Q3 Earnings Session Outperform; Fed Rate Hike Sentiments in Play

By: Miguel A. Rodriguez

12:54, 21 October 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 

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