The Federal Open Market Committee (FOMC) released its meeting minutes from last month’s meeting, which is when they decided to “hold off” on raising interest rates. The minutes detailed how most FOMC participants still expect a rate hike by year end, but simply thought the current environment was too fragile to raise rates. Namely, the low inflation rate, which is below the Fed’s 2% target, was cited. This, coupled with the volatility in global markets due to slowing Chinese growth, were big factors in the decision to ultimately leave rates unchanged.
With a strong dollar and low oil prices, it seems very unlikely that the 2% target will be hit anytime soon. However, while the participants were ‘dovish’ enough this time around, there were several ‘hawkish’ undertones, namely from Richmond Federal Reserve President Jeffrey Lacker, who argued that low rates are no longer appropriate. The latest “odds” for rates to be raised by December is right at 50/50.
Russia and Syria:
Russia began strategic air strikes on Syria last week, with Russian President Vladimir Putin stating they are going after ISIS. However, it appears more likely that they are taking aggressive action to secure Syria President Bashar al-Assad’s regime. Though Putin stated the airstrikes were targeting ISIS, the Pentagon claims Russia mostly targeted areas with CIA-trained forces fighting Assad. This led the U.S. to announce this morning that it will overhaul its efforts to support the Syrian rebels (fighting against Assad and also ISIS), stating it will provide arms and equipment to them. The U.S. also stated it may provide air support in an effort to stabilize the region. Beyond this, the U.S. has not announced too much opposition to Putin’s actions, perhaps because they may, in fact, bring some element of stability to the region, as ISIS could easily become the next Russian target.
The volatility we are seeing in the Middle East is certainly far from over and has a risk of harming investor confidence around the globe. Should the situation deteriorate, volatility in world markets is certainly a possibility. And as we have seen multiple times, volatility in foreign markets can directly impact the U.S. equities space.
Earnings Season Kicks Off:
Investors will pay especially close attention to earnings this quarter to determine how recent market volatility impacted various companies and sectors. This week saw the “unofficial” start to earnings season when Alcoa (AA) announced its earnings on Wednesday. A few notable companies that reported this week were:
Monsanto (MON) reported its loss widened as seed sales, particularly in corn, continue to weaken. The company was also hurt by a strong U.S. dollar, as foreign sales are worth “less” as the currency is translated back into U.S. dollars. Monsanto also lowered its 2016 full-year profit forecast to $5.10 – $5.60 per share, lower than the $6.19 average analyst expectation. All told, the company reported a loss of $495 million, or $1.06 per share. Analysts were expecting a $0.02 loss. As corn prices are expected to remain weak, Monsanto announced they will cut 12% of its global workforce, or roughly 2,600 jobs. The company also announced a $3 billion stock buyback program in an effort to return more cash to shareholders.
PepsiCo (PEP) profits fell 73% year-over-year on a one-time impairment charge. Revenues fell 5.2%, mostly due to weak foreign currencies. However, strong sales growth was reported for the U.S. thanks to lower gas prices that gave consumers more discretionary spending power. This led to a nearly 7% increase in sales at gas and convenience stores. The company also raised its profit forecast for the year, as gross margins are expected to be higher due to price increases and cost cutting measures. The earnings announcement coincided with the release of the new, aspartame-free Diet Pepsi. Initial consumer response seems to be negative, but PepsiCo has stated they are not particularly worried about this, as two years of test trials indicate that consumers seem to enjoy the new taste. Also, while some consumers will shun the product, PepsiCo feels that the “gain” in customers that previously avoided aspartame will more than make up for that loss. It is certainly a tricky situation when a company changes its taste profile, as we have seen multiple times in the past with the likes of New Coke, Clear Pepsi, etc.
A few notable companies reporting earnings next week include: JP Morgan (JPM), Wells Fargo (WFC), Intel (INTC), Johnson & Johnson (JNJ), Bank of America (BAC), Blackstone Group (BX), Citigroup (C), and General Electric (GE).
Paradigm Office Is Open Monday:
Though Monday is Columbus Day and the banks and post offices are closed, the equities markets are open regular hours (though bond markets are closed). Paradigm employees will be in the office regular hours on Monday.