Today’s Economic & #Commodity Perspectives #Futures

Euro surges after Macron cruises into the final voting round — EUR/USD surged by about 1.2% on Sunday evening after centrist Emmanuel Macron not only got into the May 7 second round of voting but also beat National Front leader Marine Le Pen by a margin of about 2 points.  The fact that the election outcome matched the pre-election polls fairly well also gave the market more confidence about relying on new polls for the May 7 Macron-Le Pen match-up.  A snap poll taken by Ipsos after Sunday’s election gave Macron a margin of 62%-38% over Le Pen, which is fairly close to poll indications seen in recent weeks.  Safe-haven assets took a hit on Sunday with the yen down -0.9% and gold down -0.8%.  June S&P 500 E-mini futures on Sunday evening were up +0.8%.  The coast is not completely clear for the markets ahead of the final round of the French presidential election on May 7, but Sunday’s outcome was a big step in that direction.

U.S. weekly focus — The markets face a very busy week with (1) a crammed Washington agenda topped off by a possible U.S. government shut-down on Friday night, (2) a slew of U.S. economic reports headlined by Friday’s Q1 GDP report (expected +1.1%), (3) the peak Q1 earnings week with 194 of the S&P 500 companies due to report, and (4) the Treasury’s sale of $103 billion of T-notes.  There are also geopolitical concerns that North Korea might conduct a nuclear test or more missile tests to coincide with Tuesday’s anniversary of the North Korean army.  The ECB and BOJ at their respective meetings this week are expected to leave policy unchanged.

Washington focus includes Trump tax plan and possible U.S. government shut-down — President Trump last Friday said that his administration would be making a “big announcement” on a “massive” tax cut plan on “Wednesday or shortly thereafter.”  OMB Director Mulvaney expanded on that statement on Sunday by saying, “I think what you are going to see Wednesday is some specific governing principles, some guidance.  Also some indication of what the rates are going to be.”  He said the administration has not yet decided whether the plan will be revenue-neutral.  He said it was “probably fair” to assume that the full plan with legislative language will not be available until June.

Meanwhile, the continuing resolution (CR) expires on Friday and the U.S. government will go into a partial shutdown at midnight on Friday if Congress does not approve new spending authority.  There is talk that Congress this week may need to approve at least a 1-week stop-gap CR to give them more time to work on the spending bill.  There are a number of hang-ups that could cause a U.S. government shutdown but the main one is President Trump’s demand that this week’s spending bill include some funding for his border wall.  Mr. Trump last week said he might not make cost-sharing reduction payments to insurance companies that support Obamacare unless he gets the border wall money.

The odds for at least a short government shutdown could be as high as 50-50 depending on how serious President Trump is on his demands.  However, the markets have so far not shown much concern since any shutdown is likely to be short and of minor macroeconomic significance.  The bigger battles will come later this year with the fiscal 2018 budget that must be passed by Sep 30 and a debt ceiling hike that must be passed by Oct-Nov.  House Republicans this week will also wrestle with the Obamacare repeal-and-replace issue after conservative and moderate House Republicans last week said they made some progress on a compromise.

10-year T-note yield recovers modestly from 5-month low — The 10-year T-note yield last Tuesday posted a 5-month low but then rebounded mildly higher to close the week +1.1 bp at 2.248%.  The 10-year T-note yield posted last Tuesday’s 5-month low on (1) safe-haven demand ahead of the French election, (2) weak Q1 U.S. economic data, and (3) reduced expectations for Fed rate hikes and reduced inflation expectations due to the slow-moving Republican agenda.  However, the 10-year yield recovered modestly as the week progressed as Republicans kept pushing for a health care compromise and as President Trump said a tax cut plan would be announced this week.  In addition, Fed Vice Chair Stanley Fischer last Friday said that weak Q1 GDP growth will likely be temporary and that interest rate hikes should be able to proceed as planned.

U.S. stocks consolidate ahead of French election — The S&P 500 index last week drifted higher but remained in the lower half of the March-April consolidation range.  The stock market remains concerned about (1) high valuations, (2) the weak U.S. Q1 economic data, (3) the slow-moving Republican tax cut agenda, and (4) North Korea.  U.S. stocks last week were also dampened by concern ahead of Sunday’s French presidential election.  However, there are still significant supportive factors for stocks that include the sharp month-long drop in U.S. interest rates and expectations for strong earnings growth in Q1 and indeed for the full 2017 calendar year.

U.S. Q1 earnings season reaches peak week — This is the peak week for Q1 earnings with 194 of the S&P 500 companies scheduled to report.  The market consensus for SPX Q1 earnings growth is +11.2% and +7.5% ex-energy, according to surveys by Thomson I/B/E/S.    Energy earnings are expected to see strong year-on-year growth figures in Q1 due to the depressed year-earlier level.  Of the 95 SPX companies that have reported so far, 75.8% 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 +9.7% in Q2, +9.3% in Q3, and +13.6% in Q4.