- Weekly market focus
- Strong payroll report slightly boosts market expectations for Fed tightening
- Trump/Republican agenda gets slowed down
- Q4 earnings season peak is past and results have been generally favorable
Weekly market focus — The markets this week will focus on (1) any progress or details on the Republican tax cut and infrastructure agenda, (2) whether Fed speaking engagements this week provide any hints on the timing of the Fed’s next rate hike (speaking engagements include Philadelphia Fed President Harker today, St. Louis Fed President Bullard on Thursday, and Fed Vice Chair Fischer on Saturday), (3) the Treasury’s refunding operation of $62 billion of 3, 10 and 30-year securities, and (4) Q4 earnings season with 86 of the SPX companies reporting this week.
Strong payroll report slightly boosts market expectations for Fed tightening — Last Friday’s payroll report of +226,000 was stronger than market expectations of +180,000, supporting the view that businesses are relatively confident about the economy and hired at a decent clip in January. However, Jan average hourly earnings rose by only +2.5% y/y, weaker than market expectations of +2.7% y/y and down from Dec’s 7-1/2 year high of +2.8%.
Friday’s unemployment report produced a slight rise in market expectations for Fed rate hikes. The federal funds futures curve (on a yield basis) on Friday tightened up by +2 bp from the previous day to 1.12% for the Dec 2017 contract and by +3 bp to 1.60% for the Dec 2018 contract. The payroll report followed the FOMC meeting last Tuesday and Wednesday, which was considered a non-event since the Fed made no significant changes to its post-meeting statement and provided no timing guidance on when it may raise rates again.
Regarding the Fed’s next rate hike, the market is currently discounting a 30% chance of that rate hike at the next FOMC meeting on March 14-15, an 80% chance of that rate hike by the May 2-3 meeting, and a 100% chance of that rate hike by the June 13-14 meeting. The market is still discounting two +25 bp rate hikes by the end of this year, two additional rate hikes in 2018, and a little more than one rate hike in 2019. That would bring the funds rate to 1.92% by the end of 2019, up by +129 bp from the current funds rate mid-point of 0.63%.
Trump/Republican agenda gets slowed down — The markets are still waiting for details on Trump/Republican tax cut and infrastructure agenda. The corporate tax cut plan has been bogged down by opposition by some large companies such as Wal-Mart and Koch Industries to the House Republicans’ border adjustment tax plan, which would impose a 20% tax on U.S. imports. The plan is drawing opposition since the tax in the end would be paid by U.S. consumers and in the meantime would hurt U.S. companies that are big importers such as petroleum and consumer product companies. Some smaller companies such as clothing importers might even end up facing a corporate tax bill that is larger than their profits.
House Republicans are relying on the border adjustment tax to provide some $1 trillion of revenue over 10 years, revenue that would help pay for a cut in the corporate tax rate to as low as 20% in the House plan from the current rate of 35%. Without the border adjustment tax, Republicans would have to rely mainly on a tax on the one-time repatriation of overseas corporate profits as a pay-for, meaning the corporate tax rate could not be cut as low as hoped. That would be bad news for the U.S. stock market, which is counting on a stock-price boost from a corporate tax cut, which would make more after-tax profit available to shareholders.
The Trump/Republican agenda has also been bogged down by the Obamacare repeal-and-replace debate, which is taking significant time and resources away from consideration of the tax cut and infrastructure plans. Meanwhile, President Trump’s travel ban is back as a big distraction for the White House after a federal district court and appeals court over the weekend blocked implementation of the ban, ensuring the ban will remain in the news this week. The travel ban could eventually end up at the U.S. Supreme Court to settle the issue of executive power.
Q4 earnings season peak is past and results have been generally favorable — Q4 earnings season is past its peak but this will still be a busy week with 86 of the S&P 500 companies scheduled to report. Notable earnings reports include Tyson Foods on Monday; GM and Disney on Tuesday; Time Warner and Humana on Wednesday; and Viacom, Kellog and Yum Brands on Thursday.
The market consensus is for Q4 SPX earnings growth of +8.0% y/y, up from expectations of +6.8% y/y just a week ago, according to surveys by Thomson I/B/E/S. Q4 earnings have so far been positive with 66.8% of the 274 SPX reporting companies having beaten earnings expectations, slightly above the long-term average of 64.0% but below the 4-quarter average of 71%. Regarding revenue, only 47.8% of reporting SPX companies have beaten revenue expectations, below the long-term average of 59% and the 4-quarter average of 51%.
Looking ahead, the market is expecting a sharp pickup in earnings growth in 2017 with growth of +11.5% in Q1, +10.6% in Q2, +9.6% in Q3, and +12.8% in Q4. On a calendar year basis, the market consensus is for an improvement in SPX earnings growth to +11.3% in 2017 from the paltry growth rates seen in the last two years (i.e., +0.2% in 2015 and +1.4% in 2016). SPX earnings growth just turned positive again in the second half of 2016 after the earnings recession seen in the second half of 2015 through the first half of 2016.
