Today’s Economic & #Commodity Perspectives #Futures

Weekly market focus — The U.S. markets this week will focus on (1) the continued tense North Korean situation, (2) a moderately-busy economic data schedule that is heavy on housing data, (3) appearances by three Fed officials, (4) the first heavy week of Q1 earnings reports, and (5) the Treasury’s sale of $16 billion of 5-year TIPS on Thursday.  The North Korean situation remains tense as the U.S. Vinson aircraft carrier battle group is due to arrive this week in the vicinity of the Korean peninsula.  Vice President Pence arrived in South Korea on Sunday to kick off a pre-planned 10-day trip to Asia.

Sunday night’s Chinese economic data was stronger than expected with Q1 GDP up +6.9% y/y (vs expectations of +6.8%), March retail sales up +10.0% ytd y/y (vs expectations of +9.6%), and Mar industrial production +6.8% ytd y/y (vs expectations of +6.3%).  The European markets are closed on Monday for the Easter Monday holiday.  The markets will be on edge ahead of this coming Sunday’s first round of the French presidential voting.  There is still an outside chance that far-right National Front Marine Le Pen could win the presidency in the second round vote on May 7, although her betting odds have faded to 28% versus the higher 53% odds for centrist Emmanuel Macron.

Friday’s weak U.S. retail sales report underlines soft Q1 GDP growth — Last Friday’s March retail sales report of -0.2% was in line with market expectations but the ex-autos report of unchanged was slightly weaker than market expectations of +0.1%.  The report closed out a weak quarter for consumer spending and caused the Atlanta Fed’s GDPNow to cut its Q1 GDP tracking forecast to +0.5% from +0.7%.  The Q1 GDPNow forecast looks somewhat better at +1.2% excluding its expected -0.7 point subtracting from inventories.

Meanwhile, Friday’s retail sales report caused the NY Fed’s Nowcast to cut its Q1 GDP forecast to +2.6% from +2.8% a week earlier.  The Nowcast forecast is stronger than the GDPNow because it incorporates sentiment data that has been more favorable than the hard data followed by GDPNow.  Notably, Nowcast on Friday cut its Q2 GDP forecast sharply by -0.5 point to +2.1% from the previous week’s +2.6%, suggesting that the Q1 weakness is not completely due to residual seasonal factors and may bleed over into Q2.

Fed rate-hike expectations drop sharply — Market expectations for Fed tightening dropped sharply last week by -6 bp for the end-2017, -14 bp for the end-2018, and -18 bp for the end-2019.  The market is now expecting only 1-1/2 rate hikes for the rest of this year and a little more than one rate hike in 2018.  That is far below the median Fed-dot forecast for two more rate hikes this year and three rates hikes per year in 2018 and 2019.  Reduced expectations for Fed rate hikes stem mainly from (1) the difficulty Republicans are having on their pro-growth agenda of tax reform and infrastructure spending, (2) the weak U.S. economic data seen in Q1, and (3) ideas the Fed will slow its rate-hike regime in order to make room for balance sheet reduction starting later this year.

10-year T-note yield drops to 5-month low — The 10-year T-note yield last week fell sharply by -14.5 bp to 2.237%, posting a new 5-month low on Thursday.  The 10-year T-note yield is now up by +41.1 bp from the pre-election level, which is only about one-half of the +81.3 bp post-election surge seen when the 10-year T-note yield posted a 2-1/2 year high of 2.639% on Dec 15.  T-note yields fell sharply last week due to (1) reduced expectations for Fed tightening, (2) the soft U.S. economic data, (3) reduced expectations for the Republican agenda, (4) the fall in 10-year breakeven inflation expectations last Thursday to a 4-month intraday low of 1.89%, (5) President Trump’s endorsement of Fed Chair Yellen last week when he said he might reappoint her to another Fed Chair term, and (6) President Trump’s decision not to name China as a currency manipulator, which reduced fears by some that China might retaliate by selling Treasury securities.

 

 

S&P 500 escapes the week with only a modest loss but confidence is waning — The S&P 500 index managed to escape last week with only a modest weekly loss of -0.68%.  However, stock market confidence is ebbing as the Republican agenda stalls and as geopolitical uncertainties increase with the North Korea situation and the first round of the French presidential election this coming Sunday.  However, there are still significant supportive factors for stocks that include last week’s sharp drop in U.S. interest rates and the beginning of what is expected to be a strong Q1 earnings season.  The VIX index last Thursday closed at 15.96%, the highest level in 5 months, as concern grew that a larger downside correction may be in store while the markets wait for more clarity on tax reform, the U.S. economic data, and geopolitical factors.

U.S. Q1 earnings season heats up — This will be the first big week for Q1 earnings with 59 of the S&P 500 companies scheduled to report.  Notable reports include Goldman Sachs and Bank of America on Tuesday; Morgan Stanley, BlackRock, AMEX, and Abbott Labs on Wednesday; Citigroup, Visa, and Verizon on Thursday; and GE and Honeywell on Friday.  

The market consensus for SPX Q1 earnings growth is +10.4% and +6.5% ex-energy, according to surveys by Thomson I/B/E/.  Energy earnings are expected to see strong year-on-year growth figures in Q1 due to the depressed year-earlier level.  Of the 29 SPX companies that have reported so far, 75.9% reported above-consensus earnings, better than the long-run average of 64% and the 4-quarter average of 71%, according to Thomson.  

Looking ahead, the consensus is for continued strong earnings growth this year with SPX earnings growth of +10.0% in Q2, +9.4% in Q3, and +13.3% in Q4.  On a calendar year basis, the consensus is for SPX earnings growth to be strong at +10.9% in 2017 and +12.1% in 2018.