The AM Call: This is It

• We face a big week ahead. Recent polls show the U.S. presidential race remains very close, with the outcome likely decided by voters in a handful of swing states, as shown below. We do not have a forecast for the winner of the Presidential race. Indeed, we believe it is impossible to know the outcome, given that most polls remain within the margin of error and a lot depends on voter turnout. What we can say is that, in our view, markets would be happiest to know the winner as soon as possible and adjusting accordingly, whereas prolonged uncertainty about the decision could be more challenging for markets.

• We also have a Fed meeting this week, and last week’s nonfarm payrolls report for October appears to have sealed the case for a -25 bps cut in the Fed funds rate to 4.50%-4.75%. We note that since the last Fed meeting in September, the yield curve has shifted dramatically, with the front end (2Y and in) continuing to fall, while the belly and long end (3Y and longer) have moved higher. In our view, this signals market uneasiness about U.S. debt trajectory, as well as concerns that inflation could remain sticky. We think that a tactical bias to add duration when the 10Y is over 4% remains a good framework.

• The October payroll figure released last Friday was worse than expected, with only 12,000 new jobs created, versus the estimate of 100,000. The payroll report was impacted by Hurricanes Helene and Milton, as well as the strike by Boeing workers, so the underlying health of the jobs market may be somewhat better than the headline figure indicates. Still, there does seem to be a slowdown in the pace of hiring after the surprising strength in September’s nonfarm payroll number was also revised down slightly.

• Other labor market indicators remain healthy, with the unemployment rate steady at 4.1%, while average hourly earnings rose by 4.0% YoY as expected.

• We also got an update on the Fed’s preferred inflation metric, core PCE, last week. Core PCE rose by 0.3% MoM and 2.7% YoY for September.

• Stocks retreated for the week led by a tech sector sell-off, as persistent inflation data and earning results from the “Magnificent Seven” that failed to excite investors amid elevated valuations, led investor to take gains in winners and rotate into lower valuation sectors. In earnings, Amazon (AMZN) was a positive highlight with a 23% EPS beat, while Alphabet (GOOGL) and Meta (META) also posted strong figures with respective 15.2% and 14.9% beats. Microsoft (MSFT) posted a modest EPS surprise of 6.1%, while Apple (APPL) disappointed by only surpassing EPS estimates by 2.5%, a low mark from its typical beat as weak China demand continued to weight on top-line growth. Overall, the tech leaders posted strong results with AI investments starting to show results, although perhaps not at the pace demanded by their lofty valuations.

• In other earnings  news, Pfizer (PFE), Intel (INTC), Reddit (RDDT), Snap Inc (SNAP), Carvana (CVNA), DoorDash (DASH) and Booking (BKNG) were positive highlights, while AMD (AMD), Caterpillar (CAT), Eli Lilly (LLY), Starbucks (SBUX), Robinhood (HOOD) and Coinbase (COIN) were the biggest disappointments.
• In corporate news, Alphabet’s (GOOGL) autonomous driving division Waymo raised $6 bn valuing the company at $45 bn; media reports indicated that Broadcom (AVGO) is teaming up with OpenAI and Taiwan Semi (TSM) to develop processors inhouse for the private AI companies’ needs; and SuperMicro (SMCI) had to delay its earnings release after its auditor Ernst & Young resigned. Also, Boeing (BA) raised $19 bn in equity to shore up liquidity, and Comcast (CMCSA) said it is planning to spin off its struggling cable division into a separate company.
  

The Week Ahead

• Aside from the election, we also have the Fed meeting on Thursday. The CME Fedwatch tool indicates a nearly certain (98.3%) chance of a -25 bps cut, which we agree with. This meeting is not accompanied by an update to the Fed’s economic projections, so Chair Powell’s press conference will be important for clues about the Fed’s latest thinking.

• Third quarter earnings season continues this week with Qualcomm (QCOM), Palantir (PLTR), CVS Health (CVS), Gilead (GILD), DataDog (DDOG), Kenvue (KVUE), Block Inc (SQ), DraftKings (DKNG), TradeDesk (TTD), AirBnB (ABNB), Pinterest (PINS), Warner Bros (WBD) and Paramount Global (PARA) all set to report.

Market Summary – Returns and Yields

For additional insights, be sure to check out last week’s blog post.

Definitions, sources, and disclaimers

This content is being published by Amerant Investments, Inc (Amerant Investments), a dually registered broker-dealer and investment adviser registered with the Securities and Exchange Commission (SEC) and member of FINRA/SIPC. Registration does not imply a certain level of skill, endorsement, or approval. Amerant Investments is an affiliate of Amerant Bank.

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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