Prospects for earnings and jobs add to the chill in the air

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President Joe Biden and House Speaker Nancy Pelosi are working to forge an agreement between Democrats on spending plans for the administration, currently before Congress.

Mandel Ngan / AFP / Getty Images

“Oh, the days shrink to a precious few, September, November,” the song said, omitting October because it wasn’t rhyming. But that month begins in the last quarter of the year, when what hasn’t been accomplished in the first nine months must be done in the last three before the calendar switches.

The sense that time is running out is palpable in Washington, where President Joe Biden’s economic agenda was at stake at the end of the day, as progressives and moderates in his own Democratic Party fight for the size of the programs and with the limit. indebtedness of the country. get drawn into the fight (about which, more below).

Portfolio managers could feel the heat after the S&P 500 Index posted a negative total return of 4.65% for the month just ended and a barely positive 0.58% for the third quarter, bringing the count for the first nine months of 2021 at 15.92%. Bonds haven’t helped a balanced portfolio much, as the Bloomberg Barclays Aggregate only returned 0.05% last month, while posting negative returns of 0.87% for the third quarter and 1.55. % for the year to date. (Thanks to Bianco Research for carefully collecting the data.)

No doubt the silver runners will be eagerly awaiting the earnings season that is about to begin, not so much for actual third quarter results but for clues into the quarters to come from corporate executive conference calls. Indeed, much of the expected good news on earnings can already be ruled out, judging by the large upward revisions to analysts’ estimates, writes John Higgins of Capital Economics in a research note. With little room for higher valuations, he sees the best stock gains behind them.

But future optimistic earnings estimates may have to be revised down as the forecast for gross domestic product is revised down, according to Mizuho Securities chief economist Steven Ricchiuto. Analysts only lowered the estimates after monthly economic data fell below expectations. In addition, rising inflation will reduce either real wages or profit margins, depending on the loser, the workforce or the company. “In any case, it is difficult to claim that the first half of 2022 will be stronger than the second half of this year,” he concludes.

As it stands, real consumer spending has been roughly flat since the spring, observes Joshua Shapiro, chief US economist at MFR. Personal consumption spending in August barely changed from April, according to data released on Friday. In real terms, consumer spending rose 0.4% in the past month, but after falling 0.5% in July, continuing a sawtooth month-over-month trend, writes it in a research note.

Given the marked slowdown in consumer spending, Shapiro believes third-quarter GDP growth could be limited to an annual rate of around 3%, even assuming “a huge change in inventories that will add to the growth.” That would be a substantial drop from the final second quarter revision of 6.7% released last week. And a 3% figure in the third quarter is ahead of the Federal Reserve Bank of Atlanta’s latest GDPNow estimate of 2.3%, with consumer spending growing only 1.4% per year.

The economy will be the center of attention this coming week, especially on the September jobs report due on Friday morning. Still a key driver of the market (even given the caveat of a large margin of error and often substantial revisions from the first estimate), this jobs report assumes additional importance for monetary policy. .

At his September 22 press conference following the last Federal Open Market Committee meeting, Fed Chairman Jerome Powell said it would take a “reasonably good” employment report for the panel is proceeding with the planned reduction of its $ 120 billion in monthly securities purchases. This will be the last job posting before the next FOMC meeting on November 2-3, when a tapering is expected to be widely announced.

Consensus estimates by economists revolve around a 500,000 increase in non-farm payrolls for September. Then again, the 235,000 increase in August was about half a million less than their estimates. This report will reflect the end of Supplementary Employment Benefits in the event of a pandemic, the effect of which will be closely monitored.

Powell’s employment situation may also be at stake, as colleague Lisa Beilfuss writes. In addition, the Presidents of Reserve Banks in Boston and Dallas opted for retirement last week after revelations about their trading activity as the Fed actively supported the markets. There seems to be a bit of chill in the air around central bankers.

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Write to Randall W. Forsyth at [email protected]

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