Fed watch is in effect as the two-day FOMC meeting gets
underway today, a day after the stock market's strong rally on
the Summers announcement. In other news, this morning's CPI
reading was uneventful and the 2013 Q3 earnings season quietly
gets underway today.
The Fed is expected to announce tapering its monthly bond
purchases at the conclusion of its meeting Wednesday afternoon;
the consensus expectation is for trimming of $10 billion to $15
billion from the $85 billion a month pace and wrap up the entire
program by the middle of 2014. The market has taken the taper
prospect in the stride, pushing stocks back to within striking
distance of early August highs. This is in contrast to the prior
two QE episodes at the conclusion of which stocks had sold off.
Stock market investors appear to be more optimistic about the
economic picture this time around, hoping that improved economic
fundamentals and the resulting bump to corporate profitability
will offset the impact of higher interest rates.
Recent economic data has for the most part been in the positive
category. The last jobs report was underwhelming, but other labor
has been favorable and the unemployment rate has been steadily
coming down. The jump in interest rates as a result of the taper
talk has dented some of the housing market gains, but the
sector's recovery may not be at risk as long as the labor market
continues to improve. The factory sector is also showing signs of
health, with ISM and Industrial Production data exhibiting
renewed momentum. Pricing pressures in the economy remain muted
as this morning's August CPI numbers confirm. It will be
interesting to see the Fed's updated economic forecasts,
particularly given the modes forecast upgrade at the June
The improved economic outlook has ultimately to show up in a
stronger earnings picture. The 2013 Q3 earnings season that got
underway this morning with
) release and after the close from
) will give us a sense of how good the earnings picture is
through the quality of guidance for the following quarter. We are
still a couple of weeks away from the full-fledged start of the
earnings cycle, but the reports willl continue trickling in,
) on Wednesday. Expectations for Q3 have fallen enough that it
wouldn't take much effort for companies to come ahead of them,
but estimates for Q4 still remain elevated and reflect a material
growth ramp up.
The standard practice over the past year or so has been that
companies beat expectations for the reporting quarter, but guide
lower for the following period, prompting estimates to come down.
That's what happened in Q3 - the current +1.4% total earnings
growth in the quarter is down from +5.1% expected at the start of
the quarter in early July. The expectation for Q4 is for earnings
growth exceeding +11%, the highest quarterly growth pace in a
If the Q3 earnings season will be similar to what we have been
seeing lately, then these Q4 estimates will start coming down in
the coming days as companies guide lower at the time of releasing
results. The question is will the market continue going up
despite this underwhelming earnings picture or will finally start
taking notice? We will find out soon enough.
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