Weekly Market Update: Markets Brush Off Weak Data and Earnings
Global equity indices closed out the week higher, digesting dodgy data and some weak corporate news to sustain the October rally. Two giant mergers in the beer and high tech industries overshadowed a slow start to the earnings season and a profit warning from Walmart. The US September retail sales report was particularly poor and the inflation data was shaky, adding weight to arguments the Fed would have a hard time hiking rates in 2015, while Chinese trade data was notably soft. Crude prices gave up most of last week's the gains, with WTI and Brent testing back to $45 and $50, respectively, as geopolitical fears wore off and oversupply reemerged as the overriding theme. The benchmark 10-year Treasury yield briefly moved below 2% for the second time this month and the 10-year TIPS breakeven rate moved back below 1.5%. For the week, the DJIA gained 0.8%, the S&P500 added 0.9% and the Nasdaq grew 1.2%.
US jobs, retail sales and inflation data added to the guessing game about the Fed's intentions. September inflation reports out this week told a familiar story: on an unadjusted basis, negative readings in the PPI (-0.5% m/m, -1.1% y/y) and CPI (-0.2% m/m, -0.1% y/y) reports for September continued to show that low energy and commodity prices are dragging down inflation levels. After excluding volatile food and energy components, CPI looks much healthier (+1.9% y/y), although PPI (+0.8% y/y) remains beaten down. The September retail sales data was terrible, with all components flat to negative, while the August figures were revised lower. Meanwhile, the August Job Openings and Labor Turnover Survey - one of Fed Chair Yellen's favorite gauges of labor market health - declined from the series high seen in July and missed expectations, but still remained very strong. The weekly unemployment claims data was much better than expected, with initial claims of 255K matching the 42-year low reached in mid-July.
Over the weekend, Fed Vice Chair Fischer clarified the Fed's thinking on policy in a major speech. Fischer said he did not anticipate global economic weakness to delay interest rate liftoff and asserted the Fed still plans to increase rates this year, though he characterized this statement as "an expectation, not a commitment." These comments were somewhat undercut by speeches from Fed doves Brainard and Tarullo who both cited continuing weak data as reasons to hold off on raising rates in 2015.
There was more bad news in the September China trade report. Total exports were in contraction for the third month in a row and imports saw their 11th month of decline. Notably, oil and copper imports increased somewhat from August levels. More downbeat news is anticipated from China's Q3 GDP report over the weekend, with growth below the 7% annual target rate expected.
Shares of retail giant Walmart gave up more than 12% this week after management slashed its longer-term outlook at an analyst meeting. Walmart executives warned FY17 earnings would decline 6-12% on due to the pay increase for associates announced earlier this year (the firm also lowered their FY16 sales outlook citing the effects of a strong dollar). Management said operating income would bottom out in FY17 will return to growth in FY19.
Poor bond trading conditions in the third quarter drove down revenues at the big US investment banks. Goldman Sachs's quarterly report showed its fixed income, currency and commodities trading revenue fell 33% y/y, marking a much more severe decline than the ones seen at BoA and JPMorgan. Citigroup's bond trading revenues dropped by 16% in the quarter. Both JPMorgan and Goldman missed top- and bottom-line expectations, while BoA and Citi's profits were healthy, as both lapped crippling legal fees from last year.
Big US industrials Honeywell and General Electric saw revenue decline in their third-quarter reports, and GE's profits shrank as well. Honeywell's profits rose y/y, although the firm also cut its FY guidance. GE continued its effort to shed financial assets, getting approval this week for the spin-off of its Synchrony Financial unit and selling GE Capital's $30 billion commercial lending and leasing business to Wells Fargo. Reports indicated that GE will apply to remove its systemically important financial institution (SIFI) designation early next year.
New Twitter CEO Jack Dorsey announced that the company would lay off up to 8% of its work force, to cut costs while it tries to find ways to attract new users. The company also said it would deliver third quarter revenue and EBITDA at or above its prior guidance. Later in the week, former Microsoft CEO Steve Ballmer caused a ruckus when he disclosed in a Twitter posting that he had acquired a 4% stake in the company.
Two megadeals dominated M&A news. Dell reached a deal to acquire EMC for around $67 billion in one of the biggest tech mergers ever. Dell will pay $24.05 a share in cash plus shares of a new tracking stock in EMC's prize holding, VMware, valued at about $9/share. The total deal price of $33.15/share is about 28% above EMC's closing level on Oct. 7, just before reports of the talks started circulating. AB InBev clinched a deal to acquire SABMiller, for £44/share in a deal valued around £69 billion pounds ($106 billion). The resulting firm will account for a third of global beer sales. The global deal, which is likely to face significant anti-trust scrutiny, includes a $3 billion break-up fee that AB InBev would be obliged to pay if the deal can't get approval.