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  • Weekly global market focus
  • France announces truce with U.S. on digital tax
  • Bank of Japan expected to leave policy unchanged
  • Q4 earnings season heats up


Weekly global market focus 
— The U.S. markets this week will focus on (1) Washington politics as President Trump’s impeachment trial begins in the Senate with a vote today on the trial rules and with opening arguments on Wednesday, (2) Monday’s positive trade news that the U.S. and France reached a truce on France’s 3% digital tax that averts retaliatory U.S. tariffs on $2.4 billion of French goods, (3) March Brent crude oil prices, which rallied +0.54% on Monday on production disruptions in Libya and Iraq, (4) Q4 earnings with 41 of the S&P 500 companies reporting, and (5) the Treasury’s sale of $14 billion of 10-year TIPS on Thursday.

This week’s U.S. economic calendar is light with key reports including (1) Wednesday’s Nov FHFA house price index (expected +0.3%) and Dec existing home sales (expected +1.5% m/m after Nov’s -1.7%), (2) Thursday’s Dec leading indicators report (expected -0.2% after Nov’s unch), and (3) Friday’s Jan Markit U.S. manufacturing and non-manufacturing PMIs (expected +0.1 and -0.3, respectively).

In Europe, the focus will be on the US/French digital-tax truce, Thursday’s ECB meeting, and UK Prime Minister Johnson’s progress on getting his Brexit withdrawal bill through Parliament before the Jan 31 deadline.

The market is unanimously expecting the ECB to leave its policy unchanged, but the big news will be ECB President Lagarde’s expected official announcement of the ECB’s long-term review of its monetary policy, which is expected to be completed by year-end.  The ECB is not expected to make any big changes, but could switch its inflation target from “close to but below 2%” to a symmetrical 2% target such as that seen in other major countries such as the United States.  A symmetrical 2% target would be a dovish shift that would allow, if not encourage, inflation to periodically run a little above 2%.

In Asia, the focus will be on the results of the BOJ meeting that will be announced tonight (ET time).  The BOJ is expected to leave its extraordinarily easy monetary policy unchanged.  The week-long Chinese Lunar New Year holiday begins this Friday.

France announces truce with U.S. on digital tax — France on Monday announced that Presidents Trump and Macron reached a truce on France’s 3% sales tax on digital services that will avert the U.S. tariff on $2.4 billion of French goods and retaliatory French tariffs.  The U.S. and France apparently agreed to extend their negotiations until the end of 2020.  However, the Trump administration did not fully confirm a truce, meaning the situation remains uncertain.

The U.S. and France had earlier set a deadline of the middle of this week to reach a compromise.  U.S. Treasury Secretary Mnuchin and French Finance are scheduled to hold talks on the issue on Wednesday at Davos.  French Finance Minister Le Maire last Friday said he saw the possibility of a compromise based on the intent of the OECD countries to eventually agree on the structure of a digital sales tax that is acceptable to all parties. 

Bank of Japan expected to leave policy unchanged — The Bank of Japan at its policy announcement tonight is expected to leave its main policy variables unchanged.  The BOJ is targeting its short-term policy rate at -0.1% and the 10-year JGB rate at zero with a boundary of +/- 0.20%.  The 10-year JGB yield is currently trading at 0.002%, up sharply from Sep’s 3-1/4 year low of -0.29% and near the BOJ’s midpoint target of zero.  The BOJ in October 2019 adopted more dovish guidance saying it would keep rates at current or lower levels “as long as it is necessary” in order to achieve its inflation goals.

The BOJ tonight is expected to leave its QE program unchanged with the nominal amount at 80 trillion yen per year.  However, the BOJ’s purchases in recent months have been below the nominal amount since the QE program is secondary compared with the BOJ’s goal of keeping the 10-year JGB yield near zero.

The Japanese economy appears to have survived the 2 percentage point hike in the national sales tax to 10% that took effect on Oct 1, 2029.  The BOJ is now getting some help from a fiscal stimulus program from the Japanese government and from reduced US/Asia trade tensions after the US/Japan first-stage trade agreement and last week’s US/China phase-one trade agreement.

Q4 earnings season heats up — Q4 earnings season begins in earnest this week with 41 of the S&P 500 companies scheduled to report.  Notable reports this week include Netflix, IBM, Capital One, and United Airlines today; Northern Trust, Abbott Labs, and Baker Hughes on Wednesday; Intel, American Airlines, and Discover on Thursday; and American Express on Friday.

The consensus is for Q4 earnings growth for the S&P 500 companies to fall by -0.8% y/y (+1.9% ex-energy), according to Refinitiv.   That would follow the weak 2019 quarterly SPX earnings growth rates of +1.6% in Q1, +3.2% in Q2, and -0.3% in Q3.  Looking ahead, the consensus is for SPX earnings growth of +5.8% in Q1-2020, +7.3% in Q2, +10.2% in Q3, and +14.9% in Q4.  Revenue growth in Q4 is expected at +4.4% y/y (+5.6% ex-energy).

The consensus is for 2019 calendar-year earnings growth of only +1.0% as earnings growth flattened out after the extraordinary growth of +22.7% seen in 2018 due to the massive 2018 corporate tax cut.  The market consensus is for earnings growth in 2020 to improve to +9.6% y/y, although this early estimate is likely to be revised lower as the year wears on.

Of the 44 S&P 500 companies that have reported thus far, 70.5% have reported above-consensus earnings, which is better than the long-term average of 64.9% but below the 4-quarter average of 73.5%, according to Refinitiv.

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