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Waiting on a Tax Plan, But Facebook and Fed Center Stage as Rally Rolls On

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November 1, 2017

(Wednesday Market Open) Investors apparently will have to wait one more day for a Republican tax plan, but a Fed decision and earnings from Facebook (FB) could keep things from getting dull. Pre-market trading pointed toward a much higher open amid generally strong earnings.

If the markets open where pre-market trading indicated, the Dow Jones Industrial Average ($DJI), S&P 500 (SPX), and Nasdaq (COMP) would all be at new record highs. October was an amazing month.

Republicans in Congress are expected to unveil their tax plan tomorrow, according to published reports in the media — a postponement from their original date of today. Even rumors of what might be in the plan often moved the markets over the last few weeks, so who knows what might happen when the actual plan hits the fan, so to speak. It’s important not to get too caught up in details, however, because a lot can change before the final votes. Any proposals affecting corporate taxes could draw attention.

Fed decision day begins with the SPX marking seven consecutive months of gains as earnings continue to roll in. We’re about 60% of the way through earnings, and 73% of companies have exceeded analysts’ expectations on profits, while 66% have beaten revenue forecasts, according to Thomson Reuters.

The Fed isn’t the only big news today, as Facebook (FB) and Tesla (TSLA) both share results after the close. Earnings continue with Apple (AAPL) tomorrow, and the week doesn’t get any slower as Friday brings the October payrolls report. Also, an apparent terror attack in lower Manhattan on Tuesday could have people on edge, as could talk of a possible announcement regarding a new Fed chair that could come as soon as tomorrow.

A Fed decision is due at 2 p.m. ET today, and odds of a hike are near zero, according to the futures market. There’s no press conference scheduled, so investors will have to see what they can take away from the Fed’s statement. It’s always a good idea to compare the current statement to the previous one to decipher any differences in the economic outlook or current conditions. The question is what the Fed might say about inflation, which even Fed Chair Janet Yellen has said is a “mystery” due to lower than expected price gains. Check back on Ticker Tape this afternoon for coverage of the decision.

After the Fed, the spotlight shines on FB’s earnings. Ad revenue performance is in focus, because FB has warned it couldn’t maintain the increased number of ads it had been serving up to people on its News Feed. Also, FB warned on last quarter’s call that advertising impression growth might slow as the company focuses more on driving engagement through mobile video.

For Q3, Wall Street consensus is for FB ad revenue to grow 42% year-over-year to $9.71 billion. Any significant deviation would likely affect the stock’s post-earnings action. Daily active users is another category worth checking. This number increased 17% in Q2.

TSLA could be another interesting sight after the close today, with shares playing defense going into the earnings report after the company reported Q3 production and deliveries that fell short of expectations. Qualcomm (QCOM) and Kraft Heinz (KHC) are the other big hitters reporting in post-market hours. This morning, U.S. Steel (X) shares roared 8% higher after the company killed it on earnings and delivered strong guidance. We’ve been talking about how well many of the old-line companies seem to be doing, and here’s another example of everything old being new again, so to speak.

Another older company doing well is Sony, whose shares on the Tokyo Stock Exchange hit their highest level since 2008 early Wednesday.

Consumer staples led the way Tuesday, thanks in part to a strong showing by Kellogg (K). The cereal and snack company reported revenue growth in Q3 for the first time in 10 quarters, and shares crackled and popped 7%. Aside from the 0.84% jump in consumer staples, Tuesday wasn’t too exciting from a sector perspective. No other sector rose or fell more than 0.4% on a day when the major indices remained pretty close to where they started.

The dollar climbed on Tuesday, but bonds barely moved. The 10-year yield seemed to be charging toward 2.5% a week ago, but now it’s back below 2.4%. The Fed’s statement later today might give bonds more life. Investors also await a Bank of England decision on rates tomorrow, with many analysts predicting a hike.

While volatility came down on Tuesday, it could start moving back up later today and Thursday ahead of payrolls, so be on the lookout.

Crude oil edged above $55 a barrel early Wednesday, and that’s technically significant because front-month futures haven’t spent much time above that the last two years. If oil closes at $55 or above, that might send signals of strength to come. Weekly supply data are due later today.

Ten-Year Yields

FIGURE 1: WAIT A MINUTE.

Ten-year bond yields scampered higher last week and appeared on pace to test 2.5% resistance. But since then they’ve fallen back under 2.4%, perhaps in part due to mediocre overseas data and the Bank of Japan keeping interest rates unchanged at current low levels. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Driving Sales: Auto and truck sales leaped in September after lagging much of the year, and today brings the October numbers. Some analysts forecast October to be another good month, because of people in hurricane-affected areas needing to replace damaged cars. That played a role in September, but could filter into October as well. It’s also worth checking to see if strength reported by U.S. automakers in Q3 continued into early Q4. Though General Motors (GM) reported a year-over-year drop in Q3 revenue, the company did better than Wall Street analysts had expected and reported strong crossover sales in the U.S. Ford (F) also reported strong Q3 U.S. sales as consumers shifted toward trucks and SUVs, which tend to be more profitable than smaller cars. Consumer sentiment reached 17-month highs last month, so maybe that injected vigor into car sales as well.

On the Home Front: The real estate sector rebounded late Tuesday after a rough start, but it’s been on a pretty steep slide since mid-October. Even with Tuesday’s gains, the sector is now up about 5% year-to-date compared to 15% gains for the broader S&P 500 Index (SPX). While you never want to blame just one thing, it’s hard not to notice that the recent weakness coincides with word out of Washington, D.C., that Congress has been considering ending certain real estate-related tax deductions as part of its tax reform plan. The National Association of Realtors is among the groups decrying what it calls “any tax reform plan that would weaken the tax incentives for owning a home.” Tomorrow the rubber hits the road, so to speak, as Republicans are expected to present their full plan. Let’s see how the real estate sector reacts.

And Across the Water: Economic news filtered in from overseas early this week, including the Bank of Japan leaving its key interest rate unchanged at negative 0.1% and lowering its core inflation forecast for fiscal 2017/2018 to 0.8% from 1.1%.  That was largely as expected, Briefing.com noted, and the dollar rose vs. the yen on the news. Also, China’s October PMI slipped slightly while the Eurozone recorded a 1.4% year-over-year increase in consumer prices, a little lower than analysts had expected. On the whole, the news looked a little bearish, and also contrasted with strong economic readings lately from the U.S. economy. Some of this weakness overseas could explain why U.S. Treasury bond prices climbed early this week after last week’s plunge to the lowest levels since early this year.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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