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Q3 Earnings Session Outperform; Fed Rate Hike Sentiments in Play

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The Philadelphia Fed manufacturing index, released yesterday, slipped to -8.7, showing clear signs of an economic slowdown.

Third-quarter corporate earnings continue to outperform market analysts' estimates for revenue and earnings per share. This was the case for companies like Danaher Inc., Philips Morris, and AT&T yesterday. Something that did not happen with Tesla inc., whose results and business projections disappointed the market and caused the stock to fall around 6% yesterday. 

However, in general, the earnings season is outperforming expectations. The earnings season performed better than what was expected a few months ago when the market was concerned about a hard blow from the Federal Reserve's aggressive interest rate hikes. 

As a result, stock indices began the session with significant gains, fueled by better-than-expected earnings from companies. 

But on the other hand, investors are very sensitive to the evolution of interest rates. The main debate among investors is about how far the Federal Reserve will go with its rate hikes. Any comments or economic figures that could influence the Fed's policy decision may greatly impact the market. 

The Philadelphia Fed manufacturing index was released yesterday. It showed clear signs of an economic slowdown, dropping to -8.7. In theory, this should be good news for the markets because it could affect the Fed's decision by slowing down the pace of rate hikes. Nevertheless, the employment and price components of this index picked up notably, thus having the opposite effect, encouraging the Federal Reserve to continue with aggressive hikes, given that inflation remains high and the labor market remains strong. 

These latest figures coincided with comments made by Fed official Harker yesterday. Harker did not rule out increases above what the market is currently discounting, at around 4.5%, and his inflation forecasts for next year remain high.  

Despite the fact that the number of existing home sales fell, market interest rates (bond yields) continued their upward trend, and the 10-year treasury bond reached a new high of 4.22%. 

These rises in market interest rates that anticipate more restrictive decisions by the Federal Reserve in its monetary policy were the reason why risky assets (stock market indices) fell back from the highs reached on the day and ended up with losses compared to the previous session. 

Today is the last day that Fed officials can make public statements before the meeting on November 2, so next week the market will be exclusively focused on economic data such as personal consumption spending for next Friday, the Fed's preferred inflation figure. 

 

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Sources: Bloomberg, Reuters 

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.