Earnings strong but data showing weakness

Stock markets are enjoying a more positive end to the week, buoyed by earnings results and a surprise Coupon Payment by Evergrande.

Earnings have been a source of positivity at a time when so much focus has been on growth risks to the economy, of which there are many. The season is off to a promising start but it will have to continue that momentum if we’re going to avoid falling back into the woes of what may be.

The results from Snap were a reminder of the indirect impact that global supply chain issues can have on businesses. In their case, it was advertising spend that will be inhibited as a result of firms suffering supply issues during a typically lucrative time for the industry. We’re likely to see more examples like this as the season progresses.

The company’s results are weighing on other platforms similarly exposed to lower ad revenues ahead of the open, with Facebook and Twitter particularly hit after Snap also warned on the impact of the changes to Apple’s data collection rules. A big negative for advertisers and another blow to those heavily reliant on those revenues.

Evergrande reportedly made its $83.5 million offshore coupon payment just ahead of the end of the grace period tomorrow which lifted its stock price on Friday. The surprise move may spur some hope that it will also make its $47.5 million coupon payment by next week when that 30-day grace period ends. Beyond that, it’s anyone’s guess as the company can’t scrape together these funds forever unless something fundamentally changes.

Data showing softness as central banks prepare to turn the taps off

Economic data is getting additional scrutiny at the moment as central banks around the world are forced into uncomfortable decisions as a result of supply-side inflationary pressures that are pushing headlines rates well above their targets. While many still argue that the price pressures are temporary, their expected duration and intensity are rising which is forcing policymakers to consider actions they’d clearly rather avoid.

While the recovery has been much better than envisaged earlier in the pandemic, which may afford central banks a little slack for modest tightening, the data is highlighting several weaknesses that tighter monetary policy will only exacerbate. As the PMIs have shown, supply-side issues are taking their toll on activity, which won’t be helped by any surges in Covid cases as the northern hemisphere heads into the winter.

UK Retail Sales Figures were also disappointing, which again raises questions over the Bank of England’s plans to raise interest rates before the end of the year and multiple times next. It seems the squeeze on households and businesses is going to be made even harder which will weigh on the economy over the next year.

The Retail Sales number was seemingly made worse by the “fuel shortage” which may have been a blocker to people travelling to venues. Earlier festive season shopping may also boost retail sales figures over the next couple of months in anticipation of supply issues.

The US PMIs were a little better, with the services number rising to 58.2, way above expectations of 55.3. Given how important the services sector is to the economy and the progress made on the latest Covid wave, this is very encouraging going into the end of the year.