- Weekly global market focus
- Fed dials back Treasury purchases for this week but balance sheet soars
- Markets hope for expanded PPP program early this week
- Q1 earnings season heats up
- Oil prices remain on the defensive
Weekly global market focus — The markets this week will focus on (1) the pandemic statistics and forecasts for when the U.S. and Europe will be able to restart their economies, (2) U.S. Congressional negotiations on expanding the size of the now-closed PPP program (3) Thursday’s European April PMI reports, (4) Thursday’s U.S. unemployment claims report, (5) various U.S. and European confidence indexes to be released during the week including Friday’s final-April U.S. consumer sentiment index, and (6) whether oil prices can stabilize and halt some of the bleeding for U.S. oil industry stocks and bonds.
Fed dials back Treasury purchases for this week but balance sheet soars — The Fed last Friday announced that it will cut its daily Treasury security purchases to $15 billion per day starting today from last week’s level of $30 billion. The Fed is trimming its Treasury purchases as the systemic risks ease for the financial system.
The Fed last Friday, in a report delayed from Thursday, said that its balance sheet in the week ended last Wednesday rose by $285 billion to a new record high of $6.37 trillion, which is equivalent to 29% of U.S. GDP. The Fed’s balance sheet during the pandemic has soared by $2.2 trillion (+53%) from late February, far exceeding the QE3 size of $1.7 trillion that took two years to complete in 2012-14.
Fed officials this week are in their usual quiet period ahead of the FOMC meeting next Tue/Wed (April 28-29). The FOMC at that meeting could make some minor adjustments to its various lending programs and could more closely define its QE program. Most Fed officials last week were pessimistic about the chances for a quick economic recovery and continued to stress that the Fed will essentially do whatever it takes to prevent a systemic financial-system meltdown and to get the economy back on track.
Markets hope for expanded PPP program early this week — The political pressure is high for a deal to boost the size of the $350 billion Paycheck Protection Program (PPP), which ran out of money last Thursday. There was some positive movement over the weekend when President Trump and House Minority Leader McCarthy said they would favor adding hospital relief to the PPP hike. Democrats also want to get rescue funds for state and local governments, but that appears to be a sticking point for some Republicans. That means that state/local government support may be left to the next rescue package when Congress returns to Washington.
A deal on a PPP hike seems likely for early this week. A PPP deal would be a supportive factor for the stock market, which is in favor of any programs that support employment and reduce the economic devastation caused by the pandemic. If Congressional leaders cannot get unanimous consent from their members, then Congressional members will have to be called back to Washington from their recess for a floor vote. The Senate has a pro-forma session scheduled for today, which would provide an opportunity for the Senate to act on any last-minute PPP deal.
Q1 earnings season heats up — The stock market remains very nervous about Q1 earnings season because of the potential for some highly negative surprises given the partial shutdown of the U.S. economy and the fact that many companies have stopped giving earnings guidance.
This will be the first big week for Q1 earnings, with 47 of the S&P 500 companies scheduled to report. Notable reports include Halliburton and IBM on Monday; Netflix, Coca-Cola, and HCA Healthcare on Tuesday; Paypal, Discover Financial Services, and AT&T on Wednesday; Capital One, Intel, Pultegroup, and Southwest Airlines on Thursday; and American Airlines, American Express, and Verizon on Friday.
The consensus is for Q1 earnings for the S&P 500 companies to fall by -13.0% y/y (-11.4% ex-energy), according to analyst surveys by Refinitiv. The consensus of -13.0% masks the fact that some industries are expected to do much worse than others. Industry earnings expectations are ranked as follows: Communications Services +5.8%, Health Care +2.6%, Utilities +1.8%, Consumer Staples +1.8%, Technology +1.1%, Materials -16.0%, Financials -32.2%, Consumer Discretionary -33.3%, Industrials -33.4%, and Energy -56.6%.
Looking ahead, SPX earnings growth is expected to be even worse in Q2 at -27.3%. Earnings growth is then expected to improve to -14.1% in Q3 and -5.9% in Q4. For calendar-year 2020, earnings are expected to fall by -14.3%, but are then expected to recover by +23.4% in 2021.
Oil prices remain on the defensive — Front-month May WTI crude oil futures prices last Friday took the brunt of the punishment in the crude oil market, plunging to a new 18-year low on the nearest-futures chart and closing the day sharply lower by -$1.60 (-8.05%) at $18.27 per barrel. The May futures contract expires tomorrow (Tue), which means the June contract will then become the new front-month contract. The June WTI contract is in much better shape and is trading $6.76 higher than the May contract. The June contract last Friday fell to only a 2-week low and closed the day down -1.96% at $25.03.
The crude oil market was unimpressed with the April 12 OPEC+ agreement to cut production by 9.7 million bpd since it was only a fraction of the 25-35 million bpd plunge in oil demand caused by the pandemic. Also, there are doubts about whether OPEC+ members will live up to their production-cut promises. Saudi Arabia and Russia last Friday tried to give the market a boost by issuing a joint statement saying that they are willing to make further joint cuts with other OPEC+ members if deemed necessary.