Weekly market focus — The markets this week will focus on (1) any progress or details on the Republican tax cut and infrastructure agenda, (2) whether Fed speaking engagements this week provide any hints on the timing of the Fed’s next rate hike (speaking engagements include Philadelphia Fed President Harker today, St. Louis Fed President Bullard on Thursday, and Fed Vice Chair Fischer on Saturday), (3) the Treasury’s refunding operation of $62 billion of 3, 10 and 30-year securities, and (4) Q4 earnings season with 86 of the SPX companies reporting this week.
Strong payroll report slightly boosts market expectations for Fed tightening — Last Friday’s payroll report of +226,000 was stronger than market expectations of +180,000, supporting the view that businesses are relatively confident about the economy and hired at a decent clip in January. However, Jan average hourly earnings rose by only +2.5% y/y, weaker than market expectations of +2.7% y/y and down from Dec’s 7-1/2 year high of +2.8%.
Friday’s unemployment report produced a slight rise in market expectations for Fed rate hikes. The federal funds futures curve (on a yield basis) on Friday tightened up by +2 bp from the previous day to 1.12% for the Dec 2017 contract and by +3 bp to 1.60% for the Dec 2018 contract. The payroll report followed the FOMC meeting last Tuesday and Wednesday, which was considered a non-event since the Fed made no significant changes to its post-meeting statement and provided no timing guidance on when it may raise rates again.
Regarding the Fed’s next rate hike, the market is currently discounting a 30% chance of that rate hike at the next FOMC meeting on March 14-15, an 80% chance of that rate hike by the May 2-3 meeting, and a 100% chance of that rate hike by the June 13-14 meeting. The market is still discounting two +25 bp rate hikes by the end of this year, two additional rate hikes in 2018, and a little more than one rate hike in 2019. That would bring the funds rate to 1.92% by the end of 2019, up by +129 bp from the current funds rate mid-point of 0.63%.
Trump/Republican agenda gets slowed down — The markets are still waiting for details on Trump/Republican tax cut and infrastructure agenda. The corporate tax cut plan has been bogged down by opposition by some large companies such as Wal-Mart and Koch Industries to the House Republicans’ border adjustment tax plan, which would impose a 20% tax on U.S. imports. The plan is drawing opposition since the tax in the end would be paid by U.S. consumers and in the meantime would hurt U.S. companies that are big importers such as petroleum and consumer product companies. Some smaller companies such as clothing importers might even end up facing a corporate tax bill that is larger than their profits.
House Republicans are relying on the border adjustment tax to provide some $1 trillion of revenue over 10 years, revenue that would help pay for a cut in the corporate tax rate to as low as 20% in the House plan from the current rate of 35%. Without the border adjustment tax, Republicans would have to rely mainly on a tax on the one-time repatriation of overseas corporate profits as a pay-for, meaning the corporate tax rate could not be cut as low as hoped. That would be bad news for the U.S. stock market, which is counting on a stock-price boost from a corporate tax cut, which would make more after-tax profit available to shareholders.
The Trump/Republican agenda has also been bogged down by the Obamacare repeal-and-replace debate, which is taking significant time and resources away from consideration of the tax cut and infrastructure plans. Meanwhile, President Trump’s travel ban is back as a big distraction for the White House after a federal district court and appeals court over the weekend blocked implementation of the ban, ensuring the ban will remain in the news this week. The travel ban could eventually end up at the U.S. Supreme Court to settle the issue of executive power.
Q4 earnings season peak is past and results have been generally favorable — Q4 earnings season is past its peak but this will still be a busy week with 86 of the S&P 500 companies scheduled to report. Notable earnings reports include Tyson Foods on Monday; GM and Disney on Tuesday; Time Warner and Humana on Wednesday; and Viacom, Kellog and Yum Brands on Thursday.
The market consensus is for Q4 SPX earnings growth of +8.0% y/y, up from expectations of +6.8% y/y just a week ago, according to surveys by Thomson I/B/E/S. Q4 earnings have so far been positive with 66.8% of the 274 SPX reporting companies having beaten earnings expectations, slightly above the long-term average of 64.0% but below the 4-quarter average of 71%. Regarding revenue, only 47.8% of reporting SPX companies have beaten revenue expectations, below the long-term average of 59% and the 4-quarter average of 51%.
Looking ahead, the market is expecting a sharp pickup in earnings growth in 2017 with growth of +11.5% in Q1, +10.6% in Q2, +9.6% in Q3, and +12.8% in Q4. On a calendar year basis, the market consensus is for an improvement in SPX earnings growth to +11.3% in 2017 from the paltry growth rates seen in the last two years (i.e., +0.2% in 2015 and +1.4% in 2016). SPX earnings growth just turned positive again in the second half of 2016 after the earnings recession seen in the second half of 2015 through the first half of 2016.