- Weekly global market focus
- Market focus remains on Fed and inflation
- Republicans will offer an infrastructure proposal this week but the odds for a deal are slim
- Q1 earnings season winds down
Weekly global market focus — The U.S. markets this week will focus on (1) the continued assessment of the inflation situation and whether the Fed will need to tighten monetary policy sooner than expected, (2) Fedspeak and Wednesday’s April 27-28 FOMC meeting minutes, and whether the Fed continues to foster its theme that the current inflation surge is transitory, (3) the pandemic statistics, (4) any progress this week on President Biden’s $4 trillion jobs and family plan, (5) oil prices as the U.S. and Iran continue to discuss the possibility of resuming the nuclear deal, with reduced sanctions on Iran, (6) the Treasury’s sale of 20-year T-bonds on Wednesday and 10-year TIPS on Thursday, and (7) the tail end of Q1 earnings season with reports this week from 19 of the S&P 500 companies.
In Europe, the focus remains on pandemic progress and when the European economies can more fully reopen. Friday’s May Markit Eurozone manufacturing PMI is expected to fall by -0.4 points to 62.5, adding to April’s -0.4 point decline.
Japan’s Q1 GDP report on Monday night is expected to show a decline of -4.5% (q/q annualized), losing some ground after the +11.7% surge seen in Q4.
Market focus remains on Fed and inflation — The U.S. stock market late last week staged a recovery rally after the sharp sell-off seen last Tuesday and Wednesday. The S&P 500 index last Wednesday fell sharply to a 5-week low on inflation and Fed concerns, but then recovered on Thursday (+1.22%) and Friday (+1.49%), finally closing the week just moderately lower by -1.39%. The S&P 500 index would need to climb by only +1.5% to match the record high posted on March 7.
The Nasdaq 100 index last Wednesday fell to a 1-1/2 week low where it corrected lower by a total of -7.9% from the late-April record high. The Nasdaq 100 index recovered on Thursday (+0.82%) and Friday (+2.17%), but would still need to rally by another +5.1% to match the late-April record high.
Stocks staged a recovery late last week after comments suggested the Fed is sticking to its theme that the current inflation surge will be transitory. Fed Governor Waller on Thursday said that he sees the current strength in the inflation statistics as “temporary.” He also said, “We will not overreact to temporary overshoots of inflation.” Cleveland Fed President Mester on Friday added, “this is not the time to be adjusting anything on monetary policy. It is a time for watchful waiting, seeing how the recovery evolves.” On the hawkish side, however, Dallas Fed President Kaplan said last Friday that he is worried about excess imbalances, especially the housing market, and the Fed should discuss tapering its QE program “sooner rather than later.”
The markets were surprised last Wednesday by the much stronger than expected CPI report of +0.8% m/m headline and +0.9% m/m core. On a 3-month annualized basis, the headline CPI soared by +7.2% and the core CPI was up by +5.6%. However, there was some favorable inflation news late last week as the 10-year breakeven inflation expectations rate eased to closed the week at 2.54%, which was 5 bp below last Wednesday’s 8-year high of 2.59%.
Republicans will offer an infrastructure proposal this week but the odds for a deal are slim — A group of Republicans led by Senator Shelley Moore Capito (R-WV) met with President Biden last Thursday and said they would present a more detailed infrastructure proposal this week. Their last infrastructure offer totaled $568 billion, which is far below Mr. Biden’s proposal of $2.25 trillion. Republicans have some prohibitive red lines, including a limit to traditional infrastructure and no reversal of the Republicans’ 2017 tax cuts.
There is clearly some political performance art in progress since the odds of a Democratic-Republican deal on infrastructure are virtually nil. However, Mr. Biden made campaign promises to work in a bipartisan manner, and he also needs to convince Democratic moderates such as Democratic Senator Manchin that he is making a serious attempt to compromise with Republicans.
In the end, however, the more likely outcome is that House Democrats will proceed with their own plan based on Mr. Biden’s proposal. House Speaker Pelosi has said she would like to have a House infrastructure bill finalized by July 4th and send it to the Senate for its passage before its August recess. However, that timing is very uncertain since Democrats have not even decided yet whether they will split up Mr. Biden’s $4 trillion job and family plan or just end up passing it as one massive bill.
Q1 earnings season winds down — Q1 earnings season is winding down, with only 19 of the S&P companies reporting this week. Notable reports include Walmart and Home Depot on Tuesday; Target, TJX, and Cisco Systems on Wednesday; Ross Stores and Applied Materials on Thursday; and Deere on Friday.
The consensus is for S&P 500 earnings in Q1 to show a very strong gain of +50.6% y/y, according to Refinitiv. Q1 earnings have been much stronger than expected. The current Q1 earnings estimate of +50.6% is far better than expectations of +24.2% that were seen as recently as April 1. Also, of the 457 reporting SPX companies, 87.1% have beaten the consensus, which is much better than the long-term average of 65.3% and the 4-quarter average of 75.5%, according to Refinitiv. Looking ahead, the consensus is for even stronger S&P 500 earnings growth in Q2 of +61.6%, then easing to +23.6% in Q3 and +16.3% in Q4. On a calendar year basis, the consensus is for strong +35.1% earnings growth in 2021, overcoming the -12.2% decline seen in 2020.
