The AM Call: Equities Sell Off as Rates March Higher, Venezuela Sanctions Lifted

• Last week, broad equity indices declined as geopolitical events and rate volatility overshadowed 3Q23 earnings season. So far, 86 of the 500 S&P index companies have reported, with 74% beating EPS estimates. However, this is lower than the 78% beats posted in 3Q22. As well, the average EPS beat of 6% is lower than the 8% average reported in 2Q23.
• The real action remains in rates. Last week, the 30Y Treasury yield rose above the psychologically-important 5% level, as the long-end continues to sell-off. As of this writing, the 10Y Treasury briefly hit 5% before falling back slightly. Fedspeak continued to focus on the “higher-for-longer” message, with futures pricing in a hold at the next FOMC meeting on November 1.
• In LatAm news, the U.S. Treasury department announced an easing of sanctions against Venezuela. The U.S. allowed specific oil-related licenses, as well as the resumption of secondary trading in Venezuelan debt for U.S. accounts, in exchange for the promise of fair elections in 2024. Elsewhere in LatAm, Argentina is headed for a run-off between Milei and Massa. 
• Recent U.S. macro data has continued to come in hotter than expected, as advance retail sales for September rose 0.7%, compared to the estimate of 0.3% (previous 0.8%). Retail sales excluding auto and gas were came in at 0.6%, compared to the forecast of 0.1% and the revised previous of 0.3%.

• Equities: In earnings, a strong Netflix (NFLX) release driven by higher-than-expected subscriber additions was muted by disappointing Tesla (TSLA) earnings that missed on every line. Tesla’s gross auto margin came in at 15.7% vs. the 19.2% projected and 28% reported last year, and on the earnings call, Elon Musk spent the majority of its duration vocalizing concerns with the economy and interest rate impact on vehicle demand as well guiding down investor expectations regarding the launch of the cybertruck. Large banks and airlines reported strong earnings beats, but still saw sell-off across the board on concerns for forward earnings trajectories. Other beats were released by PPG Industries (PPG), Las Vegas Sands (LVS), Lam Research (LRCX), AT&T (T), Procter & Gamble (PG) and American Express (AXP), while Kinder Morgan (KMI), BlackRock (BX) and Discover Financial (DFS) reported disappointing prints. Johnson & Johnson (JNJ), Lockheed Martin (LMT), Philip Morris (PM) and Abbott (ABT) issued either tepid or in-line figures.  
• In other corporate news, General Motors (GM) announced an offer to UAW for a 23% increase in wages that translates to 30% including other benefits therefor matching Ford’s (F) offer. SolarEdge (SEDG) fell 30% and pulled along with it all solar & renewable energy peer stocks after warning that a weaking in demand from Europe will lead Q4 figures to be significantly lower than those currently projected by analysts.

The Week Ahead

• Looking ahead, press reports indicate that Israel is likely to commence a ground war in Gaza shortly. Markets remain unsettled as earnings season shifts into full swing this week.
• Earnings this week include Google (GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), Boeing (BA), General Electric (GE), Coca-Cola (KO), Verizon (VZ), Comcast (CMCSA), Snap Inc (SNAP), Visa (V), Mastercard (MA), ADP (ADP), IBM (IBM), Intel (INTC), ServiceNow (NOW), Clorox (CL), Ford (F) and Chipotle (CMG).
• For macro data this week, we will be receiving PCE numbers, which is the last major data point on inflation before the Fed’s next meeting. The estimate on a month-over-month (MoM) basis is 0.3% and on the year it is at 3.4%. Core PCE estimates are at 0.3% on the month and 3.7% on the year.

• We will also be receiving the Advance estimate of 3Q23 GDP. The estimate for Real GDP is 4.3%, compared to actual of 2.1% in 2Q23. In comparison to the consensus estimate, GDPNow remains stronger at 5.4%.
• We also get preliminary October S&P PMI data. Estimates are for manufacturing PMI to dip to 49.4, while services PMI retreats to 49.9. Overall composite PMI is expected at 50.0. Any number below 50 indicates contraction.

Market Summary – Returns and Yields

Definitions, sources, and disclaimers

Definitions:

• Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.  

Important Disclosures:

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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