Today’s Economic & #Commodity Perspectives #Futures

Weekly market focus — The U.S. markets this week will focus mainly on Fedspeak with seven appearances by various Fed officials including an address by Fed Chair Yellen on Thursday at a Fed community development research conference in Washington.  Only nine of the S&P 500 companies report earnings this week including Nike and FedEx on Tuesday.

This week’s U.S. economic schedule is light.  Key U.S. economic reports include (1) Tuesday’s Q4 current account deficit (expected wider at -$128.1 billion vs Q3’s -$113.0 billion), (2) Wednesday’s Jan FHFA house price index (expected +0.4%) and Feb existing home sales report (expected -2.4% after Jan’s +3.3%), (3) Thursday’s Feb new home sales report (expected +1.8% after Jan’s +3.7%), and (4) Friday’s Feb durable goods orders (expected +1.2% and +0.6% ex-transportation).

Busy week in Washington with House Obamacare vote scheduled for Thursday — This will be a busy week in Washington.  FBI Director James Comey and NSA Director Michael Rogers on Monday will appear before the House Intelligence committee to comment on the investigation into Russian interference in the U.S. election and will likely be asked whether the Trump administration was under surveillance during the campaign.  House Speaker Ryan is hoping to hold a vote in the House on Thursday on his Obamacare repeal-and-replace legislation, which picked up more supporters late last week.  Mr. Ryan is trying to get Obamacare out of the way so he can focus on corporate tax reform, which is of much more direct interest to the markets.  Senate hearings will be held during the week for Supreme Court Justice appointee Neil Gorsuch.

G-20 communique jettisons promise to avoid protectionism — The outcome of the Friday-Saturday G-20 meeting of finance ministers and central bankers in Baden-Baden came out about as expected.  The Trump administration was successful in getting the G-20 in its communique to drop its previous promise to “avoid all forms of protectionism.”  The market generally knew that was coming due to media reports last week.  The markets are more worried about actions than communique language.  Otherwise, the markets seemed to be generally satisfied with Treasury Secretary Mnuchin’s first outing on the international stage.

Overseas focus is on French politics and Brexit — With the Dutch election now over, attention has shifted squarely onto the French presidential election (April 23 and May 7).  There will be a televised debate on Monday night among the top five candidates.

Independent centrist Emmanuel Macron over the weekend extended his odds of being the next French president to a new high of 68% from 61% before last Wednesday’s Dutch election, according to PredictIt.org.  Meanwhile, the odds for far-right National Front leader Marine Le Pen dipped to 29% over the weekend from 34% before last Wednesday’s Dutch election where far-right populist Geert Wilders was soundly beaten by the establishment Liberal party.  Ms. Le Pen’s odds are currently at the lowest level since the PredictIt.org opened betting on the French election in November 2016.  Ms. Le Pen’s odds reached their highest level of 44% in November 2016.

Meanwhile, UK Prime Minister May now has the authority to officially declare Brexit at any time but will reportedly wait until next week.  That will kick off the 2-year negotiation period for the UK’s exit from the EU.

U.S. markets reset the countdown to the next Fed rate hike — The markets took in stride last week’s 25 bp Fed rate hike and were pleased that the Fed stuck with its forecast for three rate hikes per year through 2019 rather than jacking that up to four hikes per year.  The market is not discounting a 100% chance of the Fed’s next rate hike until the Sep 19-20 meeting.

The S&P 500 index in the past 2-1/2 weeks has been consolidating mildly below the record high posted on March 1.  U.S. stocks continue to be supported by the improved economy, expectations for a sharp improvement in SPX earnings growth to +11% this year from negligible growth in 2015-16, and expectations for an eventual cut in corporate tax rates.

We look for earnings growth and expectations for reduced corporate tax rates to provide continued support for U.S. stocks.  However, there are still potentially serious downside risks for U.S. stocks that include the slow progress of the Republican agenda and the possibility that the Trump administration might suddenly announce protectionist trade policies.  It would be a positive for stocks if Speaker Ryan can push his Obamacare proposal through the House this week because he will then be able to start working on corporate tax reform while the Senate takes its time considering Obamacare.

Another potential concern is whether GDP growth is slowing down in Q1.  The Atlanta Fed’s GDPnow Q1 GDP tracking estimate has fallen to +0.9%, although the NY Fed’s tracking estimate (which takes into account sentiment) is substantially stronger than +2.8%.

The 10-year T-note yield last week fell back to the 2.50% area from the high of 2.63% seen before last week’s FOMC meeting.  The T-note market continues to closely track changes in expectations for Fed policy.  With Fed policy on hold for at least the next two months or so, there may not be much reason for T-notes to move in the next several weeks, assuming stability in stocks and crude oil.  The T-Note VIX index (TYVIX) last Friday fell to a 5-month low of 4.34.