- Weekly market focus
- U.S. economic data expected to be mostly on the stronger side this week
- Saudi Arabia shoots down production freeze agreement
- NAHB housing market index expected to edge higher and remain generally strong
- Q1 earnings season heats up with expectations for a -7.8% drop in SPX earnings
Weekly market focus — The markets this week will focus on (1) the -5% plunge in oil prices on Sunday night after news that oil producers in Doha on Sunday were unable to reach a production freeze agreement, (2) bearish details on China’s quarterly GDP report that were released on Saturday showing that China’s Q1 GDP on quarter-by-quarter basis grew by only +1.1% q/q (+4.5% annualized), substantially below last Thursday night’s advance report of a +6.7% year-on-year report, (3) the likely bearish reaction of global stock markets on Monday to Sunday night’s -5% plunge in oil prices and the bearish Chinese GDP news, (4) the situation in Brazil as Brazilian President Dilma Rousseff seemed likely to lose Sunday’s impeachment vote in Brazil’s lower house of Congress and face an eventual trial in the Brazilian Senate, (5) U.S. politics as New York holds its primary on Tuesday, (6) the first big week for Q1 earnings with 100 of the S&P 500 companies scheduled to report, and (7) Thursday’s ECB meeting where the ECB is likely to stand pat after boosting its QE program to 80 billion euros per month from 60 billion euros just a month ago at its March meeting.
U.S. economic data expected to be mostly on the stronger side this week — This week’s U.S. economic data is expected to be on the stronger side. Strong reports this week are expected to include (1) today’s April NAHB housing market index (expected +1 to 59), (2) Wednesday’s March existing home sales report (expected +3.5% after Feb’s -7.1%), (3) Thursday’s Feb FHFA house price index (expected +0.4%), (4) Thursday’s March leading indicators report (expected +0.4% after Feb’s +0.1%), and (5) Friday’s preliminary-April Markit U.S. manufacturing PMI index (expected +0.5 to 52.0 after March’s +0.2 to 51.5). The only weak report of the week is expected to be Tuesday’s March housing starts report (expected -0.7%). The Treasury on Thursday will sell $16 billion of 5-year TIPS.
Saudi Arabia shoots down production freeze agreement — Russia and other oil producers were optimistic going in to Sunday’s oil producer meeting in Doha because they thought they had a preliminary production freeze agreement. However, it turned out that Saudi Arabia refused to be part of any production agreement in which Iran even declined to attend the meeting and refused to put any curbs on its production.
Oil prices were sharply lower by -5% in early trading on Sunday night after news that the production freeze had collapsed since oil producers showed that they could not even take the minimal step of agreeing to freeze production near record highs. The implication is that Saudi Arabia plans to continue its hard-line battle for market share and will not agree to freeze its production unless all other producers agree as well, including Iran. The question now is how much of the +42% rebound in oil prices seen in the past two months was due to expectations for a freeze in production. The oil markets are now going back the early-year situation where it was every producer for itself, with production being curbed by uneconomically low prices rather than by artificial production agreements.
NAHB housing market index expected to edge higher and remain generally strong — The market is expecting today’s Apr NAHB housing market index to show a +1 point increase to 59 following March’s report of unchanged at 58. The NAHB index posted a 10-year high of 65 in Oct 2015 but then drifted lower to a 10-month low of 58 by Feb-March. Despite that mild 5-month decline, U.S. home builder confidence is still relatively high due to decent home sales levels, rising home prices, and mildly tight home supplies. Indeed, housing starts in February rose by +5.2% to 1.178 million units, which was only -2.7% below the 8-1/4 year high of 1.211 million units posted in June 2015.
Q1 earnings season heats up with expectations for a -7.8% drop in SPX earnings — Q1 earnings season heats up this week with 100 of the S&P 500 companies scheduled to report. Notable reports this week include Morgan Stanley and IBM on Monday; Goldman Sachs and Intel on Tuesday; US Bancrop and American Express on Wednesday; PulteGroup on Thursday; Alphabet, Microsoft, Visa, and GM on Thursday; and GE, Caterpillar, American Airlines, McDonalds, and Honeywell on Friday.
The market consensus for Q1 SPX earnings growth is -7.8%, according to surveys by Thomson Reuters I/B/E/S. Of the 35 SPX companies that have reported thus far, 66% have reported above-consensus earnings, better than the long-term average of 63% but below the 4-quarter average of 68%. Only 43% of reporting SPX companies have announced above-consensus revenue, below the long-term average of 60% and the 4-quarter average of 46%.
The expected -7.8% decline in Q1 earnings is not due solely to weakness in energy earnings but is instead spread broadly with 7 of the 10 sectors expected to see year-on-year declines in earnings growth. Energy earnings are expected to be terrible at -108%, but declines are also expected in materials (-18.7%), financials (-9.3%), technology (-5.5%), utilities (-2.7%), and consumer staples (-2.1%). The only sectors expected to show earnings growth are consumer discretionary (+13.3%), telecom (+5.7%), and health care (+4.6%). Looking forward, the consensus is for a -2.2% decline in Q2 earnings growth, which would be the fourth consecutive quarter of negative growth. Earnings are then expected to improve to +4.5% in Q3, and +10.2% in Q4.
