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Monday, November 4, 2013

With  the Q3 earnings season winding down, the market’s focus will be on evaluating the odds of a December Fed Taper with the help of this week’s busy economic docket. But it wouldn’t be easy given the effects of government shutdown on economic data.
 
We got some positive economic data out of Europe and China this morning, but the only notable report on the home front is the delayed September Factory Orders reading coming out a little later. The rest of this week packs a number of top-tier economic reports that will shed further light on how well the economy is doing in the fourth quarter. The angle from which all these reports will be judged is the Fed, particulalry the beginning of Taper.
 
If the momentum on the factory side from Friday’s manufacturing ISM report is a sign of things to come, then should likely a positive surprise from the service sector ISM reading coming out on Tuesday as well. Thursday brings the first look at Q3 GDP, with expectations of +1.9% growth after the final +2.5% gain in second quarter. The Q3 GDP slowdown is well understood and has likely been overtaken by the effects of government on the economy’s Q4 growth pace. Luckily the shutdown’s effects aren’t expected to be enduring and will most likely get reversed in the following quarter.
 
The most noticeable effect of the shutdown will be in the October non-farm payroll report coming out on Friday, where the ‘headline’ number will reflect the furloughed federal government workers. Given these government-worker effects, the most telling part of the jobs report will be the one dealing with the private sector. The lack of shutdown effects in Friday’s manufacturing ISM could mean that the level of distortion in the jobs report will be low, particularly on the private sector side. This will be positive for the economy, but it would imply that Fed Taper could come in earlier than would otherwise be the case.
 
On the Q3 earnings front, the bulk of the reporting season is now behind us, with results from 367 S&P 500 members already known, as of Friday November 1st. This week brings in Q3 reports from 72 S&P 500 members, with heavy representation from the oil & gas and utility industries, though a number of major media companies like CBS Corp (
(CBS - Analyst Report)) and Disney ((DIS - Analyst Report)) are also on the docket. Overall, the Q3 earnings season has turned out be positive, particularly relative to the last few quarters.

It’s no surprise that actual results have been better relative to the lowered pre-season expectations is no surprise given management team’s impressive track record in under-promising and over-delivering. There is still not much growth and most companies are still guiding lower, prompting estimates for Q4 to come down. But whatever little growth we have in Q3 thus far is better than we have seen in recent quarters. And for those keeping records, the Q3 earnings season appears on track a new quarterly record for total earnings, surpassing the level achieved in Q2.

Sheraz Mian
Director of Research

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