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OCTOBER 25, 2023

SIGNALS OF POTENTIAL APPROVAL

BlackRock’s proposed iShares spot Bitcoin ETF has been listed on the DTCC, potentially signaling approval from the SEC. This is a significant step toward launching a crypto ETF, according to expert Eric Balchunas. The iShares ETF, called IBTC, is also being considered for listing on the Nasdaq. Balchunas believes BlackRock may have already secured SEC approval or is well-prepared to do so. If approved, this could open the door for other crypto ETF submissions. The SEC has until January 10, 2024, to make a decision. This application’s outcome is important as it could encourage institutional participation and impact cryptocurrency adoption in mainstream finance.

ROBUST GROWTH

The U.S. economy experienced a remarkably strong expansion in the third quarter, thanks to a combination of factors such as robust employment gains, increased wealth, and a decrease in inflation. As a result, there are now expectations that the gross domestic product (GDP) might have grown at an annual rate of 4.5%, exceeding the previous quarter’s growth rate by more than double. This represents the fastest expansion since 2021 when the economy was recovering from the impact of the pandemic. Moreover, despite initial concerns about a potential decline in consumer spending, U.S. citizens have defied expectations by consistently maintaining their purchasing habits. Nonetheless, this poses a dilemma for the Federal Reserve, and while the strong growth could justify further tightening of monetary policy, forecasts indicate a slowdown in the fourth quarter and the upcoming year, raising questions about the effectiveness of the Fed’s attempts to moderate economic activity.

TECH GIANTS’ EARNINGS

Alphabet reported a notable 11% increase in revenue during the third quarter, primarily attributed to a resurgence in advertising. This surge marks the first time in over a year that the company’s expansion has reached double digits. Nonetheless, despite the strong revenue performance, Alphabet’s shares fell nearly 7% due to the cloud business missing analysts’ expectations. Notably, YouTube advertising revenue exceeded expectations at $7.95 billion, while Google Cloud revenue fell slightly short at $8.41 billion. The cloud unit remains a crucial area of investment as Alphabet competes with Amazon Web Services and Microsoft Azure, especially in the context of generative artificial intelligence adoption. On the other hand, Microsoft delivered a robust performance in the fiscal first quarter, leading to a 6% increase in the company’s shares during extended trading. Microsoft reported earnings per share of $2.99, surpassing expectations of $2.65, and revenue of $56.52 billion, exceeding the expected $54.50 billion. The Intelligent Cloud segment, which includes Azure, showed remarkable growth with $24.26 billion in revenue, up 19%. Azure’s revenue jumped 29% during the quarter, surpassing analyst consensus. Microsoft continues to see strong adoption of generative AI tools and noted an increase in the Azure OpenAI Service’s customer base. In the Productivity and Business Processes unit, Microsoft reported $18.59 billion in revenue, up 13%, driven by Microsoft 365 and Teams communication app. The More Personal Computing segment, featuring Windows and Surface, contributed $13.67 billion in revenue, marking a 3% increase, Alphabet, the parent company of Google, reported a notable 11% increase in revenue during the third quarter, driven by a resurgence in advertising. This marks the first time in over a year that Alphabet’s expansion has reached double digits, highlighting the company’s growth. However, despite strong revenue performance, Alphabet’s shares fell nearly 7% due to the cloud business failing to meet analysts’ expectations. On the other hand, Microsoft delivered a robust performance in the fiscal first quarter, with earnings per share surpassing expectations and remarkable growth in its Intelligent Cloud segment, driven by Microsoft Azure. Microsoft’s strategic investments in AI and cloud services continue to drive strong growth and value for shareholders, further reinforced by the recent acquisition of Activision Blizzard.

HOUSING NIGHTMARE

Rising mortgage rates, coupled with soaring housing prices and modest income growth, have plunged housing affordability to a 23-year low. According to the National Association of Realtors housing affordability has dropped by almost half since 2021 when interest rates were extremely low. Consequently, many families are now struggling to afford a home, with the recent surge in rates causing five million families to fall below the qualification standard for a $400,000 loan, and while there has been a slight decrease in treasury bond yields this week, there is no quick solution to the affordability issue. The qualifying income needed to afford a median-priced house has more than doubled, making it even more challenging for American families, especially first-time buyers. The current situation is challenging because of the three main factors: family income, house prices, and mortgage rates, and since interest rates have surged, house affordability has been affected even as incomes rise and housing prices remain high. Moreover, to restore affordability, mortgage rates would need to drop significantly, and if prices stay steady, rates should fall to around 3.55% to return to historical averages. However, if prices continue to rise, lower rates will be needed. The issue is complicated because it is not just about rates as there is also a shortage of homes for sale, and builders are not keeping up with demand. Furthermore, although there is hope that millennials entering the housing market could boost demand, the situation is still complex. Additionally, the Federal Reserve’s approach to interest rates and the bond market’s reaction are also impacting mortgage rates, and achieving a “normal” real estate market may take until 2026, and some regions face more significant affordability challenges than others.

INTERNATIONAL NEWS

Chinese President Xi Jinping has taken significant steps to boost the economy and address deflationary risks, signaling a firm commitment to support growth. With a one trillion yuan ($137 billion) budget boost and a willingness to exceed traditional deficit-to-GDP ratios, Beijing aims to shore up growth for 2024 and avoid complacency. These actions come in the wake of strong economic data that puts the government on track to achieve its goal of approximately 5% growth for the current year. Additionally, the government’s actions also signal a willingness to expand its balance sheet when necessary, however, it is worth noting that property construction struggles, strained local government finances, and falling exports continue to exert deflationary pressures. Moreover, the method chosen to deliver this stimulus, which is relatively smaller in scale compared to past methods, indicates a shift in strategy towards managing debt levels more prudently; and the use of the central government’s balance sheet through sovereign bonds signifies a departure from relying on local governments for leverage, as they face difficulties in servicing existing debts. This budget revision also suggests a more flexible approach to fiscal policy, as China rarely adjusts its budget outside of its annual parliamentary gathering. Overall, these policy moves reflect China’s determination to revitalize the economy and ensure stability and growth.

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