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North American Morning Briefing : Stock Futures Waver Ahead of Fed Decision

11/03/2021 | 05:17am EST

MARKET WRAPS

Watch For:

U.S. interest rate decision; U.S. ADP National Employment Report for October; U.S. ISM Report on Business Services PMI for October; U.S. EIA Weekly Petroleum Report; CVS Health Corp. 3Q results; Sherritt International 3Q results.

Opening Call:

Stock futures hovered Wednesday as investors awaited the conclusion of the Federal Reserve's monetary policy meeting and a raft of economic data.

Stocks have surged in recent weeks, lifted by corporate earnings that have given investors confidence that businesses are charting a strong recovery. The reports have helped soothe lingering fears that snarled global supply chains and rising prices might drag on companies and crimp economic growth.

"Earning season has been very strong and the beats have been extremely robust," said Hugh Gimber, a strategist at J.P. Morgan Asset Management. "Despite the fact that there have been lots of concerns about price pressures and supply bottlenecks there is no sign that any of that is going through into margins."

Companies popular with traders on Reddit's WallStreetBets page rose ahead of the opening bell. Bed Bath & Beyond surged over 60%. The company, which on Tuesday announced a partnership with grocery chain Kroger, was among the most discussed companies on the forum, according to sites that track mentions of ticker symbols. Other meme-stock favorites GameStop and AMC rose over 5%.

In out-of-hours trading, Activision Blizzard fell over 10% after the videogame maker said the release of two of its titles would be delayed. Ride-hailing firm Lyft jumped over 12% after saying revenue climbed in the latest quarter as demand for its services returned.

Investors' eyes are on the Federal Reserve, which is set to conclude its two-day meeting later in the day. Officials are expected to announce the beginning of the end of their $120 billion-a-month bond-buying program but keep rates unchanged despite growing disquiet about inflation.

Chairman Jerome Powell's postmeeting press conference at 2:30 p.m. ET is likely to be closely followed by investors looking to see if the central bank chief addresses the surge in consumer prices and offers hints about the pathway for interest rates. Mr. Powell is likely to double down on his view that inflation is being driven by supply-chain bottlenecks that should ease in time, said Mr. Gimber.

"What Powell has to achieve today is to separate out the timing of the tapering decision from the timing of future rate increases," said Mr. Gimber. "They want to stress they are data dependent, and they are willing to be patient."

CVS Health and Marriott International are among the companies set to report earnings ahead of the opening bell Wednesday. Qualcomm and Fox are set to release quarterly figures after markets close, while Costco Wholesale will release sales data.

Investors also have a raft of economic data to digest. ADP's employment report is due to be released at 8:15 a.m., followed by figures on factory orders and a gauge of service-sector activity at 10 a.m.

Overseas, the Stoxx Europe 600 wavered between small gains and losses. In Asia, stock markets were mostly lower. Japanese markets were closed Wednesday for a public holiday.

Forex:

The Fed is widely expected to announce the start of asset-purchase tapering later Wednesday and the dollar's reaction will depend on whether it hints at the timing of a first interest-rate increase, UniCredit said.

"Should the Fed fail to offer new clues on this today (we do not expect any), the benefit the dollar may obtain from a formal announcement that the tapering plan would be starting this month may actually prove not too large and a 'sell-the-fact' logic may even prevail," it said. In this event, EUR/USD and GBP/USD may avoid additional selling pressure below 1.15 and 1.36 respectively, it said.

The Bank of England may unexpectedly hold off on raising interest rates at Thursday's meeting, causing sterling to extend its recent losses versus the euro, Danske Bank said.

"We continue to see either an unchanged Bank Rate or a dovish hike as the most likely outcomes on Thursday when the Bank of England announces its monetary policy decision (no rate hike being our base case), which would send EUR/GBP further up," Danske Bank analyst Lars Sparreso Lykke Merklin said.

A 'dovish hike' would mean the BOE raising interest rates but issuing a cautious message that could dampen expectations for further rate increases.

Bonds:

In bonds markets, 10-year U.S. Treasury yields were down to 1.533% from 1.546%.

T. Rowe Price will be on the lookout for comments by Fed Chairman Jerome Powell on whether interest rates can be raised during the process of tapering its bond purchases, Nikolaj Schmidt, chief international economist at the asset manager, said.

