- Weekly market focus
- Friday’s strong U.S. economic data indicates that U.S. economy remains on track
- Market expectations for Fed rate hikes drop sharply after Tuesday’s Yellen comments
- U.S. factory orders expected to show a decline but orders optimism is high after last Friday’s ISM report
- Q1 earnings season begins next week with expectations for a -6.9% decline in SPX earnings
Weekly market focus — The markets this week will focus on (1) crude oil prices, which have fallen sharply by -14% in the past two weeks and fell sharply last Friday after a key Saudi official said that Saudi Arabia will not freeze production if Iran does not freeze production, (2) the U.S. stock market, which received a boost from last week’s strong U.S. economic data and dovish Yellen comments, (3) the dollar index, which fell sharply last week as the market deferred expectations for the Fed’s next rate hike, (4) Fed policy as the minutes from the March 15-16 FOMC meeting are released this Wednesday and as Fed Chair Yellen makes an appearance on Thursday, and (5) U.S. politics as Wisconsin holds its primary on Tuesday. There are only 5 of the S&P 500 companies that report earnings this week.
This week’s U.S. economic schedule is light with key reports including (1) today’s Feb factory orders report (expected -1.8%), (2) Tuesday’s Feb U.S. trade deficit (expected slightly wider at -$46.2 billion), (3) Tuesday’s March ISM non-manufacturing PMI (expected +0.7 to 54.1), and (4) Wednesday’s Feb JOLTS job openings report.
Key overseas news this week includes (1) the resumption today of talks on the Greek bailout review, (2) Thursday’s release of the minutes from the ECB’s March 10 meeting where it announced an expansion of its QE program to 80 billion euros per month from 60 billion euros and a -10 bp cut in its deposit rate to -0.40%, (3) a presentation on Thursday by ECB President Draghi in Lisbon on the Eurozone economic and financial situation, and (4) the BOJ’s branch managers’ meeting on Thursday.
Friday’s strong U.S. economic data indicates that U.S. economy remains on track — Last Friday’s U.S. economic data was strong and indicated that the U.S. economy remains on track so far and that the chances for a recession later this year remain low. Indeed, the Bloomberg Economic Surprise index last week temporarily moved up into positive territory, illustrating how the recent U.S. economic data has been better than market expectations.
Last Friday’s March payroll report of +215,000 was stronger than expectations of +205,000. March average hourly wages moved slightly higher to +2.3% y/y from the preliminary +2.2% report in Feb. Lat Friday’s March ISM manufacturing index rose by +2.3 points to 51.8, which was stronger than market expectations of +1.5 to 51.0 and pushed the index into expansionary territory for the first time since last September. Importantly, the March ISM new orders sub-index rose sharply by +6.8 points to 58.3. Last Friday’s final-March University of Michigan U.S. consumer sentiment index was revised higher by +1.0 point to 91.0, which was stronger than market expectations for a +0.5 point upward revision to 90.5.
Market expectations for Fed rate hikes drop sharply after Tuesday’s Yellen comments — Last Tuesday’s comments by Fed Chair Yellen about the need for caution on rate hikes due to global risks caused the federal funds futures curve last week to fall sharply by 10-20 bp for late 2016 through 2018. The market is now discounting a zero chance for a rate hike at the next FOMC meeting on April 26-27, only a 20% chance for a rate hike at the following meeting in June (versus expectations of 50% before the Yellen comments), and a 72% chance for a rate hike by December. The market is not fully discounting the next rate hike until May 2017, which is more than a year away.
The dollar index took a sharp hit on the delayed Fed rate hike expectations, falling sharply by -1.72% during the week. Meanwhile, the delayed rate hike expectations and the sharp sell-off in the dollar index gave the U.S. stock market a boost with the S&P 500 index posting a new 3-month high. Meanwhile, the 10-year T-note yield during the week fell by -13 bp to 1.77% from 1.90% the previous week.
U.S. factory orders expected to show a decline but orders optimism is high after last Friday’s ISM report — The market is expecting today’s Feb factory orders report to show a decline of -1.8% and -0.5% ex-transportation, weaker than the Jan report of +1.6% and -0.2%, respectively. Expectations for a weak Feb factory orders report today are based in part on the already-reported news that Feb durable goods orders fell by -2.8 and -1.0% ex-transportation since durable goods orders account for more than half of the factory orders series. While factory orders were weak in February, the picture looks brighter going forward since last Friday’s March ISM manufacturing new orders sub-index rose sharply by +6.8 points to 58.3, suggesting that manufacturing executives saw a significant pickup in orders in March. For that reason, today’s expected decline in Feb factory orders is not likely to cause much market concern.
Q1 earnings season begins next week with expectations for a -6.9% decline in SPX earnings — Q1 earnings season unofficially begins next Monday when Alcoa releases its Q1 earnings report. In the meantime, there are 7 of the S&P 500 companies that report earnings this week: Darden Restaurants and Walgreens on Tuesday; Constellation Brands, Monsanto and Bed, Bath & Beyond on Wednesday; and CarMax and ConAgra Foods on Thursday.
The market consensus is for Q1 SPX earnings to drop by -6.9% y/y, which would be the worst performance since the recession ended in 2009, according to Thomson Reuters I/B/E/S. The market consensus is then for another quarter of negative SPX earnings growth in Q3 of -2.0% before earnings finally turn positive in the second half of the year to +4.8% in Q4 and +10.5% in Q4. Earnings growth was negative in the second half of 2015 and another two quarters of negative growth in Q1 and Q2 would produce an earnings recession lasting a total of one year.
