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LIVE MARKETS-Q1 profits continue to leapfrog expectations

05/07/2021 14:57
LIVE MARKETS-Q1 profits continue to leapfrog expectations

Major U.S. indexes rise; Nasdaq leads with gain of ~0.7%

All major S&P sectors higher: Energy leads

Dollar down; gold rises; crude edges higher

U.S. 10-Year Treasury yield fell to low of 1.4690%, now ~1.58%

- Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at [email protected]



Q1 PROFITS CONTINUE TO LEAPFROG EXPECTATIONS (1420 EDT/1820 GMT)

First-quarter earnings for U.S. companies continue to exceed expectations, with estimated growth now at 50.4% in what is the largest improvement on record going back to 2002, according to Refinitiv.

With this, the current 21Q1 earnings growth rate is the highest since 2010 Q1.

"Since the start of earnings season, 21Q1 Y/Y earnings have improved by 26.1 percentage points," Refinitiv analysts said in a note Friday.

Some 87.2% of earnings reports beat analyst expectations - which was the highest beat rate on record since 1994.


(Caroline Valetkevitch)

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INVESTORS THINK IT'S OK IF INFLATION RUNS, A BIT (1350 EDT/1750 GMT)

As part of the most recent American Association of Individual Investors (AAII) sentiment survey nL1N2MU1QF, AAII polled its members for their thoughts on the Federal Reserve’s willingness to let inflation run moderately above 2% for a period of time without raising interest rates.

According to AAII, slightly more than a third of respondents (35%) said that they agree with what the Federal Reserve is doing.

This compares to 24% of respondents who said that they think this is a bad decision and that they think that the Fed will not be able to keep a lid on inflation once it starts climbing.

About 11% of respondents said that they are opposed to this decision because it hurts savers and bondholders. Additionally, about 11% of respondents stated that they disagree with this policy because it encourages borrowing and excessive money printing.

Here are a couple of quotes from investors with differing points of view on the matter:

“I’m alright with this, I suppose I’ll take a ‘wait and see’ approach. These are unprecedented times and I think some patience is warranted."

“Not a good idea. It encourages too much borrowing on the part of people who really get hurt when inflation finally catches up and interest rates have to rise."

(Terence Gabriel)

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PASS THE CAVIAR, AND ADD SOME TO THE PORTFOLIO (1341 EDT/1741 GMT)

On Friday, thoughts begin drifting to Saturday night dinners and Sunday brunches. As Invesco notes, climbing standards of living over the past few decades means consumers' food preferences are changing.

"In developed markets, consumers are directing more of their food dollars to things that not only taste good, but which are nutritious and free of harmful additives," Invesco analyst Máire Lane writes in her note "Better food: An investment trend worth consuming?"

For investors looking at the food sector, Lane lays out four categories set for growth.

First, Lane cites reports showing levels of fish consumption have more than doubled since the 1960s. But consumers who order sea bass may be paying top dollar for similar looking, but cheaper fishes like tilapia according to estimations of seafood fraud.

To that end, Invesco likes Paris-listed Eurofins Scientific EUFI.PA because of their technology allowing distributors to test and identify fish samples.

Fish may be gaining market share, but few things have "global appeal" like burgers. Lane picks out chains with premium, health-conscious ingredients like Shake Shack SHAK.N, and meatless burger companies. (Shake Shack shares have dropped today, however, after reporting quarterly results). nL8N2MU35K

Every good meal needs a good beverage, and lockdowns turned many on to crafting cocktails at home. Lane notes that "luxury liquor" is one of the fastest-growing alcoholic beverage segments, jumping at a 9.2% annual rate over the past five years.

To play this space, she thinks customers will choose premium mixers to pair with liquor, and so recommends British beverage company Fevertree Drinks FEVR.L.

"We believe the trend of consumers directing a larger portion of their food budget toward higher-quality — and higher-margin — options is here to stay," Lane concludes.


(Lisa Mattackal)

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INVESTORS CROWD THE NEUTRAL CAMP (1235 EDT/1635 GMT)

Neutral sentiment among individual investors over the short-term direction of the stock market rose to a 9-week high in the latest American Association of Individual Investors (AAII) Sentiment Survey. With this, bullish sentiment edged up, and bearish sentiment dipped.

