- Weekly market focus
- Expectations eased last week for the Fed’s next rate hike
- U.S. ISM manufacturing index expected to fall back after 3-month advance
- Another busy Q1 earnings week as earnings beat low expectations
Weekly market focus — The market this week will focus on (1) whether Friday’s April payroll report shows the expected trend increase of +200,000 and shows that employment growth remains on track despite weak GDP growth of +0.5% in Q1, (2) Fedspeak with seven different speaking events by various Fed officials, (3) U.S. politics as Indiana on Tuesday holds Republican and Democratic primaries, and (4) a busy Q1 earnings week with 125 of the S&P 500 companies scheduled to report.
In overseas news this week, the European Commission on Tuesday will release its spring economic forecasts. China this coming Saturday will release its April trade report, which is expected to show a rise in trade surplus to $40.4 billion from March’s $29.9 billion and a smaller +1.3% y/y increase in April exports (vs March’s +11.5%). The Japanese markets will be closed on Tuesday through Thursday for holidays. The UK markets are closed today for the May Day holiday.
Key U.S. economic reports this week, aside from Friday’s unemployment report, include today’s U.S. ISM manufacturing index (expected -0.4 to 51.4), Tuesday’s April vehicle sales report (expected 17.3 million vs March’s 16.5 mln), Wednesday’s April ADP report (expected +195,000 after March’s +200,000), Wednesday’s March U.S. trade deficit (expected to narrow to -$41.1 billion from Feb’s -$47.1 billion), Wednesday’s March factory orders report (expected +0.6% after Feb’s -1.7%), and Wednesday’s April ISM non-manufacturing index (expected +0.2 to 54.7).
Expectations eased last week for the Fed’s next rate hike — Market expectations eased last week for the Fed’s next rate hike after the FOMC’s mildly dovish post-meeting statement. The FOMC in that statement reduced its emphasis on overseas risks, but on the dovish side the FOMC reiterated that rate hikes will be gradual and again declined to provide a balance of risk assessment. The federal funds futures yield curve last week fell by 1-2 bp for the 2016 contracts, by 3-5 bp for the 2017 contracts, and by 5-7 bp for the 2018 contracts. The market is assessing the chances for a rate hike at the next FOMC meeting on June 14-15 at only 12%, but the odds then slowly ramp up to 28% by July, 50% by September, 66% by November, and 78% by December. The market is not fully discounting a 100% chance of a rate hike until April 2017.
U.S. ISM manufacturing index expected to fall back after 3-month advance — The market is expecting today’s April ISM manufacturing index to show a -0.4 point decline to 51.4, giving back part of March’s +2.3 point increase to 51.8. The ISM manufacturing index took a sharp hit last year due to the strong dollar, weak overseas economic growth, and the petroleum and mining sector recessions. However, the ISM index has now risen for the last three reporting months of Jan-March by a total of +3.8 points to climb back into expansion territory above 50.0. The index in March in fact posted a new 8-month high of 51.8 in March. In other positive ISM news, the orders pipeline seems to be filling up considering that the ISM manufacturing new orders index in March rose sharply by +6.8 points to a 1-1/3 year high of 58.3.
However, the markets are looking for a small decline in the ISM index in today’s report for April as the 3-month advance loses steam and as U.S. manufacturers continue to face challenges from weak overseas and domestic economic growth and ongoing recessions in the petroleum and mining sectors. In a negative leading indicator for today’s ISM report, Markit reported that its U.S. manufacturing PMI index in early April fell by -0.7 points to 50.8. The market is expecting today’s Markit’s U.S. manufacturing PMI report for final-April to be left unrevised from the preliminary-April report, leaving the final index down by -0.7 points from March.
Another busy Q1 earnings week as earnings beat low expectations — This will be another busy weak for Q1 earnings with 125 of the S&P 500 companies scheduled to report. Notable reports this week include Lowes and General Growth today; Halliburton, Pfizer, and Valero on Tuesday; Time Warner, Priceline, Marathon Oil, Whole Foods, TripAdvisor, and MetLife on Wednesday; Merck, Kellogg, and News Corp on Thursday; and Excelon and Weyerhaeuser on Friday.
The market consensus for Q1 SPX earnings growth is now -5.7% y/y, better than expectations of -7.1% from a week earlier and -7.8% from 2 weeks earlier, according to surveys by Thomson Reuters I/B/E/S. Of the 311 SPX companies that have reported thus far, 75% have reported above-consensus earnings, substantially better than the long-term average of 63% and the 4-quarter average of 68%. Regarding revenue, 57% of reporting SPX companies have reported above-consensus revenue, slightly below the long-term average of 60% but well above the 4-quarter average of 46%.
The expected -5.7% decline in Q1 earnings is not due solely to weakness in energy earnings but is instead spread broadly with 7 of the 10 sectors expected to see year-on-year declines in earnings growth. Energy earnings are expected to be terrible at -107%, but declines are also expected in materials (-12.7%), financials (-8.7%), utilities (-5.4%), technology (-4.9%), and consumer staples (-0.6%), according to Thomson Reuters I/B/E/S. The only sectors expected to show earnings growth are consumer discretionary (+21.6%), Telecom +7.7%), and health care (+6.9%).
Looking forward, the consensus is for a -3.0% y/y decline in Q2 earnings growth, which would be the fourth consecutive quarter of negative growth. Earnings are then expected to improve to +2.7% in Q3 and +9.6% in Q4.
