- Weekly global market focus
- U.S. pandemic statistics have leveled off
- Markets hope for quicker action on pandemic rescue bill
- Q2 earnings season reaches peak with SPX earnings growth now expected at -40.3%
Weekly global market focus — The U.S. markets this week will focus on (1) whether the pandemic statistics in the U.S. start to ease, (2) whether Congress can avert the expiration of bonus unemployment benefits this Friday, (3) the Tue/Wed FOMC meeting, which is expected to produce an unchanged policy but where the Fed is expected to provide assurances that it will continue to do whatever it takes to produce a solid economic recovery, (4) Thursday’s Q2 GDP report, which is expected to show a record decline of -35.0% y/y annualized (-10.2% q/q), (5) the peak Q2 earnings week with 189 of the S&P 500 companies reporting, and (6) the Treasury’s sale of $165 billion of T-notes today and tomorrow.
In Europe, the focus will be on the Q2 GDP reports late in the week. Thursday’s Eurozone Q2 GDP is expected to plunge by -12% q/q (-40% q/q annualized), which would be even worse than the expected drop of -10.2% q/q (-35.0% q/q annualized) in U.S. Q3 GDP.
In Asia, the focus will mainly be on U.S./China tensions. China last Friday announced the closure of the U.S. consulate in Chengdu as retaliation for the U.S. closure earlier in the week of the Chinese consulate in Houston. The markets will be watching for any new U.S. measures against China this week regarding tech companies, Hong Kong, hacking, or the Covid pandemic.
U.S. pandemic statistics have leveled off — The U.S. pandemic statistics in the past several days have leveled off, raising hopes in the market that tighter rules in hard-hit states may be producing some results. The 5-day average of new U.S. Covid cases has remained just below 70,000 for the past week. Meanwhile, the situation remains grim in Brazil and India, where new cases continue to rise sharply.
Markets hope for quicker action on pandemic rescue bill — The S&P 500 index late last week sold off by nearly -2%, mainly because of last Thursday’s weak unemployment claims report (initial claims +109,000 to 1.416 million) and because of the delay by Republicans in producing their pandemic rescue plan.
Senate Majority Leader McConnell said last Thursday that he will roll out the Republican rescue bill today. The bill is expected to contain another round of direct payments to individuals, a second round of PPP payments to businesses, aid for schools, funding for expanded virus testing, and a number of other measures.
Republicans are proposing to replace the expiring $600 per week unemployment bonus with a new program that provides 70% of wage replacement, which the Washington Post says would amount to an average $200 bonus. However, it seems doubtful that swamped state unemployment offices have the capacity to quickly implement a complicated 70% wage replacement program. It also seems doubtful that Democrats would agree to a wage-replacement program with an average benefit of only $200 per week.
In any case, the Republican rescue plan is only necessary to begin negotiations with Democrats. However, the time for negotiations is extremely limited. The $600 per week unemployment bonus expires this Friday for up to 25 million people. If that bonus lapses, Bloomberg Economics estimates there would be a $65 billion loss of monthly income from the economy, which would erase a large part of the expected improvement in Q3 personal spending. The stock market will not be pleased with any drop in consumers’ disposable income that puts a new dent in GDP growth.
White House Chief of Staff Meadows and Senate Majority Leader McConnell both made comments over the weekend indicating that Republicans this week will push for a narrow bill that extends the expiring enhanced unemployment benefits and adds a few other measures they want such as business liability protection against Covid claims. Mr. McConnell said that Congress could pass a narrow unemployment benefits bill this week and then spend the following weeks negotiating a broader bill.
Democrats last week said they are not willing to approve the pandemic bill on a piece-meal basis. However, there might be the possibility of a short-term unemployment extension bill of perhaps 6-8 weeks that would allow Congress to deal with an overall bill in September after they return from their August recess, which is scheduled to begin next Friday.
Q2 earnings season reaches peak with SPX earnings growth now expected at -40.3% — This will be the peak week for Q2 earnings with results from 189 of the S&P 500 companies. Notable reports this week include Visa and Starbucks on Tuesday; Facebook, General Motors, and Paypal on Wednesday; Alphabet, Apple, Mastercard, UPS, and Ford on Thursday; and Caterpillar and Exxon on Friday.
The consensus is for a plunge of -40.3% y/y in S&P 500 Q2 earnings (according to Refinitiv) due to the widespread economic shutdowns seen across the United States and the world. Looking ahead, the consensus is for earnings to fall by -23.4% y/y in Q3 and -12.6% in Q4, then recovering sharply in early 2021. On a calendar year basis, the consensus is for SPX earnings to fall -22.3% in 2020 and then recover by +30.0% in 2021.
Earnings results in Q2 will be highly variable depending on how hard a particular sector was hit by the pandemic. The earnings consensus by sector, according to Refinitive, is as follows in ranked order: Energy -159.1%, Consumer Discretionary -114.1%, Industrials -89.0%, Financials -44.8%, Materials -36.7%, Communication Services -31.6%, Real Estate -15.1%, Consumer Staples -13.9%, Health Care -4.8%, Info Technology -4.4%, and Utilities -1.6%.