AAII reported that neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, increased 0.8 percentage points to 32.5%. Neutral sentiment was last higher on March 3, 2021 (34.4%). Neutral sentiment's historical average is 31.5%.

Bullish sentiment gained 1.7 percentage points to 44.3%. Bullish sentiment was last lower on March 3, 2021 (40.3%). Optimism is above its historical average of 38.0% for the 23rd week out of the past 25 weeks.

Bearish sentiment fell 2.5 percentage points to 23.1%. Bearish sentiment is below its historical average of 30.5% for the 13th time this year.

With these changes, the bull-bear spread rose to +21.2 from +16.9 last week nL1N2MN1P8:



(Terence Gabriel)

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S&P BANKS LET OFF A LITTLE STEAM AFTER RECORD (1201 EDT/1601 GMT)

The S&P 500 Banks index .SPXBK is on track for a ~3.5% weekly gain, its biggest since mid-March, although it is down 0.5% on the day so far after hitting a record level on Thursday when it surpassed even the loftiest levels reached in 2007, ahead of the great financial crisis.

Banks are up ~32% so far in 2021 after a pandemic induced dip of ~17% in 2020 but Piper Sandler analyst Jeffery Harte expects to see more gains ahead for the sector.

"The banks have been strong over the last 6-8 months as the environment has improved. The path from here should be upwards but probably more slowly," Harte said.

Along with the economic recovery, he sees support coming from credit quality, which he says has been surprisingly good throughout the pandemic, and also from the big stash of capital banks will be able to use for stock buybacks, which could help to boost the shares.

Of course, it is not all rosy for the sector as loan growth and interest rates still need to pick up. Shorter maturity rates such as 2-year and 5-year Treasuries have lagged gains in longer-dated Treasury yields.

But still, Harte estimated that the sector could see another 10% plus upside but he said:" It's just not going to be tomorrow, probably months."

(Sinéad Carew)

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THAT ASIDE, MRS. LINCOLN, HOW WAS THE PLAY? A PAYROLLS DEEP-DIVE (1116 EDT/1516 GMT)

Market participants waiting with baited breath for the curtain to go up on the Labor Department's monthly employment report on Friday were rewarded with a mostly disappointing drama.

The economy added 266,000 jobs in April USNFAR=ECI, undershooting the 978,000 consensus by a mile, and the unemployment rate USUNR=ECI unexpectedly rose to 6.1% instead of dropping to 5.8% as expected. nL1N2MT2XD

The shortfall is largely attributable to labor shortages as cited in recent business surveys such as PMI, with businesses struggling to find workers to meet booming demand.

"This jobs report was quite the disappointment, suggesting businesses very well could be having trouble hiring amid the reopening," says Ryan Detrick, chief market strategist at LPL Financial. "As poor as today's jobs growth was relative to what was expected, we still believe the reopening is coming and future months should make up for this miss."

And those future months have a lot to make up. With today's report, total U.S. employment remains 8.2 million below the pre-COVID level.



Lack of workers isn't the only headwind. Spiking demand is colliding with a supply drought, significantly capping factory output. With this, manufacturing payrolls decreased by a surprise 18,000.

But buried in the manure, there's a pony or two.

The unemployment rate's unwelcome rise was at least partially driven by workers returning to the labor force.

"The labor force increased by 430,000 workers in April, the largest gain in six months," writes Elise Gould, senior economist at the Economic Policy Institute. "Likely in response to improving public health metrics and increased expectations of job opportunities, more and more workers are actively returning to the labor force in search of work."

This is evidenced by an uptick in (the still depressed) labor market participation rate and a decrease in the long-term unemployed share of the total, as seen in the two charts below:



Additionally, the so-called "real" unemployment rate, which includes those marginally attached to the labor market and Americans forced by economic reasons into part-time gigs, actually shed 0.3 percentage points to 10.4%.



The tight labor pool unexpectedly caused average hourly wages to increase by 0.7% from March (up 0.3% year-over-year) and the average workweek grew longer, a sign that employers are dangling pay increases to convince workers to stay on the job and asking them to work longer to fill out their schedules and meet the demand boom.

"We know from endless surveys that labor demand is very strong, but we also know from both surveys and media-reported anecdotes that firms are finding it hard to recruit people," notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.



