By Edward Moya
US stocks are lower as good news about the economy is once again bad news, since it will keep policymakers on the fence on delivering more tightening.
Treasury yields are rising after a couple of strong economic releases about consumer spending and increased manufacturing output. It seems the US economy isn’t ready to head into a recession just yet.
In addition to the good news, the greenback is also firmer after both a cool Canadian inflation report put BoC rate hike expectations on ice and as falling UK pay growth will allow the BoE to hold off on raising rates.
It seems Tuesday was all about an incremental move higher for Fed rate hike expectations, while all the other advanced economies posted softening data that could suggest they are done tightening.
Earnings
It looks like JPMorgan, Citigroup and Wells Fargo had a clean baton pass to Bank of America and Goldman Sachs. The latest round of bank earnings saw both Goldman and BoA deliver better-than-expected earnings and revenue.
Other notable earnings saw Johnson & Johnson boost their full-year revenue guidance and Lockheed Martin still target sales growth, despite uncertainty with the Pentagon’s budget.
The big banks are mostly upbeat on the US consumer.
Citigroup CEO Fraser said, “US personal banking also had double-digit revenue growth while a continued deceleration in spending indicates an increasingly cautious consumer.”
Goldman CEO Solomon expects “a continued recovery in both capital markets and strategic activity if conditions remain conducive.”
US Data
The US consumer appears to be much stronger than anyone thought on Wall Street.
The advance estimate for retail sales in September rose 0.7%, well above the 0.3% consensus estimate and exceeding all economists’ estimates. A strong retail sales number like this has traders wondering if it is possible for this momentum to persist into Q4 and if this will end up being inflationary.
After a round of banking earnings and spending data, the US consumer is still looking healthy.
Despite strong sales and production releases, the Fed won’t be raising rates at the November 1st meeting. At this point it seems they will need to keep suggesting that they might not be done tightening.
Fed fund futures showed the odds of a rate hike by the end of the year went up from Monday’s 36.9% to around 50.3%.
Home builder sentiment fell to a 10-month given the recent surge with borrowing costs. This was the third straight decline, which shows builders are hesitant to build up more homes which would provide more relief for shelter prices.
Oil
Oil prices are rising as energy traders remain in wait-and-see mode to see if the US diplomatic efforts will be successful in preventing the Israel-Hamas conflict from turning into a wider regional war.
Tuesday’s economic data also gave a boost to the crude demand outlook. A strong retail sales beat suggests the US consumer is healthy and can probably continue to afford paying these high prices at the pump.
An upside surprise with industrial production might be only a tentative improvement, but speaks volumes about how this economy continues to impress.
Gold
Gold’s behaviour on Tuesday shows that the bulls are back. Gold prices are higher despite a surge in Treasury yields and a slightly strong dollar.
Overall, the day’s big earnings were positive, but stocks are still selling off as investors become worried that the Fed’s tightening cycle isn’t over.
Geopolitical risks remain the primary driver for gold traders and some investors are still skeptical that diplomatic efforts will lead to a major de-escalation in the Israel-Hamas conflict.
The world economy is starting to show signs that monetary policy has become restrictive enough and is unravelling the growth story, which should be good news for gold prices.
Edward Moya is Senior Market Analyst, The Americas at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
