- Weekly global market focusÂ
- Minor tweaks expected at FOMC meeting
- Italy’s escape from S&P downgrade should help calm peripheral bond markets
- Q1 earnings season hits peak week
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) the Tue/Wed FOMC meeting, which is expected to produce minor tweaks and where the markets will be listening to Fed Chair Powell’s press conference to see if he thinks the Fed has done enough to get ahead of the economic damage and financial system threats from the pandemic, (3) the peak week for Q1 earnings, (4) the Treasury’s sale of $142 billion of T-notes on Mon/Tue, and (5) a busy U.S. economic calendar headlined by Wednesday’s Q1 GDP report (expected -3.9% q/q annualized) and Friday’s April ISM manufacturing index (expected -13.0 to 36.1).
In Europe, the focus will be on Thursday’s ECB meeting, where the ECB may expand its pandemic QE program by 250-500 billion euros from its current size of 750 billion euros. The markets will also be watching for any progress among EU officials on a big stimulus package after last Thursday’s inconclusive EU summit.
In Asia, the focus will be on the Mon/Tue BOJ meeting where the central bank may expand its QE program to address the pandemic. China’s April national PMI reports on Wednesday are expected to lose a little ground but generally show optimism (mfg PMI expected -1.0 to 51.0 after Mar’s +16.3 point jump to 52.0, and non-mfg PMI expected -1.8 to 50.5 after March’s +22.7 point recovery to 52.3).
Minor tweaks expected at FOMC meeting — The Fed last Friday announced that it will cut its Treasury purchases this week to $10 billion per day from last week’s level of $15 billion. The Fed’s daily purchases reached a peak of $75 billion per day in the second half of March but the Fed has since been tapering its purchases as the markets calm down.
The Fed’s balance sheet in the week ended last Wednesday rose by another $205 billion, which was the smallest weekly increase since mid-March as the Fed scales back its securities purchases. However, the Fed’s balance sheet reached a new record high of $6.37 trillion, which is equivalent to 30% of U.S. GDP. The Fed’s balance sheet has so far soared by $2.4 trillion (+58%) from late-February, far exceeding the QE3 size of $1.7 trillion that took two years to complete in 2012-14.
The FOMC at its meeting on Tuesday and Wednesday is not expected to announce any big changes. The Fed might raise its IOER rate from the current level of 0.10% because the funds rate traded as low as 0.04% last week, well below the 0.125% mid-point of the funds rate target range of 0.00%/0.25%. Any increase in the IOER rate would simply be a technical move, with no implication for the Fed’s policy direction. The Fed this week might also make some adjustments to its various lending programs. The Fed could also announce some parameters for its QE program, which currently has no stated limit or target.
Italy’s escape from S&P downgrade should help calm peripheral bond markets — The Italian bond yield premium today could ease somewhat because S&P Global after last Friday’s close left intact Italy’s bond rating of BBB, which was better than fears of a 1-step downgrade. Italy’s BBB debt rating is currently only two steps above junk. S&P Global, however, left intact its negative outlook on Italy’s debt rating, meaning that Italy remains in danger of a downgrade in coming months.
The ECB last week tried to head off worries about a wave of coming downgrades by saying that it will accept junk-rated debt as collateral in bank money market operations, grandfathering in pre-pandemic debt ratings until Sep 2021.
Italy’s 10-year bond yield spread over bunds last Friday fell to a 1-week low of 231 bp, where it remained elevated from pre-pandemic levels near 135 bp, but still well below the mid-March 11-month peak of 279 bp.
Q1 earnings season hits peak week — The stock market remains very nervous about Q1 earnings season because of the potential for some highly negative surprises due to the partial shutdown of the U.S. economy and the fact that many companies have stopped giving earnings guidance.
This will be the biggest week for Q1 earnings reports with 169 of the S&P 500 (SPX) companies reporting. The number of weekly Q1 earnings reports will edge lower to 151 next week before dropping off sharply to 13 in the week of May 11-15. Notable reports this week include Alphabet, Starbucks, UPS, Caterpillar, and Ford on Tuesday; Facebook, Microsoft, Mastercard, and Boeing on Wednesday; Apple, Amazon.com, Visa, American Airlines, and McDonalds on Thursday; and Exxon and Honeywell on Friday.
Earnings expectations fell in the past week due to poor economic news and negative earnings results. The consensus is for SPX Q1 earnings to fall by -14.8% y/y (-12.9% ex-energy), according to analyst surveys by Refinitiv. Looking ahead, SPX earnings growth is expected to be even worse in Q2 at -33.3%. Earnings growth is then expected to improve to -18.1% in Q3 and -8.8% in Q4. For calendar-year 2020, earnings are expected to fall sharply by -17.9%, but then recover by +26.2% in 2021.
The Q1 earnings consensus of -14.8% masks the fact that some industries are expected to do much worse than others. Industry earnings expectations are ranked as follows: Communications Services +5.1%, Consumer Staples +4.0%, Health Care +2.7%, Technology +2.4%, Utilities +1.3%, Materials -16.2%, Industrials -33.6%, Financials -37.6%, Consumer Discretionary -41.5%, and Energy -68.0%.
