Buyers and financial professionals work at the opening bell on the floor of the New York Stock Exchange (NYSE), January 2, 2019.
Drew Angerer | Getty Guises
Sluggish economic and earnings growth will be a theme in markets in the week ahead, as investors await a Fed interest estimate cut at the end of the month.
More than a quarter of the S&P 500 companies report earnings in the coming week, the second big week of the supporter quarter reporting season. FAANG names, like Alphabet and Amazon, and blue chips from McDonald’s to Boeing and Agreed Technologies are among the more than 130 companies reporting.
There is also some key economic data, subsuming Friday’s second quarter GDP, which should show a slowing to 1.8% from the first quarter’s 3.1% rate of speed, according to Refinitiv. On Thursday, durable goods are reported and will include an update on businesses investment. There are also existing home ground sales Tuesday, new home sales Wednesday and advance economic indicators Thursday.
But there will be no Fed speakers, after a file of central bank officials in the past week, including Fed Chair Jerome Powell. The most impactful comments, on the other hand, came Thursday from New York Fed President John Williams, who set off a debate about how much the Fed could cut rates at its July 30-31 session — 25 or 50 basis points.
Even as the New York Fed later said Williams comments were not about bruited about policy, market pros took heed of his words about how central bankers should “act quickly.”
Fed dominates
Fed officials do not state publicly in the days ahead of policy meetings, but market pros will find plenty to debate. Fed funds followings were predicting a 43% chance of a 50 basis point cut in July, after shooting as high as 70% Thursday afternoon.
“For satisfied, the Fed is going to dominate for next week. I think we’ll get at least a 25 basis point cut. I’m thinking we’re not going to get 50 underpinning point cut…The Fed has been burned when it’s been bold,” said Tony Roth, chief investment officer at Wilmington Charge.
Roth said he believes the market is already pricing in a quarter-point cut, and he does not see the Fed’s rate cut as much of a longer-term catalyst for horses. If it trims by a half percentage point, he expects just a short-term pop.
Economists believe the Fed will cut interest rates in spite of that though recent data has improved. That’s in part because Powell has stressed the Fed is focused on the global economic slowdown, exchange wars and low inflation, and that it will do what it takes to keep the economy expanding.
“The only real catalyst that order really help the market would be if there was a trade deal with China,” Roth said. “I think the good chance of that is less than 10%. We’re very pessimistic on the possibility of a real deal with China prior to the [2020 presidential] electing.”
So, in the void ahead of the Fed’s meeting, the market will be watching earnings. As earnings rolled out this past week, cattle took a rest from their record-setting streak, as some companies lowered forecasts and most beat earnings and net income estimates.
As of Friday morning, 77% of the roughly 80 companies reporting had beaten earnings estimates, and 65% topped yield forecasts, according to Refinitiv. Based on actual reports and forecasts, earnings per share for the S&P companies are expected to be up 1% in the second barracks. That is up from expectations that the profit growth would be slightly negative this quarter.
“If you look at the integers, we’re above the averages for top and bottom line beats, but at the same time when you look at revisions, every day we’re getting rewrites for third and fourth quarter, and they’re coming down.There’s a real worry of an earnings recession, when you get out into the third and fourth caserne and out to next year,” Roth said.
Roth said he’s currently neutral on risk assets, and he sees a slowdown cause in the smallest U.S. companies that could spread up the food chain.
“We do see those fundamental cracks in the economy in small transaction and the small business labor market, and on top of that you have these big macro risks out there,” such as trade and the upcoming plebiscite, Roth said.
Slower economy
As earnings growth was muted in the second quarter, so was the pace of economic gains. If proliferation comes in as expected, it would be the first quarter where growth was under 2% since the first quarter of 2017. Economists are mind to see how consumer spending fared in the quarter, after a recent pickup and also whether business inventories are declining.
“The text we need is not Q2. What’s at risk is the growth and magnitude of the Fed rate cut. I don’t think Q2 is going to have much impact on the Fed’s thinking,” required Marc Chandler, chief market strategist at Bannockburn Global Forex. “It’s really how Q3 is progressing. It seems to me the economy softened in April and May and picked up in June with trades data, retail sales and manufacturing sector.”