"I do not expect that Powell will endorse this but he may give us some indication that the FOMC would be willing to change, in particular accelerate, the pace of tapering should this be needed," he said. The FOMC has a strong preference for a predictable taper process, according to T. Rowe Price, for which the main risk is that the FOMC might opt for an accelerated process should inflation pressures surprise on the upside, Schmidt said.

Investors should keep an eye on discomfort around the "inflation is temporary narrative" at the Federal Reserve's meeting, said Nikolaj Schmidt, chief international economist at T.Rowe Price.

"As time has passed and inflation has remained stubbornly too high for comfort, I believe that the members of the FOMC have lost some of their confidence in the idea that inflation is all temporary," he said.

As supply-chain bottlenecks are likely to extend for some time to come and services inflation is set to increase due to rents, the temporary narrative will become increasingly challenging for the FOMC to preserve, Schmidt said. If the Fed is forced to take a more assertive stance on inflation, the economist would expect some hints at this at the coming meeting, he added.

The risk has increased that the European Central Bank will be forced into a swifter policy turn, said Martin Wolburg, senior economist at Generali Investments, although he doesn't expect a first interest-rate rise in 2022. The key message at the ECB's October meeting last week was that the ECB continues to stick to its view of higher inflation being transitory, even as it acknowledges that the abating of inflation takes longer than previously thought, Wolburg said.

"While markets remained more sceptical about the inflation outlook, we stick to our view that there will be no hikes in 2022," Wolburg said. "That said, the risks that the ECB is pushed into a more hawkish stance increases the longer the inflation spike lasts," he said.

Commodities:

Oil prices were down on the back of bearish U.S. inventory data released late Tuesday, according to DNB Markets' Helge Andre Martinsen. Crude oil stocks rose by more than expected, while gasoline stocks shrank by less than expected, he said.

OPEC+ is set to meet on Thursday and despite persistent pressure from President Biden--he blamed OPEC+ for inflationary pressures in the U.S. while at the COP26 climate summit in Glasgow on Tuesday--the cartel and its allies are "expected to rebuff all pressure...and continue [their] output strategy of tapering production cuts by 0.4 million barrels a day per month," Martinsen said.

Gold edged lower in European trading ahead of the FOMC meeting. The price of the precious metal is unlikely to change much until the meeting's conclusion, Commerzbank said.

TODAY'S TOP HEADLINES

Freight Operators' Profits Are Surging in Strained Supply-Chain Markets

The supply-chain crunch plaguing retailers and manufacturers is providing an earnings bonanza for freight carriers.

Deere Workers Reject Second Contract Offer, Extending Strike

Workers at Deere & Co. rejected a second contract offer, extending a strike against the farm equipment and construction machinery company that has lasted nearly three weeks.

Union employees at 12 Deere facilities voted against the tentative contract offer agreed to by their negotiators Oct. 30, the company said late Tuesday. Deere said that employees at two parts plants in Denver and Atlanta, who work under a separate contract, voted to approve the offer that had identical economic terms as the one that the company's other employees rejected.

Mondelez Says Snack Prices to Rise Further as Costs Grow

Mondelez International Inc. said prices for its cookies and candies would climb further in the months ahead as the snacking company aims to stay ahead of escalating costs.

The maker of Oreo cookies, Toblerone chocolate and Sour Patch Kids candy is raising prices around the world, executives said Tuesday, as Mondelez pays more for ingredients, transportation and wages and as demand for its products grows.

Activision Shares Tumble on Game Delays

Activision Blizzard Inc.'s shares tumbled in after-hours trading Tuesday after the company said it is delaying the launch of two games and reported third-quarter earnings with a holiday-season outlook falling short of Wall Street analysts' expectations.

A sequel to the 2016 hit "Overwatch" and a new installment of "Diablo" will come out later than previously planned, the company said, citing recent leadership changes at the Blizzard Entertainment unit making them. Several of those changes came shortly after the company was sued in July by a California regulator over allegations of gender-based discrimination, harassment and retaliation.

Lyft Reports Higher Revenue as Ridership Returns

Lyft Inc. said revenue climbed in the latest quarter, as consumers continue to pay higher prices because of the shortage of drivers and the increase in rider demand.

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11-03-21 0616ET

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