- Weekly Market Focus
- Zero chance of a rate hike at the Tue/Wed FOMC meeting
- U.S. new home sales expected to edge to new 3-month high
- 2-year T-note auction to yield near 0.83%
- Peak Q1 earnings week arrives with earnings so far beating low expectations
Weekly Market Focus — The markets this week will focus on (1) the zero percent chance for a rate hike at the Tue/Wed FOMC but where the FOMC could adopt a slightly more hawkish tone, (2) Friday’s Q1 GDP report, where the expected poor report of +0.7% will be partially due to seasonal factors, (3) U.S. politics with presidential primaries on Tuesday in Pennsylvania, Connecticut, Maryland, Delaware, and Rhode Island, (4) the peak Q1 earnings week with 186 of the SPX companies scheduled to report, (5) the Treasury’s auction of $103 billion of T-notes, and (6) Thursday’s BOJ meeting where there is a chance of additional stimulus measures.
Zero chance of a rate hike at the Tue/Wed FOMC meeting — The federal funds futures market is discounting a zero chance of a rate hike at the 2-day FOMC meeting on Tue/Wed. Even though Chinese turmoil has died down for the time being, the Fed will be on hold this week due to soft U.S. Q1 GDP growth near +0.7% and caution ahead of the Brexit vote on June 23. The next FOMC meeting on June 14-15 comes just a week before the Brexit vote, meaning the Fed is unlikely to implement a rate hike at that meeting. The market is discounting only an 18% chance for a rate hike at the June meeting. The chances for a Fed rate hike then ramp up as the year wears on to 36% by July, 56% by Sep, 74% by Nov, and 88% by Dec. The market is not discounting a 100% chance of a rate hike until Feb 2017.
U.S. new home sales expected to edge to new 3-month high — The market is expecting today’s U.S. March new home sales report to show a +1.6% increase to 520,000, adding to Feb’s +2.0% increase to 512,000. The U.S. new sales series in Feb was only -6.1% below the 8-year high of 545,000 units posted in Feb 2015. U.S. new home sales remain in relatively good shape despite various obstacles including high prices and mildly tight inventories. There were 5.6 months of new homes on the market in Feb, mildly below the long-term average of 6.1 months. Meanwhile, the median price of a new home in February of $301,400 was only -4.9% below the record high of $317,000 posted in Nov 2015. U.S. existing home sales in March rose by +5.1%, which was a positive indicator for today’s March new home sales report.
2-year T-note auction to yield near 0.83% — The Treasury today will sell $26 billion of 2-year T-notes. The Treasury will then continue this week’s $103 billion T-note package by selling $34 billion of 5-year T-notes on Tuesday, and $28 billion of 7-year T-notes and $15 billion of 2-year floating rates on Thursday. Today’s 2-year T-note issue was trading at 0.83% late last Friday afternoon. That translates to an inflation-adjusted yield of -0.62% against the current 2-year breakeven inflation expectations rate of 1.45%.
The 12-auction averages for the 2-year are as follows: 3.10 bid cover ratio, $150 million in non-competitive bids to mostly retail investors, 3.3 bp tail to the median yield, 11.5 bp tail to the low yield, and 55% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 46.8% of the last twelve 2-year T-note auctions, which is well below the average of 55.9% for all recent Treasury coupon auctions.
Peak Q1 earnings week arrives with earnings so far beating low expectations — This is the peak week for Q1 earnings with 186 of the S&P 500 companies scheduled to report. Notable reports this week include Halliburton today; Apple, AT&T, EBay, Capital One, Chipotle, and Procter & Gamble on Tuesday; Facebook, PayPal, and Nasdaq on Wednesday; Amazon.com, MasterCard, UPS, Ford, and Coca-Cola Enterprises on Thursday; and Exxon, Chevron, and Moody’s on Friday.
The market consensus for Q1 SPX earnings growth is now -7.1% y/y, a little better than expectations of -7.8% a week earlier, according to surveys by Thomson Reuters I/B/E/S. Of the 132 SPX companies that have reported thus far, 77% have reported above-consensus earnings, substantially better than the long-term average of 63% and the 4-quarter average of 68%. Regarding revenue, 58% of reporting SPX companies have reported above-consensus revenue, slightly below the long-term average of 60% but well above the 4-quarter average of 46%.
The expected -7.1% 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 -112%, but declines are also expected in materials (-17.5%), financials (-8.7%), utilities (-5.1%), technology (-4.9%), and consumer staples (-2.4%), according to Thomson Reuters I/B/E/S. The only sectors expected to show earnings growth are consumer discretionary (+15.5%) and health care (+5.4%). Telecom is expected to show zero earnings growth.
Looking forward, the consensus is for a -2.3% y/y decline in Q2 earnings growth, which would be the fourth consecutive quarter of negative growth. Earnings are then expected to improve to +4.3% in Q3 and +10.3% in Q4. On a calendar year basis, SPX earnings growth is expected at +1.4% in 2016 and +14.2% in 2017.
