- Weekly global market focus
- Trade and impeachment will top this week’s news
- U.S. Q4 earnings season begins with low expectations
Weekly global market focus — The U.S. markets this week will focus on (1) the unveiling and signing of the US/China phase-one trade agreement on Wednesday and any developments regarding phase-two trade talks, (2) Washington events as President Trump’s impeachment trial in the Senate could begin by late this week or early next week, (3) any new US/Iran military tensions, (4) US/EU trade tensions as the EU’s new trade chief Phil Hogan visits Washington this week for talks with USTR Lighthizer, and (5) the beginning of Q4 earnings season with reports from 19 of the S&P 500 companies including the major Wall Street banks.
This is a busy week on the U.S. economic calendar. Key reports include (1) Tuesday’s Dec CPI (expected +2.4% y/y vs Nov’s +2.1%; core expected unchanged at +2.3% y/y), (2) Thursday’s Dec retail sales report (expected +0.3% and +0.5% ex-autos after Nov’s +0.2% and +0.1% ex-autos), and (3) Friday’s Dec manufacturing production report (expected +0.1% after Nov’s +1.1%).
In Europe, the markets will closely watch the US/EU trade talks this week for any sign of progress that would avert President Trump’s lingering threat to slap tariffs on European autos. Mr. Hogan will be in Washington on Tuesday through Thursday.
Also, talks between Treasury Secretary Mnuchin and French Finance Minister Le Maire will continue this week on France’s digital tax. The Mnuchin/Le Maire talks are coming down to the wire as they try to avert the U.S. tariffs that were announced on $2.4 billion of French products as retaliation for the French 3% sales tax on digital products.
The European markets will also closely watch Brexit developments. The next step on Brexit is for the House of Lords to approve Prime Minister Johnson’s Brexit withdrawal agreement, which is expected to be forthcoming. The markets believe that there is nearly a 100% chance that PM Johnson will be able to push his Brexit agreement through the Parliament by the upcoming Jan 31 Brexit deadline.
In Asia, the markets will focus on the signing of the US/Chinese trade deal and several key Chinese economic reports. The consensus is for Thursday night’s Chinese Q4 GDP report to be unchanged from Q3’s +6.0%, leaving Chinese GDP growth at a 29-year low. Chinese GDP growth in Q4 may have stabilized as the U.S. and China in Q4 headed towards the December trade deal announcement and as business confidence stabilized.
Also on Thursday night, China’s Dec industrial production report is expected to ease to +5.9% y/y from Nov’s +6.2% and the Nov retail sales report is expected to ease to +7.9% y/y from Nov’s +8.0%. Tonight’s Chinese Dec trade report is expected to show that Dec exports improved to +2.4% y/y from Nov’s +1.3% and that Dec imports improved to +9.6% y/y from Nov’s +0.3%.
Trade and impeachment will top this week’s news — Top Chinese officials will travel to Washington this week to sign the US/China phase-one trade deal on Wednesday. The markets have yet to see the full text of the 86-page agreement and it remains to be seen whether China made realistic and enforceable commitments to buy U.S. goods. If China doesn’t live up to what President Trump believes China agreed to, then there is the possibility that Mr. Trump could reimpose tariffs later this year.
Also, the markets this week will be on guard for any comments from President Trump on his approach to phase-two trade talks and whether he issues any new threats of tariffs or penalties to raised his bargaining pressure. Last week he said that phase-two talks will begin immediately but that an agreement might have to wait until after the election. That sparked market hopes that Mr. Trump will take a more relaxed approach to phase-two talks and may not raise the pressure on China in an attempt to force a phase-two trade deal before November’s election.
In Washington, the House this week is expected to approve a resolution that officially transmits the articles of impeachment to the Senate and names the House managers that will prosecute the case. The Senate will then be free to begin the Senate trial, possibly by late this week or certainly by next week.
The impeachment trial will dominate the Senate’s attention over the next several weeks. The USMCA will be on the back burner although at least two Senate committees are expected to approve the USMCA later this week, bringing the bill a step closer to a full Senate vote. The markets will be pleased when the Senate approves the USMCA since that could release a burst of new business investment once the new rules for North American trade have been finalized.
U.S. Q4 earnings season begins with low expectations — The drought in earnings growth is expected to continue in Q4 with SPX earnings growth of -0.6% (+1.9% ex-energy). 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. The consensus is for 2019 calendar-year earnings growth of +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 that early estimate is likely be overly optimistic.
There are 19 of the S&P 500 companies that report earnings this week. Notable reports include Citigroup and JPMorgan on Tuesday; Goldman Sachs, Bank of America and Blackrock on Wednesday; Morgan Stanley on Thursday; and State Street on Friday.
