This week brings us the verdict on third-quarter U.S. economic growth. It is expected to evidence a sharp deceleration from the robust second-quarter growth with supply chain disruptions and the Delta variant weighing on activity. The Atlanta Federal Reserve Bank currently estimates that third-quarter GDP will be only 0.5% after a 6.7% annualized growth rate in the second quarter. The median estimate from analysts is more optimistic at 2.8%, but the estimates vary widely from 5.0% to a contraction of -0.1%. Most GDP reports look too much in the rear-view mirror to significantly impact markets, but this could be different. An abysmal number could shift the odds away from the November announcement of a reduction in asset purchases from the Federal Reserve.
While Thursday’s GDP release could be disappointing, there is good reason to believe that the fourth quarter will be better. Supply chain disruptions are continuing at the moment, and vehicles are likely to remain in short supply, but demand from the U.S. consumer remains healthy. There remains a risk that the rise in energy costs could crimp consumer appetite as winter begins to drive elevated heating costs. The supply chain issues are well-known so that it could be near the peak pessimism on the negative impact.
The drag from the Delta variant has already begun to recede. While Covid infections continue in the U.S. and globally, the decline in the rate of change indicates that things are already improving. After eleven straight week-over-week increases in infections, the speed of the rise in U.S. Covid cases has now declined for five consecutive weeks. Japan has experienced a stunning decline in infection momentum, which bodes well for fourth-quarter production there. Assuming the trend continues, this should help reduce some of the headwinds to economic activity and exports from Asia.
The third-quarter earnings season continued last week and provided a broader look at the earnings across the sectors. 23% of S&P 500 companies have reported results so far, with 84% and 75% exceeding consensus earnings and sales estimates, respectively. This week will be the second busiest of the earnings season, with 164 S&P 500 companies scheduled to report earnings.
As expected, forward guidance has remained essential with the current worries about the economic outlook and cost pressures. The impact of supply chain disruptions and any color about the timing of normalization are significant for forecasts. For example, Intel (INTC) was punished last week based on forward guidance despite earnings beating estimates. Lastly, the effect of higher costs and the ability to pass on higher prices to protect profit margins will be closely scrutinized. Brinker International’s (EAT), the owner of Chili’s and Maggiano’s restaurants, earnings were hit hard by rising labor and food costs. Management expects to increase prices and some costs to normalize, but investors were skeptical. As a follow-up to the special report on hard seltzers losing their fizz, the Boston Beer Company (SAM) reported disappointing earnings last week, with the primary cause being the rapid slowdown in hard seltzer sales.
As expected, the actual earnings performance exceeds these elevated levels despite a moderation in economic activity. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate improved to 32.7% year-over-year versus the expectation of 27.5% at the end of the quarter.
With the debt ceiling crisis averted until December, Congress will focus on negotiating the hefty tax and spending bills. Global central bank meetings will also be in focus this week. The Bank of Japan (BoJ), European Central Bank (ECB), Bank of Canada (BoC) all meet with none expected to raise interest rates. The real focus will be on the outlook for future asset purchases. The BoC should effectively end asset purchases at this meeting. The BoJ should lower its 2022 GDP growth estimates, so any signal that asset purchases will slow soon is almost an impossibility. While the ECB indicated that decisions on asset purchases will be made in December, markets will be listening for any clues. Since Bundesbank President Weidmann, who is considered the most hawkish member, is leaving the ECB at year-end, there is some expectation that more flexibility could be forthcoming on asset purchases.
Read More: How Badly The U.S. Economy Slowed And Earnings Galore This Week