This week brings us the verdict on US economic growth in the third quarter. It should show a sharp deceleration from robust second quarter growth with supply chain disruptions and the Delta variant weighing on business. The Atlanta Federal Reserve currently estimates third-quarter GDP to be just 0.5% after an annualized growth rate of 6.7% in the second quarter. The median analyst estimate is more optimistic at 2.8%, but the estimates vary widely from 5.0% to a contraction of -0.1%. Most GDP reports look too much in the rearview mirror to have a significant impact on the markets, but it could be different. An abysmal number could erase the chances of the announcement in November of a reduction in asset purchases by the Federal Reserve.
While Thursday’s GDP release could be disappointing, there is good reason to believe the fourth quarter will be better. Supply chain disruptions continue for now and vehicles are likely to remain scarce, but U.S. consumer demand remains healthy. There is always a risk that rising energy costs will shatter consumers’ appetites as winter begins to drive high heating costs. The supply chain problems are well known, so it could be close to the peak of pessimism about the negative impact.
The drag of the Delta variant has already started to fade. As Covid infections continue in the United States and around the world, the declining rate of change indicates that things are already improving. After eleven consecutive week-over-week increases in infections, the rate of increase in Covid cases in the United States has now declined for five consecutive weeks. Japan has seen a dramatic drop in infection dynamics, which bodes well for Q4 production in that country. Assuming the trend continues, this should help reduce some of the barriers to economic activity and exports from Asia.
The third quarter earnings season continued last week and provided a broader view of earnings across all sectors. 23% of S&P 500 companies have released results so far, with 84% and 75% beating consensus earnings and sales estimates, respectively. This week will be the second busiest of the earnings season, with 164 S&P 500 companies expected to report results.
As expected, forward guidance has remained essential with current concerns about the economic outlook and cost pressures. The impact of supply chain disruptions and any color regarding when to standardize is important for forecasting. For example, Intel (INTC) was punished last week based on its forecast, despite earnings exceeding estimates. Finally, the effect of higher costs and the ability to pass on higher prices to protect profit margins will be closely scrutinized. Brinker International’s (EAT), owner of Chili’s and Maggiano’s restaurants, has been hit hard by rising labor and food costs. Management expects to raise prices and normalize some costs, but investors were skeptical. Following the special report on hard salt losing their fizz, the Boston Beer Company (SAM) reported disappointing results last week, with the main cause being the rapid slowdown in hard seltzer sales.
As expected, real earnings performance exceeds these high levels despite a moderation in economic activity. Combining actual results with consensus estimates for companies that have yet to release, the mixed profit growth rate improved to 32.7% year-over-year, from an expectation of 27. , 5% at the end of the quarter.
With the debt ceiling crisis averted through December, Congress will focus on negotiating the hefty tax and expense bills. Meetings of global central banks will also be in the spotlight this week. The Bank of Japan (BoJ), the European Central Bank (ECB) and the Bank of Canada (BoC) have all encountered no expected increases in interest rates. The focus will be on the prospects for future asset purchases. The BoC is indeed expected to end asset purchases at this meeting. The BoJ is expected to lower its GDP growth estimates in 2022, so any signal that asset purchases will slow soon is nearly impossible. While the ECB has indicated that asset purchase decisions will be made in December, markets will listen to any hints. As Bundesbank President Weidmann, who is considered the most hawkish member, leaves the ECB at the end of the year, it is expected that more flexibility will be given to asset purchases. .