- Weekly market focus
- U.S. Economic Surprise Index falls back into negative territory while market is looking ahead to very weak Q1 GDP figure in two weeks
- FOMC rate-hike expectations eased last week
- Big week for Chinese economic data
- Q1 earnings season begins with a -7.6% drop expected in SPX earnings
Weekly market focus — The markets this week will focus on (1) Thursday’s Chinese Q1 GDP report, which is expected to ease to a new 7-year low of +6.7% from +6.8% in Q4, (2) six appearances by various Fed officials and whether there is any shift in expectations for Fed policy, (3) the Treasury’s sale of 3-year, 10-year and 30-year securities, (4) the beginning of Q1 earnings season with Alcoa reporting on Monday, and (5) a fairly busy U.S. economic calendar.
U.S. Economic Surprise Index falls back into negative territory while market is looking ahead to very weak Q1 GDP figure in two weeks — The Bloomberg U.S. Economic Surprise index temporarily spiked above the zero mark two weeks ago but then quickly fell back and closed last week at -0.134, indicating that the recent U.S. economic data continues to under-perform relative to market expectations. The market is expecting a very weak Q1 GDP report to be released in two weeks on April 28 of only about +0.5%, which would follow the already-disappointing Q4 figure of +1.4%. The Atlanta Fed’s GDPNow estimate for U.S. Q1 GDP has fallen to just +0.1%. U.S. Q1 GDP will be undercut by continued weakness from business investment, government spending, net exports, and inventories, and by softer U.S. personal consumption.
This week’s busy U.S. economic schedule is expected to be mixed. Strong key reports this week are expected to include (1) Wednesday’s March retail sales report (expected +0.1% and +0.4% ex-autos), and (2) Friday’s preliminary-April U.S. consumer sentiment index from the University of Michigan (expected +1.0 to 92.0 after March’s -0.7 point decline to 91.0). The main weak report this week is expected to be Friday’s March industrial production (expected -0.1% after Feb’s -0.5%). Wednesday’s Fed Beige Book report will deliver the Fed’s U.S. regional economic assessment ahead of the FOMC meeting in two weeks on April 26-27.
This week’s March PPI and CPI inflation data is expected to show little change from February, thus sustaining the recent uptick in the U.S. inflation data. Wednesday’s March final demand PPI report is expected at +0.3% y/y headline and +1.3% y/y core, steady to slightly higher from Feb’s +0.3% and +1.2%, respectively. Thursday’s March CPI report is expected to be steady to slightly higher from Feb at +1.1% y/y headline and +2.3% y/y core versus Feb’s +1.0% and +2.3%, respectively.
FOMC rate-hike expectations eased last week — The federal funds futures curve (on a yield basis) last week fell by 6-9 bp for 2017-18. Last Tuesday’s March 15-16 FOMC meeting minutes said that “some” FOMC participants indicated that a rate hike at the April FOMC meeting “might well be warranted” if the economic data comes in as expected. However, the overall tone of the minutes was dovish based on the statement that, “Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook.” Those global risks mainly include China and the Brexit vote on June 23.
The market is currently discounting a zero chance of a Fed rate hike at the next FOMC meeting on April 26-27 based on the federal funds futures market. The chances for a rate hike then slowly ramp up as the year wears on to 14% by June, 28% by July, 40% by September, 52% by November, and 62% by December. The market is not discounting a full 100% chance of a Fed rate hike until July 2017.
Big week for Chinese economic data — This is a big week for Chinese economic data, which could undercut by the yuan and the Chinese stock market if the economic data is weaker than expected. Tuesday’s Chinese March trade report is expected to show an improvement in exports with a +9.7% y/y gain versus the -25% y/y decline seen in February. Thursday’s Chinese March retail sales and industrial production reports are expected to be stable near February’s levels. Specifically, March industrial production is expected to rise slightly to +5.5% y/y from Feb’s +5.4% y/y and the March retail sales report is expected to be unchanged from Feb at +10.2% y/y.
The big Chinese report this week will be Thursday’s Q1 GDP report, which is expected to ease to a new 7-year low of +6.7% from the 6-3/4 year low of +6.8% posted in Q4. On a calendar year basis, China’s GDP in 2015 fell to a 25-year low of +6.9% and the consensus is for a further decline to +6.5% in 2016.
Q1 earnings season begins with a -7.6% drop expected in SPX earnings — Q1 earnings season begins today with Alcoa releasing its Q1 report. There are a total of 15 of the S&P 500 companies that report earnings this week with other notable reports including CSX and Fastenal on Tuesday; JP Morgan Chase on Wednesday; Bank of America, Wells Fargo and BlackRock on Thursday; and Citigroup, Schwab, and Seagate on Friday.
The market consensus for Q1 SPX earnings growth is -7.6%, according to surveys by Thomson Reuters I/B/E/S. Of the 10 sectors, seven are expected to see year-on-year declines, illustrating that poor Q1 earnings expectations are not due solely to energy. Energy earnings are expected to be terrible at -103%, but declines are also expected in materials (-19.8%), financials (-9.2%), technology (-5.4%), utilities (-2.6%), and consumer staples (-2.0%). The only sectors expected to show earnings growth are consumer discretionary (+13.4%), telecom (+5.2%), and health care (+4.5%). Looking forward, the consensus is for a -2.0% decline in Q2 earnings growth, which would be the fourth consecutive quarter of negative growth. Earnings are then expected to improve to +4.6% in Q3, and +10.4% in Q4.
