- Weekly global market focus
- Powell speaks twice this week
- US/Chinese tensions likely to remain high this week
- House approves $3 trillion stimulus bill but Senate Republicans aren’t yet willing to negotiate
- Q1 earnings season winds down
Weekly global market focus — The U.S. markets this week will focus on (1) the pandemic and economic statistics as states begin to reopen, (2) reaction to Fed Chair Powell’s comment on Sunday that a U.S. recovery could stretch until the end of 2021 and two appearances by Mr. Powell this week, (3) oil prices, which have recovered sharply in the past several weeks due to voluntary OPEC+ cuts and the quick production shutdowns by private companies of unprofitable wells, (4) US/Chinese tensions, (5) the Treasury’s sale of 20-year T-bonds and 10-year TIPS, and (6) the tail end of Q1 earnings season.
In Europe, the Brexit situation turned even more negative last week as the latest round of talks ended with pessimism on both sides ahead of the year-end deadline. In China, the focus will be on the annual parliamentary meeting that begins this week, during which the government is likely to try to keep the Chinese financial markets stable.
Powell speaks twice this week — Fed Chair Powell speaks twice this week where he may repeat some of his themes from last week. Mr. Powell on Tuesday will testify, along with Treasury Secretary Mnuchin, before the Senate Banking Committee to deliver a quarterly report on the CARES Act. Mr. Powell on Thursday will then deliver the opening remarks in a virtual “Fed Listens” event moderated by Fed Governor Brainard on how Covid-19 is affecting U.S. communities.
Mr. Powell in a webinar last week expressed pessimism about the economy and called for Congress to pass more stimulus for the economy, saying more stimulus would be “costly but worth it.” He also said that the Fed has no plans even to consider negative interest rates. The Fed isn’t convinced negative interest rates are an effective monetary stimulus tool and the Fed believes there are negative effects for bank profitability and individual savers. Left unsaid, the Fed is also likely afraid of sparking a run on the $5 trillion in U.S. money market funds if short-term rates were to turn decisively negative. Despite the Fed’s protestations, the federal futures contracts from mid-2021 through early-2022 closed last Friday at slightly negative levels of minus 1-3 bp.
The Fed this week will continue to taper its Treasury and MBS purchases, trimming its daily Treasury purchases to $6 billion from last week’s $7 billion and its daily MBS purchases to $4.5 billion from last week’s $5 billion. The Fed’s balance sheet, in the week ended last Wednesday, rose by +$213 billion from the previous week, soundly beat the increases of +$83 billion and +65 billion in the two previous weeks. The Fed last week finally got its corporate bond facility running and bought $305 million worth of bond ETFs just on the first day.
The Treasury this week will sell $20 billion in 20-year T-bonds, which could see an uncertain reception from investors since the Treasury hasn’t sold 20-year T-bonds since 1986. The Treasury will sell $12 billion of 10-year TIPS on Thursday.
US/Chinese tensions likely to remain high this week — US/Chinese tensions will remain high this week after the Trump administration last Friday blocked global chipmakers from supplying chips to Huawei Technologies, China’s telecom and networking giant. China’s state-run newspaper Global Times cited an unidentified source as saying that China will adopt countermeasures such as launching investigations and imposing restrictions on U.S. companies such as Apple, Cisco, and Qualcomm, according to Reuters.
The moves against Huawei followed Mr. Trump’s move last week to prevent the U.S. federal pension fund from moving $50 billion into tracking an MSCI emerging market index that includes Chinese stocks. Mr. Trump also mused about forcing Chinese companies that are not allowed by the Chinese government to provide auditing information to U.S. accounting authorities to delist from NYSE and Nasdaq
On the brighter side, Mr. Trump recently said he is not looking to renegotiate the phase-one trade deal. He also suggested that he does not plan to begin phase-two trade talks before the November presidential election.
House approves $3 trillion stimulus bill but Senate Republicans aren’t yet willing to negotiate — The House late last Friday approved a new $3 trillion stimulus bill, containing about $1 trillion in rescue funds for state and local governments, another round of stimulus checks to individuals, and the extension of unemployment insurance. However, Senate Majority Leader McConnell is in no hurry to consider new virus rescue legislation. If recent patterns persist, then House Democrats will start negotiating with Treasury Secretary Mnuchin to see what the White House is interested in pursuing. Once the White House weighs in, then Senate Republicans may be convinced to come on board with a new package. A new rescue bill is not expected until at least June.
Q1 earnings season winds down — Q1 earnings season is nearly over with 25 of the S&P 500 companies reporting this week, with a heavy concentration of retailers that have been hit hard by the pandemic. Notable reports this week include Walmart, Home Depot, and Nordstrom on Tuesday; Target, L Brands, and Expedia on Wednesday; Nvidia, Best Buy, TJX, and Ross Stores on Thursday; and Deere on Friday.
The consensus is for SPX Q1 earnings to fall by -12.1% y/y (-11.5% ex-energy), according to surveys by Refinitiv. Looking ahead, SPX earnings growth is expected to be even worse in Q2 at -41.9% y/y. Earnings growth is then expected to improve to -24.0% in Q3 and -12.5% in Q4. For calendar-year 2020, earnings are expected to fall sharply by -22.6%, but then recover by +30.2% in 2021.
There is an extremely wide variation of earnings results expected at the industry level. Industry earnings expectations are ranked as follows: Technology +6.9%, Health Care +6.9%, Consumer Staples +5.2%, Utilities +4.2%, Communications Services +1.9%, Materials -12.3%, Industrials -29.8%, Energy -30.5%, Financials -37.9%, and Consumer Discretionary -45.5%.
