Originally published by Rivkin
Earnings season in the U.S. is well underway now with around 7% of companies having already reported quarter three earnings. The big names reporting overnight included both Netflix Inc (NASDAQ:NFLX). & Bank of America Corp (NYSE:BAC). both of which exceeded analyst expectations.
Netflix added 3.6 million subscribers in the third quarter of which 3.2 million were outside the U.S., surpassing the average estimate for around 2 million. Revenue increased to US$2.29 billion with forecasts for US$2.28 billion and reported earnings per share of 12 US cents against expectations of 6 US cents. Forecasts for fourth quarter U.S. subscribers was also raised to 1.45 million from 1 million while 3.75 million new international subscribers are expected to be added. Shares surged higher to close up 19.34% in afterhours trading to $119.10 from $99.80.
Bank of America Corp. followed JP Morgan, Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) in beating analyst estimates thanks to a pickup in fixed-income trading. Trading revenue associated with bonds increased 39% in the third quarter translating into a 7.3% gain in profit. At the same time equity trading disappointed with revenue of US$960 million with forecasts for US$1.2 billion. Earnings per share was 41 US cents up from 38 US cents per share a year earlier and analyst expectations of a decline to 34 US cents. The reaction in the share price was fairly muted, up just +0.31% as the future for interest rate hikes remains fairly subdued along with recent scandals at Wells Fargo and concerns over Deutsche Bank (DE:DBKGn) weigh on the industry.
Data from the U.S. showed than industrial production (YoY Sep) increased +0.2% from -0.5% previously in line with estimates and manufacturing production was slightly higher than forecast up +0.2% from -0.5% previously and expectations of a +0.1% gain.
U.S. government bond yields declined following comments from Fed vice chair Stanley Fischer who stated that there were limits to how far the central bank can push the unemployment rate below estimates of full employment. While he highlighted pushing modestly below this estimate posed no danger he said “but saying we should keep going until the inflation rate shows us we’re wrong, then you’re going to change too late”. Fischer view is seen as second only to Fed Chair Janet Yellen and these comments are helping cool inflation concerns as Yellen said there were plausible ways for the economy to run hotter than normal on Friday.
While not providing any clues for a December rate hike Fischer reiterated recent comments that September was a “close call” and part of a continued theme we are seeing from central bankers that fiscal authorities should be doing more to drive growth.
The yield on two-year debt declined -2 basis points to +0.8187% as did the ten-year yield, down -2.4 basis points to +1.7678% while the . Equity markets were lower, both the S&P 500 & Nasdaq 100 declined -0.30% & -0.26% respectively dragged down by consumer cyclicals (-0.74%) and energy (-0.44%). The first chart below highlights both the S&P500 & Nasdaq100 consolidating modestly below their all-time highs as they await third quarter earnings, a U.S. Presidential race and a likely rate hike in December.
In Europe inflation data continued to improve, shown on the second chart below, as the headline consumer price index (YoY Sep) increased to +0.8% from +0.2% previously in line with forecasts. Core inflation for the same period was unchanged as expected at +0.8%. Moving forward a significant contributor to headline inflation will be oil prices as the base effect from previous declines is now phasing out. While we can expect an increase in headline inflation the important factor to keep an eye on will be the reaction in core prices.
European equity markets were broadly lower, with the Euro Stoxx 600 & DAX declining -0.74% & -0.73% respectively. The Euro gained +0.30% against the U.S. dollar while German Bund yields were relatively unchanged. On Thursday night we will have the monetary policy decision from the ECB, there are almost zero expectations of any change to current rates or the QE program but investors will be focusing on any hint on extending the current QE program past March 2017.
Including this meeting the ECB will meet a further four times before the program is due to expire, this provides them with ample time to assess whether we see a sustained pickup in data. At the same time there are concerns around liquidity of assets to purchase so this time also provide further breathing room to the ECB to address these concerns or look to alternative measures. Recent data out of Europe has been more encouraging than not, although inflation is expected to remain below the ECB’s 2% target until 2019 so right now it is more likely the ECB will extend or adjust its program in some way rather than tapering purchases and withdrawing stimulus.
Locally the S&P/ASX 200 was -0.83% weaker while the Australian dollar is +0.3% higher in overnight trading. Looking ahead today we have the release of the RBA minutes from the October meeting at 11:30am AEDT and we expect much of the same rhetoric that we have seen in recent meetings with the next big focus will be the quarterly inflation on the 26th of October ahead of the November 1st rate decision and statement on monetary policy on November 6th.
ASX SPI200 futures are up 3 points suggesting a relatively flat open to the market this morning.
Data releases:
- RBA Minutes From October Meeting 11:30am AEDT
- U.K. CPI & PPI (YoY Sep) 7:30pm AEDT
- U.K. Housing Price Index (YoY Aug) 7:30pm AEDT
- U.S. CPI (MoM & YoY Sep) 11:30pm AEDT
- U.S. Real Average Weekly Earnings (YoY Sep) 11:30pm AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.