- Highly uncertain Q1 earnings season begins today
- Congress is making little progress so far on expanding the PPP loan program
- Fed dials back its liquidity injections
- Oil prices sag after Sunday’s OPEC+ deal
Highly uncertain Q1 earnings season begins today — Q1 earnings season effectively begins today with eight of the S&P 500 companies reporting, including JPMorgan Chase and Wells Fargo. United Airlines also reports today and is likely to have some alarming news for airline earnings.
The S&P 500 index on Monday fell by -1.01% as the market looked forward to earnings season with trepidation. The markets are extremely unsure about earnings estimates due to the partial shutdown of the U.S. economy and the fact that many corporations have stopped providing earnings guidance. There are likely to be many earnings reports this quarter that show major deviations from the consensus.
The current consensus for S&P 500 earnings growth, according to Refinitiv, is for declines of -9.0% y/y in Q1, -20.7% in Q2, -9.4% in Q3, and -2.3% in Q4. For the 2020 calendar year, the consensus is for a SPX earnings decline of -9.4%, followed by a sharp +19.0% upward rebound in 2021.
The pandemic is hitting some industries much harder than others, as seen in the extremely wide variation in industry earnings expectations. Q1 earnings are expected to be a debacle for Energy -49.6% y/y, Industrials -30.8%, Consumer Discretionary -29.3%, Financials -16.8%, and Materials -13.9%. However, other sectors are actually expected to show modest earnings increases in Q1 including Communication Services +7.4% y/y, Info Tech +2.5%, Utilities +2.2%, Health Care +1.3%, Real Estate +1.0%, and Consumer Staples +0.7%.
Congress is making little progress so far on expanding the PPP loan program — There was no movement reported yesterday between the Democratic and Republican leaders who are trying to negotiate an increase in the size of the Paycheck Protection Program (PPP). The PPP program provides loans to small and mid-sized businesses that are forgivable if at least 75% of the loan is used for payroll expenses and if the business keeps people employed.
Senate Majority Leader McConnell wants a clean $250 billion boost in the Paycheck Protection Program (PPP) from its current size of $350 billion. Meanwhile, Democrats want a larger package of $500 billion that has the $250 billion of PPP funding, plus $100 billion for hospitals, $150 billion for state and local governments, and a 15% increase in the SNAP food stamp program.
The current capacity of the PPP program may not last beyond Friday and certainly not past the end of next week. According to the Small Business Administration (SBA), more than 904,000 applications worth $221 billion were approved by the SBA as of mid-Monday, representing about two-thirds of the $350 billion that is currently available.
The Senate is due to hold a pro-forma session on Thursday, which would provide an opportunity to approve a bill if it can be passed by unanimous consent. Senate Finance Committee Chairman Grassley said he expects a bill to be passed by Friday.
However, some Republicans are growing more concerned about the amount of money being spent on rescue programs, making rescue bills harder to pass. That means unanimous consent will be difficult, and Congressional members may have to be recalled to Washington to vote. Congress is scheduled to be back in session next week, although they will undoubtedly stay on recess to observe stay-at-home orders if there are no critical bills that need a vote.
Fed dials back its liquidity injections — The Fed on Monday announced that it will cut its repo operations in half starting on May 4, indicating that demand for emergency liquidity is easing and that the Fed is comfortable on dialing back its emergency operations. The Fed said that starting on May 4 it will conduct only one repo operation per day worth $500 billion, eliminating the second daily operation. The Fed said it will continue to do 1-month repos each week, but will halve its 3-month $500 billion repo operations by conducting them once every two weeks.
The Fed last week announced that it reduced its Treasury security purchase program to $30 billion per day starting yesterday from $50 billion last week and a peak of $75 billion in late March. The Fed’s smaller Treasury purchases are a mildly bearish factor for the Treasury market. However, the T-note market still has strong underlying support from the consensus that the U.S. economy is currently in its worst slump since the Great Depression.
Oil prices sag after Sunday’s OPEC+ deal — The energy markets saw no surprises in the weekend OPEC+ agreement and May WTI crude oil prices on Monday fell by -$0.35 (-1.54%) to $22.41. May crude closed only $3.14 per barrel (14%) above the late-March 18-year low of $19.27.
The market is now waiting to see whether all OPEC+ members will start cutting production on May 1 by -23% to fulfill the terms of their 9.7 million bpd production cut agreement. G-20 members said they would cut production by an additional -5 million bpd, but that referred simply to cuts that will occur anyway due to the harsh market conditions of a lack of buyers, limited pipeline capacity, and a lack of storage facilities. The markets will be watching Russia, in particular, to see if it follows through with its promise to slash production by -23% to 8.5 million bpd from 11 million bpd.
Goldman Sachs on Monday expressed pessimism about the deal, saying it was “too little, too late.” Goldman said it believes OPEC+ will cut by only -4.3 million bpd in May from Q1 levels, falling far short of plugging its estimate of an average 19 million bpd plunge in oil demand in April and May.
