Better than expected economic data and stronger earnings from the banking sector this morning put a bid in currencies and equities. The rally in risk is restrained but the fact that many currencies continue to trade well suggests that investors are fighting to hold onto their optimism. As we suspected, the low bar for earnings made it easy for many companies to beat estimates. JPMorgan Chase for example reported a 34% increase in revenue while Wells Fargo saw earnings rise by 22%. Yet shares of both companies have not benefitted materially because of weakness beneath the headlines. JPM saw a decline in trading revenues and an increase in non-performing loans. Wells Fargoâ€™s revenues on the other hand missed expectations by a penny. So while there is good news, we canâ€™t get too excited over the releases.
The same is true for this morningâ€™s U.S. economic reports. Producer prices rose 1.1%, which was more than expected for the month of September but excluding changes in the price of food and energy, PPI was flat. The price of crude hit a 3 month high in mid September before reversing course. Gas prices also increased last month but did not pullback as much when crude fell and in fact remains well above its early August levels. As a result higher fuel costs have most trickled down to producer and consumer goods. Meanwhile the University of Michigan Consumer Sentiment index surged in the month of October to 83.1 from 78.3. Despite sluggish job growth and high gas prices, Americans have not been this optimistic in more than 5 years according to UMich. Between the drop in the unemployment rate, decline in jobless claims and surge in confidence, it is hard to believe that there is not at least some merit to the improvements in U.S. data. Americans are not only feeling better about current conditions, but they also think that business conditions will improve a year forward. At the end of the day, this suggests that the massive amount of liquidity provided by the Federal Reserve has been effective in boosting consumer confidence, which hopefully will be first step to boosting growth.
One of the big stories this week is the persistent strength of the Chinese Yuan, which hit its highest levels against the U.S. dollar in nearly 20 years. The U.S. Treasury is set to release its semi-annual report on exchange rates on October 15th and there is a very good chance that China is allowing its currency to rise ahead of this report to avoid being branded a currency manipulator. The chance of this being true either partially or completely is very high even though the odds of the U.S. actually slapping China with this label is slim. The last time China was branded a currency manipulator was 18 years ago. Political factors aside, the Yuan is also benefitting from speculation that the Chinese government will do more to support their economy. If next weekâ€™s GDP number is weak, there is a very good case for more fiscal or monetary stimulus from China.