Central-bank speculation sways markets

US earnings continue to paint a mixed picture, but it is the Fed’s latest statement that has constrained the rally, while surprisingly low euro inflation stirs the pot ahead of next week’s ECB meeting.

Stocks began the day in the red on Wall Street, a combination of some disappointing earnings and some lingering caution after the Fed’s statement from yesterday failed to be quite as dovish as some would have liked.

On the earnings front, it was Visa that did the most damage to the Dow. The credit card company is one of the new boys in the index, only having been admitted last month, but its hefty share price means it has the highest weighting in the DJIA (one of several eyebrow-raising aspects of the Dow is that it is price-weighted as opposed to capitalisation-weighted). Visa’s earnings, reported after the close of the market last night, fell 28% from the equivalent quarter in 2012, which has triggered a 3% drop in its share price today.

Exxon Mobil, another Dow component, reported today, beating estimates on both the earnings and revenue front. Exxon is one of the biggest companies in America by capitalisation, but it is only tenth by weighting in the Dow, and its 1.6% advance today has therefore not been enough to keep the Dow out of negative territory.

By early afternoon in New York, the Dow was down 0.04% at 15,612. The S&P 500 has improved as the day has progressed, managing to break into positive territory, climbing 0.08% to 1764.8.

US macro-economic data today has been on the encouraging side overall, with a middling jobless claims number and an outstanding Chicago PMI.

Jobless claims dropped from 350,000 to 340,000 last week, coming in just above expectations. We have gone through a patch where weekly numbers have been distorted by a counting backlog in California and the effects of the shutdown on Government contractors; the lack of a change to the prior 350,000 suggests that we are clear of those issues, and the next few weeks should begin to offer us a clearer picture of the state of the labour market.

Chicago PMI surged to 65.9 in October, from 55.7 last month, which is the biggest monthly rise in more than three decades. New orders came in at a huge 74.3, its best showing in nine years, which bodes well for next month.

The muted reaction on Wall Street to this report suggests that some are taking the sky-high levels with a pinch of salt, but I personally have raised my expectations for tomorrow's ISM manufacturing report on the basis of these numbers.

A report today showed that eurozone inflation slowed to an annual change of 0.7% in October. The timing of this surprise slowing is interesting, with the ECB meeting next Thursday to decide on monetary policy. The steep decline in the euro today, with EUR/USD down more than 1%, implies that market participants view an interest rate cut more likely in the wake of this report.

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