- Weekly global market focus
- Pandemic has yet to show a sustained improvement in the U.S.
- Treasury again cuts Treasury and MBS security purchases
- March U.S. factory orders expected to plunge
- Q1 earnings season remains in high gearÂ
Weekly global market focus — The U.S. markets this week will focus on (1) the course of the pandemic as the markets wait to see if there is a renewed wave of infections as U.S. states begin to reopen on a limited basis, (2) the extent of the U.S. labor market debacle as Friday’s payroll report is expected to show a -21.3 million job decline and as the unemployment rate is expected to surge to a post-war record of 16%, (3) the last big Q1 earnings week with 156 of the S&P 500 companies reporting, (4) Fedspeak with seven speaking engagements this week by various Fed officials, and (5) oil prices and oil stocks after June WTI oil prices last week rebounded upward to $19.78 per barrel from the contract low of $6.50 on April 21 as voluntary and forced production cuts take effect.
In Europe, the Bank of England at its meeting on Thursday is expected to leave its interest rate target unchanged, but the BOE might increase the size of its QE program.
In Asia, the Chinese markets are closed today. The Japanese markets are closed today through Wednesday for the Golden Week holidays.
Pandemic has yet to show a sustained improvement in the U.S. — The markets will carefully watch the pandemic statistics in states that started reopening last Friday (May 1) as test cases for whether other states will be able to reopen soon. If the infection rates remain low in states that are reopening, then the coast might be clear for other harder-hit and more cautious states to reopen. On the other hand, if infection rates start rising sharply in states that are reopening, then those states might have to close back down and other states might have to delay their reopenings.
States that have already started to reopen include Georgia, South Carolina, Texas, Oklahoma, and Alabama. In Texas, for example, malls, dine-in restaurants, gyms, and movie theatres were allowed last Friday to reopen with restrictions.
The pandemic outlook for the U.S. continues to look grim. According to official counts, the U.S. has seen the worst outbreak of Covid-19 by far compared with any other country in the world. The U.S. has had 1.13 million cases, or one-third, of the world’s 3.42 million confirmed cases, according to Johns Hopkins. The U.S. had a one-day count of 1,947 deaths attributed to Covid-19 last Friday, well ahead of the UK with 741 deaths and 406 in Brazil. The only good news is that the number of new Covid-19 cases in the U.S. has been moving largely sideways around 30,000 cases per day in the past several weeks, meaning the outbreak isn’t getting worse. However, the sideways movement in new Covid-19 cases occurred with much of the country in lockdown, which raises concern about whether infection rates can fall on a sustained basis once states start to reopen.
Fed again cuts Treasury and MBS security purchases — The Fed last Friday announced that it would trim its daily Treasury purchases this week to $8 billion from last week’s $10 billion. The Fed’s daily Treasury purchases reached a high of $75 billion in the second half of March but the Fed has since been tapering its purchases each week. The Fed also announced last Friday that it would taper its daily purchases of mortgage-backed securities to $6 billion from last week’s $8 billion.
The decline in the Fed’s purchases of Treasury and MBS securities is a bearish factor for the Treasury and MBS markets, but is bullish for the stock market since it means that the Fed believes it has the systemic risks in the financial system under control. In fact, the Fed’s balance sheet in the week ended last Wednesday rose by only +$83 billion, which is substantially less than the weekly rises of $200-500 billion seen in the previous six weeks. Still, the Fed’s balance sheet last week rose to a new record high of $6.7 trillion and has now risen by a total of +$2.5 trillion (60%) in just the last nine weeks (i.e., since the end of February).
March U.S. factory orders expected to plunge — Today’s March U.S. factory orders report is expected to plunge by -9.4% m/m following Feb’s report of unchanged. Factory orders are likely to see an even bigger drop in April when much of the U.S. economy was in a lockdown. Last Friday’s U.S. April ISM manufacturing index fell -7.6 to an 11-year low of 41.5, but would have been in much worse shape if it weren’t for artificial support from a delay in supplier deliveries (which was due to the pandemic rather than the usual reason of high demand). The April ISM production sub-index, by contrast, plunged to a record low of 27.5, illustrating the dismal state of the U.S. manufacturing sector.
Q1 earnings season remains in high gear — This will be the second biggest week for Q1 earnings season with 156 of the S&P 500 companies scheduled to report. Notable reports this week include Disney and Marathon Oil on Tuesday; GM, Paypal and T-Mobile on Wednesday; and HP and Hilton on Thursday.
The consensus is for SPX Q1 earnings to fall by -12.7% y/y (-11.9% ex-energy), according to Refinitiv, which is a bit better than last week’s expectations of -14.8. Looking ahead, SPX earnings growth is expected to be even worse in Q2 at -37.8%. Earnings growth is then expected to improve to -21.0% in Q3 and -10.4% in Q4. For calendar-year 2020, earnings are expected to fall sharply by -20.2%, but then recover by +28.2% in 2021.
The Q1 SPX earnings consensus of -12.7% masks the fact that there is a wide variation expected for industry results. Industry earnings expectations are ranked as follows: Technology +6.3%, Consumer Staples +6.2%, Health Care +5.9%, Communications Services +2.5%, Utilities +1.5%, Materials -14.5%, Industrials -32.6%, Energy -34.5%, Financials -37.1%, and Consumer Discretionary -47.6%.
