fall, and he tends to fire central bank employees, including governors, who disagree with him in this respect," said Oanda analyst Jeffrey Halley. "Readers should be pencilling in USD/TRY trading on a 10.0000 handle sooner rather than later."

Bonds:

The narrowing gap between shorter- and longer-term Treasury yields suggests investors expect the Fed might increase rates faster than they previously anticipated, which could slow growth further out in the future. Central-bank officials have said that much of the recent pickup in inflation is temporary and expect it to moderate in the years ahead, particularly as supply-chain bottlenecks ease.

"There's a lot more sensitivity to inflation data now," said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. "The market is becoming more and more concerned that we are getting an inflationary shock."

Deutsche Bank analysts now expect the Fed to start raising short-term interest rates in December 2022 instead of the third quarter of 2023, in part due to rising inflation expectations, according to a report Wednesday. The bank predicts the central bank will maintain a gradual pace and the federal-funds rate will reach 1.9% by the end of 2024.

AXA Investment Managers said the latest inflation data from the U.S. and Germany shouldn't give central banks any reason to change their announced policy.

In the case of the Fed, it means a gradual scaling back of the bond-buying programs from November, followed by gradual rises of key interest rate from mid-2022, said Achim Stranz, chief investment officer. For the European Central Bank it means a similar strategy with a six- to 12-month time lag.

Commodities:

Oil prices extended their gains in Europe following the IEA's monthly market report release, showing forecasts for as much as 500,000 barrels a day of extra oil demand in the coming months as a result of gas-to-oil switching.

"An acute shortage of natural gas, LNG and coal supplies stemming from the gathering global economic recovery has sparked a precipitous run-up in prices for energy supplies and is triggering a massive switch to oil products and direct crude use for power generation," the IEA said, adding that power-generation plants, fertilizer producers, manufacturing operations and refineries are all affected.

Gold prices hovered close to a one-month high after the inflation data, which also pushed the dollar and Treasury yields lower, further helping bullion.

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