It’s Fed day! Whether the third consecutive interest rate cut happens this afternoon or not, the announcement will likely be sharing column inches with today’s other big release: Q3 GDP growth. 1.9% ain’t too shabby! Check back in on Friday for more post-game analysis. In the meantime… 73% of companies came in above earnings estimates this quarter (the highest percentage since 2006), but this rising tide didn’t lift all boats—many regions of the economy suffered significant earnings contraction YoY. And a closer look at the quality of earnings gives a different perspective. The recent yield curve inversion also may deserve another look… Could its unusual depth and short duration have bearing on its economic implications? The implications of soft small business job growth are fairly straightforward though, just ask Fed economist Claudia Sahm. Finally, China looks to be stocking up on crude oil—are they arming themselves for more trade war maneuvers, or maybe planning a yard sale to finance their approaching >2 trillion yuan debt repayment?
1. After all, it is about company earnings…
![q3 companies beat earnings estimates](https://blog.investbcm.com/hubfs/10.30%20chart%202.png)
Source: Bespoke Investment Group, as of 10/30/19
2. However the quality of the earnings also matters as does “beating” significantly lowered earnings estimates…
![S&P 500 profit margins](https://blog.investbcm.com/hubfs/10.30%20chart%201.png)
Source: BCM Research, as of 10/29/19
3. Yesterday’s highs, however pleasing, are not reflective of every segment of the economy.
![Q2 Q3 earnings sector](https://blog.investbcm.com/hubfs/10.30%20chart%209.png)
Source: Deutsche Bank Research, as of 10/29/19
4. The Chicago Fed also showed National manufacturing to be contracting.
![dallas fed manufacturing index](https://blog.investbcm.com/hubfs/10.30%20chart%2012.png)
Source: WSJ Daily Shot, as of 10/29/19
5. It has been 10 years since the Great Recession and our manufacturing base is just barely ahead…
![gdp vs manufacturing growth](https://blog.investbcm.com/hubfs/10.30%20chart%206.png)
Source: WSJ Daily Shot, as of 10/30/19
6. This is why our manufacturing slowdown is having, at least so far, a muted effect on our economy.
![us manufacturing share of GDP](https://blog.investbcm.com/hubfs/10.30%20chart%207.png)
Source: WSJ Daily Shot, as of 10/29/19
7. Does this mean it was a false signal or perhaps the recession will be short and mild?
![yield curve inversions](https://blog.investbcm.com/hubfs/10.30%20chart%205.png)
Source: WSJ Daily Shot, as of 10/29/19
8. Don’t forget the Sahm Rule… and the fact that small businesses drive most employment in the U.S.
![small business jobs index](https://blog.investbcm.com/hubfs/10.30%20chart%208.png)
Source: The Chart Store, as of 10/25/19
9. Is China preparing for another round of the trade war?
![china crude imports](https://blog.investbcm.com/hubfs/10.30%20chart%2011.png)
Source: Fitch Solutions, as of 10/29/19
10. By itself this may not be an issue…
![china bond repayments 2020](https://blog.investbcm.com/hubfs/10.30%20chart%204.png)
Source: Bloomberg, as of 10/28/19
11. …but combined with significantly higher rates poses a potential problem!
![China bond yields](https://blog.investbcm.com/hubfs/10.30%20chart%203.png)
Source: Bloomberg, as of 10/28/19