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  • Weekly market focus
  • Congress remains far apart ahead of Friday’s deadline for a new CR 
  • U.S. Q4 earnings season begins with strong expectations
  • U.S. stocks see support from strong earnings expectations

Weekly market focus — The U.S. markets this week will focus on (1) the possibility of a U.S. government shutdown on Friday at midnight if Congress does not pass a new spending bill to replace the expiring continuing resolution, (2) Fedspeak with Evans and Mester speaking on Wednesday, (3) this week’s light U.S. economic calendar including the Wednesday’s Fed Beige Book report, (4) the beginning of Q4 earnings season in earnest with 39 of the S&P 500 companies scheduled to report, and (5) the Treasury’s sale of $13 billion of 10-year TIPS on Thursday.

Oil prices will remain a key market factor this week.  March Brent crude oil prices on Monday rallied to a new 3-year high and closed the day up +$0.36 (+0.52%) at $70.23.  

In Europe, the focus is mainly on the euro, which showed continued strength during Monday’s U.S. holiday.  EUR/USD on Monday extended Friday’s sharp rally to post a new 3-year high.  EUR/USD was supported on Monday by news of a breakthrough on a preliminary agreement for a new German coalition government between Chancellor Merkel’s CDU bloc and the Social Democrats.  However, the parties agreed only to enter formal negotiations and party members would have to ratify any final agreement, which means there is a long way to go before Germany can be assured of a stable government.

The European markets are also watching interest rates after the German 10-year bund yield last Friday rose to a 6-month high of 0.608%, but then fell back on Monday by -0.7 bp to 0.587%.  The Euro Stoxx 50 index on Monday closed the day little changed, held in check by the sharp 2-session rally in the euro.

Sterling also rallied sharply on Friday and Monday thanks in large part to weakness in the dollar.  Separately, Prime Minister May’s government is dealing with the fall-out from Monday’s news of the bankruptcy liquidation of Carillion Plc, a big government construction and services contractor that supports key government operations.  The May government refused to provide the contractor with a bailout.

In Asia this week, the focus will be on Wednesday night’s Chinese Q4 GDP report, which is expected to ease slightly to +6.7% from Q3’s pace of +6.8%.  Also on Wednesday night, China’s Dec industrial production is expected to be unchanged from Nov’s +10.2% y/y and the Dec retail sales report is expected to be unchanged from Nov’s +10.2% y/y.  

In Asian markets, the Chinese yuan on Monday rallied to a new 2-year high and closed the day up +0.49% against the dollar.  The strength in the yuan undercut Chinese stocks as the Shanghai Composite on Monday closed moderately lower by -0.54%.  The 10-year Chinese government bond yield on Monday rose by another +1.9 bp to a new 6-week high of 3.966% where it was just mildly below the 3-1/4 year high of 4.035% posted on Nov 22.  Meanwhile in Japan, the Nikkei index on Monday closed mildly higher by +0.26%.

Congress remains far apart ahead of Friday’s deadline for a new CR — There is the possibility of a U.S. government shutdown this Friday night at midnight when the current CR expires, especially considering how far apart Republicans and Democrats seem to be on a spending deal.  Democrats continue to insist that a DACA fix must be part of any spending bill, although it remains to be seen how far Democrats will go to get that DACA fix.  The most likely scenario at this point seems to be another short-term CR while Republicans and Democrats continue to hash out their differences.

U.S. Q4 earnings season begins with strong expectations — The market is expecting a stellar Q4 earnings season with +12.1% earnings growth for the S&P 500 companies, according to Thomson I/B/E/S.  The market is then expecting even stronger growth in the first half of 2018 with +14.8% growth in Q1 and +14.1% growth in Q2. On a calendar year basis, the consensus is for SPX earnings growth to improve to +14.5% in 2018 from +11.9% in 2017.

There are 39 of the SPX companies that report this week.  Notable reports include Citigroup, Schwab, and UnitedHealth Group on Tuesday; Goldman Sachs and Bank of America on Wednesday; and Morgan Stanley, American Express, and IBM on Thursday.

U.S. stocks see support from strong earnings expectations — The S&P 500 index last Friday rallied to a new record high and closed the day up +0.67%.  The U.S. stock market continues to see support from (1) very strong earnings expectations in 2018 thanks to synchronized global economic growth and U.S. tax cuts, and (2) the weak dollar, which is boosting U.S. exports and the value of repatriated corporate earnings.  The main bearish factors for the stock market include (1) interest rate concerns with the 10-year T-note yield near a 10-month high and with Fed-tightening expectations at the highest level yet, and (2) stretched valuations with the forward P/E for the S&P 500 index at 18.64, which is well above the 10-year average of 15.4.

Meanwhile, U.S. interest rates continue to see upward pressure.  The 10-year T-note yield last week closed up +7.0 bp at 2.546%, just below last Wednesday’s 10-month high of 2.595%.  T-notes yields continue to see upward pressure from rising inflation expectations and rising expectations for Fed tightening.  The 10-year breakeven inflation expectations rate last Wednesday posted a 10-1/2 month high of 2.05% and closed the week just mildly below that level at 2.02%.  Expectations for overall Fed rate hikes in 2018 rose to a new high of 58.5 bp.  

 

 

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