And finally, back to the bad news. The racial/ethnic unemployment gap widened, with the white jobless rate edging down to 5.3%, while Black unemployment rose to 9.7%.

"Clearly, these two groups are experiencing a very different labor market," Gould adds.



The report sparked a Rube Goldberg-style chain reaction, sending benchmark Treasury yields US10YT=RR and the dollar =USD lower, which in turn boosted the tech-laden Nasdaq .IXIC, .NDX, NQcv1.

Nevertheless, the Nasdaq is on course for a weekly decline, while the S&P 500 .SPX and the Dow .DJI appear set to notch advances from last Friday's close.


(Stephen Culp)

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EYE POPPING COMMODITY PRICE GAINS DON'T NECESSARILY LEAD TO LASTING INFLATION (1008 EDT/1408 GMT)

Nicholas Colas, co-founder of DataTrek Research, is out this week with some comments on commodity prices and consumer inflation.

Colas believes that next week's Producer Price Index data will get a lot of attention as a measure of "inflation in the pipeline."

He says that the March 2021 reading of 4.2% for final demand was the highest print since September 2011's 4.5%. Given the easy comps from April 2020, DataTrek is expecting to see April 2021 PPI hit +6%.

Colas points out that vs last year, many commodities are up big including plywood, steel, copper, corn and wheat. However, he also notes that commodities are notoriously volatile. In fact, he says these commodities have all seen swings of at least +/- 40% at some point in the last 20 years.

Given this, Colas addresses whether higher commodity prices inevitably lead to lasting consumer price inflation. According to Colas, the relationship has changed somewhat over time. In the 1970s – 1980s, these measures tracked each other closely.

However, from the 1990s onward, "commodity inflation has had a weaker effect on consumer inflation. The two are still correlated, but commodity prices are no longer as dominant an influence on CPI inflation."

Therefore, DataTrek's bottom line is that U.S. consumer inflation is not as tied to commodity prices as it once was, as although the history since 2000 shows the cost of commodities can certainly edge CPI higher over the short term, the effects are transitory.

"We expect things will play out the same way in 2021 – 2022 but certainly recognize that there's going to be some eye-popping commodity inflation in the near term that could capture market attention."


(Terence Gabriel)

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U.S. STOCK FUTURES MIXED AFTER PAYROLLS MISS (0900 EDT/1300 GMT)

U.S. equity index futures are mixed in the wake of a worse than expected April NFP headline number. .N

April NFP printed at 266k vs a 978k estimate. Average hourly earnings were hotter than expected:



With this, the U.S. 10-Year Treasury yield US10YT=RR fell to as low as 1.4690%, before bouncing back to around 1.54%.

With the lower yields, Dow futures 1YMcv1 and crude CLcv1 weakened, while gold XAU= and Nasdaq futures NQcv1 rallied.

If this premarket action holds through the day, there may be potential for the S&P 500 growth .IGX/ S&P 500 value .IVX ratio to end its 8-day losing streak.

As for the payrolls report, Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said “It’s a disappointing report. The participation rate is stuck in the mud. The unemployment rate at 6.1% is another disappointment."

Cardillo added that, "It’s being accompanied by higher wages, which could be a problem."

As for market reaction, Cardillo said, "We’re seeing gold going through the roof right now. Yields going down and higher yields have had a negative effect on the Nasdaq. With the 10-year (Treasury yield) going to 1.51%, that’s a hefty drop. The dollar sinking and people are rethinking the Nasdaq.”

Here is where markets stand ahead of the U.S. open:



(Terence Gabriel, Stephen Culp)

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FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: nL1N2MU0RV



NFP05072021https://tmsnrt.rs/3etkT3W

premarket05072021https://tmsnrt.rs/3tsMqH5

Nonfarm payrollshttps://tmsnrt.rs/3tnk4hD

Labor market participationhttps://tmsnrt.rs/3tu5DID

Unemployment durationhttps://tmsnrt.rs/3nWJ9i5

Underemploymenthttps://tmsnrt.rs/3tmweas

Wages and hourshttps://tmsnrt.rs/3eq5emc

Unemployment by race and ethnicityhttps://tmsnrt.rs/3uFLa4I

AAII05072021https://tmsnrt.rs/3eV339e

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)