- Weekly U.S. market focus
- Q2 earnings season is virtually over with very positive results
- Stock market remains on defensive due to North Korea tensions
- T-notes remain mildly bullish
Weekly U.S. market focus — The U.S. markets this week will focus on (1) any fresh tensions in the U.S.-North Korea standoff, (2) any fine-tuning of Fed expectations with Wednesday’s July 25-26 FOMC meeting minutes, (2) Tuesday’s U.S. July retail sales report, which is expected to show a fairly strong increase of +0.4% for both the headline and ex-autos report, (3) Sep WTI crude oil prices, which fell late last week on general commodity weakness with the North Korean tensions, and (4) the tail end of Q2 earnings season with 20 companies scheduled to report.
Key overseas events this week include (1) the early-Monday China July industrial production report (expected +7.1% y/y after June’s +7.6%) and July retail sales report (expected +10.8% after June’s +11.0%), (2) the early-Monday Japan Q2 GDP report (expected +2.5% q/q annualized after Q1’s +1.0%), and (3) European Q2 GDP reports.
The Trump administration on Saturday told reporters that President Trump on Monday will sign an executive memorandum directing U.S. Trade Representative Robert Lighthizer to consider investigating China about its intellectual property policies, particularly the practice of forced technology sharing. The executive memo is not likely to cause any big market concerns because the administration is only considering an investigation at this point and it remains far too early to discuss any trade sanctions.
The markets this week will continue to have some relief from domestic Washington politics since both the House and Senate are in recess until after Labor Day. President Trump this week will be on the second half of his 17-day vacation at his Bedminster golf club in New Jersey. However, the Russian investigations will continue and could produce fresh news this week.
The markets this week will continue to closely watch the North Korean situation after North Korea last week said it would soon fire four missiles over Japan into the waters off Guam. It remains to be seen whether such a missile test would draw some type of military retaliation by the U.S. if the missiles only land in international waters near Guam and not on Guam itself. Japan over the weekend deployed four Patriot anti-missile batteries in the western part of its country that could try to shoot down any North Korean missiles that fly in that vicinity. A missile launch or some other provocation could come in conjunction with Tuesday’s (Aug 15) anniversary of the end of Japan’s occupation of the Korean peninsula, which is an important national event for North Korea.
Top U.S. generals are scheduled to meet with South Korean president Moon Jae-in on Monday. North Korea’s paranoia will grow next Monday (Aug 21) when large-scale annual U.S.-South Korean military exercises begin. The military exercises will last about two weeks and always draw at least rhetorical fire from North Korea.
Q2 earnings season is virtually over with very positive results — The Q2 earnings season is now virtually over with only 20 of the SPX companies reporting this week. Notable reports this week include Home Depot, TJX, and Agilent on Tuesday; Cisco and Target on Wednesday; Wal-Mart, Gap, and Applied Materials on Thursday; and Deere, Foot Locker and Estee Lauder on Friday.
Q2 earnings season has been very strong with the consensus rising to +12.0% (+9.3% ex-energy) from +8.0% as of July 1, according to Thomson Reuters I/B/E/S. Of the 455 SPX companies that have already reported earnings, 73.6% have beaten their consensus, better than the long-term average of 64% and the 4-quarter average of 71%, according to Thomson. The market is expecting strong earnings growth to continue with growth of +6.8% in Q3, +12.2% in Q4, +10.4% in Q1, and +10.2% in Q2. On a calendar year basis, SPX earnings growth is expected at +11.5% in 2017 and +10.9% in 2018.
Stock market remains on defensive due to North Korea tensions — The S&P 500 index last week fell by -1.47% on long liquidation pressures sparked by North Korea tensions after President Trump stepped up his threats with his “fire and fury” comment on Tuesday. SPX stabilized on Friday after T-note prices rallied on the tepid CPI report. The stock market remains priced for perfection with relatively high valuation levels, which makes the market vulnerable to any bad news. The S&P 500 index is trading at a forward P/E of 18.7, which down from the recent high of 19.0 but still well above the 5-year average of 16.4 and the 10-year average of 15.2. The VIX index last Friday posted a new 9-month intra-day high of 17.28 but then fell back to close the week up +5.48 points at 15.51%.
This week’s U.S. stock market focus will be on (1) North Korea, (2) the tail end of Q2 earnings season, (3) any news out of Washington on the tax reform plan, and (4) interest rates with Wednesday’s FOMC minutes.
T-notes remain mildly bullish — Sep T-notes last Friday rallied on the slightly weaker-than-expected July CPI report of +1.7% y/y versus expectations for an increase to +1.8% (from June’s +1.6%) although the July core CPI was in line with market expectations of unchanged at +1.7% y/y. T-note prices were also boosted during the week by safe-haven demand with the North Korea tensions. The TYVIX index last Thursday rose to a 1-1/4 month closing high of 4.56% but then fell back slightly to 4.43% on Friday, closing the week up +0.69 points. The T-note market this week will focus mainly North Korean tensions, Tuesday’s retail sales report, and Wednesday’s FOMC minutes, which could provide more hints on whether the FOMC at its next meeting on Sep 19-20 will announce the start date for its balance sheet normalization program.