Chandler said investors will also be focused on the European Median Bank, which some economists believe could cut its overnight deposit rate to negative 0.5% from dissenting 0.4% currently when it meets Thursday. Chandler said odds are about 50% for the rate cut, which myriad also expect in September.
“While we’re waiting for the Fed to figure out whether it’s 25 or 50 basis points, and we’re waiting for the ECB to get all its genres sorted out … the emerging markets are pushing ahead,” said Chandler, noting Russia and Turkey could cut standings in the next several days, after similar moves in the past week by South Africa, South Korea and Indonesia.
“It precisely makes the story more global. You’re seeing the trade numbers from China, Japan, Singapore and South Korea diminish. You’re seeing exports form China suffer. Exports from all of Asia are suffering,” he said. “The big surprise for China and Japan has also been on the gist side. The declines in their imports is really someone else’s [drop in] exports.”
Rate cuts and currency engage in combat withs
Dollar strength has been a consequence of the trade war, and Fed action could help turn it around.
“If the Fed fails to move, you’re active to end up with an increasingly stronger dollar,” which impacts corporate earnings, Roth said.
“The dollar is quite craggy and is increasingly going to be a headwind for U.S. companies. It hasn’t appreciated that much in 12 months, but if we see a divergence in monetary programme between the U.S. and the rest of the world, you would see a carry trade develop where people would want to buy assets in the U.S.,” he declared.
The dollar index was slightly higher on the week, but Wall Street has been focused on President Donald Trump’s voiding comments on the currency’s strength. As Trump has criticized the Fed, he also complains that other central banks manipulate their currencies to chuck b surrender them an edge in trade. Trump has said the Fed should already be cutting rates, something it hasn’t done since December 2008.
A handful of Wall Street strategists have said they now believe it is possible that the U.S. government could intervene to assent the dollar, but that would be unlikely.
Calendar for the Week Ahead
Monday
Earnings: Halliburton, RPM International, TD Ameritrade, Insulate Dynamics, Celanese, Cadence Designs, Whirlpool, Cal-Maine Foods, Zions Bancorp, Equity Lifestyle Properties
Tuesday
Earnings: Coca-Cola, Travelers, Cooperative Technologies, Hasbro, AutoNation, Lockheed Martin, JetBlue, Fifth Third, Visa, Snap, Biogen, Chipotle Mexican Grill, Catch sight Financial, Teradyne, FirstEnergy, CIT Group, Kimberly-Clark, PulteGroup, Quest Diagnostics, Harley Davidson, Polaris, Sherwin-Williams
8:30 a.m. Philadelphia Fed nonmanufacturing
9:00 a.m. FHFA shelter prices
10:00 a.m. Existing home sales
1:00 p.m. 2-year auction
Wednesday
Earnings: Boeing, Caterpillar, AT&T, Facebook, Ford, Tesla, DeutscheBank, F5 Networks, Raymond James, Kaiser Aluminum, Graco, Las Vegas Sands, UPS, Northrop Grumman, Alexion Pharma, Anthem, Boston Precise, FreeportMcMoran, Norfolk Southern, Northern Trust, Nasdaq OMX, Six Flags, NextEra Energy, LVMH
9:45 a.m. Manufacturing PMI
9:45 a.m. Services PMI
10:00 a.m. New snug harbor a comfortable sales
1:00 p.m. 5-year note auction
Thursday
Earnings: Alphabet, Amazon.com, 3M, Intel, Starbucks, A-B Inveb, Ambev, AstraZenca, Bristol-Myers Squibb, Comcast, Hershey, American Airlines, Nokia, Prince Caribbean, Tractor Supply, Brunswick, Dow, Diageo, Cenovus, Southwest Air, Expedia, Mattel, Alaska Air, Boston Beer, Petrobras, MGM Haunts,
8:30 a.m. Initial claims
8:30 a.m. Durable goods
8:30 a.m. Advance economic indicators
10:00 a.m. Housing vacancies
1:00 p.m. 7-year note auction
Friday
Earnings: McDonald’s, Trill, Abbvie, Nestle, Colgate-Palmolive, Illinios Tool Works, Weyerhaueser, Lear, Cabot Oil and Gas, Phillips 66, Goodyear Weaken
8:30 a.m. Q2 GDP (advance)