- Weekly global market focus
- Powell on Wednesday may comment on negative interest rates and QE
- US/China trade tensions continue as President Trump says he is “having a very hard time with China”
- Q1 earnings season winds down
Weekly global market focus — The U.S. markets this week will focus on (1) the pandemic statistics as states begin to reopen, (2) any new comments by President Trump on the US/Chinese trade deal, (3) the market’s reception for the Treasury’s record $96 billion refunding operation to be held today through Wednesday, (4) the tail end of Q1 earnings season, and (5) a heavy slate of U.S. economic reports capped by Friday’s April retail sales report (expected -11.7% m/m).
The European markets will focus on the fallout from the German Constitutional Court’s ruling last week that parts of the ECB’s QE program may be unconstitutional, with the ECB ignoring the ruling and with the EU threatening to sue Germany for trying to usurp EU legal rulings. EU/UK Brexit trade talks will continue this week amidst EU charges that the UK is stalling and is not serious about reaching a comprehensive trade deal. In Asia, the markets are looking for some improvement in China’s April retail sales and industrial production reports on Thursday night (ET).
Powell on Wednesday may comment on negative interest rates and QE — Fed Chair Powell on Wednesday will give a speech on the economy in a webinar hosted by the Peterson Institute for International Economics. The markets are waiting to hear whether Mr. Powell continues to downplay the chances for the Fed to adopt negative interest rates since Fed officials generally believe that negative interest rates have not worked well in Europe and Japan. The federal funds futures curve last week for the first time turned slightly negative for some of the 2021 futures contracts.
The markets are also waiting to hear whether Mr. Powell offers any hints about the future of the Fed’s QE program, which restarted in March on an unlimited basis. The Fed last Friday said that it will trim its daily purchases of Treasury securities this week to $7 billion from last week’s $8 billion and the peak of $75 billion seen in the second half of March. The Fed said it will cut its daily purchases of MBS securities to $5 billion this week from last week’s $6 billion.
The Fed’s continued the tapering of its daily Treasury and MBS purchases is a favorable sign since it indicates that the Fed believes it is getting ahead of the systemic risks in the financial system. The Fed reported last Thursday that its balance sheet in the week ended May 6 rose by only $65 billion, the smallest weekly increase since the pandemic crisis began. The Fed’s balance sheet has now risen by a total of $2.5 trillion (+62%) since the end of February to a new record high of $6.72 trillion, which is equivalent to 31% of U.S. GDP (up from 19% before the pandemic).
US/China trade tensions continue as President Trump says he is “having a very hard time with China” — The U.S. stock market rose last Friday on news of a positive telephone conference call among Chinese Vice Premier Liu, USTR Lighthizer, and Treasury Secretary Mnuchin. Both sides put a positive spin on that call with the USTR saying, “Both sides agreed that good progress is being made on creating the governmental infrastructures necessary to make the agreement a success.”
Neither side commented directly on the fact that Chinese purchases of U.S. goods under the phase-one trade deal have fallen far short of the levels necessary for China to meet its promise to buy $200 billion of extra U.S. goods in 2020-21 over a 2017 baseline, with $67 billion of those purchases in 2020. However, the USTR statement suggested that China is still promising to meet those purchase targets when it said, “In spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner.”
President Trump didn’t seem to be buying the positive spin from his advisors, who are undoubtedly trying to avoid new turmoil in the stock market from revived US/Chinese trade tensions. Mr. Trump on Friday said in an interview that, “Look, I’m having a very hard time with China…. And so I’m very torn, I have not decided yet, if you want to know the truth.”
Mr. Trump also said last week that he would be able to report in the next week or two how the US/China trade deal is progressing. That suggests that Mr. Trump this week or next week will have more comments about the trade deal. China is clearly behind on its promises to purchase U.S. goods. The question is whether Mr. Trump will let that slide for the time being, or whether he will start threatening to terminate the trade agreement and slap new tariffs on China. There is also the question about whether phase-two trade talks will begin before the November election.
Q1 earnings season winds down — Q1 earnings season is winding down with only 20 of the S&P 500 companies reporting this week. Of the S&P 500 companies, 430 companies have now reported.
The consensus is for SPX Q1 earnings to fall by -12.0% y/y (-11.3% ex-energy), according to Refinitiv. Looking ahead, SPX earnings growth is expected to be even worse in Q2 at -40.8% y/y. Earnings growth is then expected to improve to -23.2% in Q3 and -11.8% in Q4. For calendar-year 2020, earnings are expected to fall sharply by -21.9%, but then recover by +29.6% in 2021.
There is an extremely wide variation of earnings results expected at the industry level. Industry earnings expectations are ranked as follows: Technology +7.0%, Health Care +6.4%, Consumer Staples +5.5%, Utilities +4.6%, Communications Services +2.2%, Materials -12.1%, Industrials -29.9%, Energy -30.5%, Financials -38.1%, and Consumer Discretionary -43.5%.
