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"A swallow does not make summer or a beautiful day," said Aristotle.
The US labor market had the best job growth of the year in June, but the likelihood of a decline in interest rates at the next meeting of the Federal Reserve to be held on July 30 and 31 is still present and these hopes contribute to the formation of record high stocks.
Despite the decline in stock prices on the job data better than expected, the Dow Jones index
DJIA, -0.16%
always finished the week up 1.2%, the S & P 500 index
SPX, -0.18%
was up 1.7% and the Nasdaq Composite Index
COMP -0.10%
rose 1.9%, leaving the three landmarks at a striking distance from their all-time highs.
"The jobs report reassures investors about the strength of the national economy," said MarketWatch's Alec Young, managing director of global market research at FTSE Russell. Nevertheless, he still expects the Fed to lower interest rates as "insurance", in case data on the US economy begin to take a turn. serious.
Payroll in the United States rose 224,000 in June, according to the Labor Ministry Friday, after a loss of 72,000 in May, but employment growth in 2019 has averaged at 172,000 jobs per month, well below the average of 223,000 per month, suggesting economic growth in the United States. maybe at least get back to average after last year 's boost from Trump' s tax cuts in 2017.
"To find any justification for this reduction, we must look at the global level," said Mr. Young, saying the slowdown in global economic growth, combined with unconventional monetary policy in Europe and Japan, had led Global investors to turn to US government bonds, with the United States. 10 Treasurer
TMUBMUSD10Y, + 0.00%
reporting less than the federal funds target rate of 2.25% to 2.5% since May.
Labor market data tends to be a late indicator, while more forward-looking data still suggests that US economic growth weakens as President Trump's trade war undermines business confidence and spending. world level.
Outside the labor market, economic data have deteriorated considerably. In June, IHS Markit's manufacturing industry fell to 50.1, the worst performance since 2009, while the ISM manufacturing index reached its lowest level since the end of 2016, falling to 51.7 . Any figure above 50 is considered an expansion of plant activity, but the manufacturing indicator has steadily declined since mid-2018.
The trade war justifies the worries
Stock markets rallied earlier last week at the announcement of President Trump and Chinese President Xi Jinping who agreed to resume trade negotiations and Chinese purchases of US agricultural products, while the United States is are committed to not applying new rates and allowing US technology companies to sell certain products. to Chinese telecommunications giant Huawei Technologies Inc.
However, the details of the nature of the reprieve remain non-existent and, although some reports mention visits by US negotiators to Beijing next week, the path to agreement is still unclear. Beijing gave no details on the timing and extent of purchases of agricultural products, while the spokesman of the Chinese Ministry of Commerce, Gao Feng, said Thursday that an agreement could not be concluded that if the United States agreed to remove all tariffs, contrary to the US position must remain in place to ensure Chinese compliance.
"The Trump administration's willingness to actively use trade barriers as a broader foreign policy tool remains a major risk to watch, despite agreeing on a second truce on trade negotiations" said JP Morgan analyst Bruce Kasman in a statement. research note. "The response of the corporate sector to this approach, rather than the direct impact of rising rates, represents the biggest threat to global growth, in our view."
Spending on factories and equipment by US companies is also slowing, the impact of last year 's tax cuts blurring and trade disputes with China are undermining confidence. Morgan Stanley's US corporate capital expenditure index fell to its lowest level in two years last month. The weakening of investment growth came after last year's increase, when the US administration lowered the corporate rate from 35% to 21%, triggering a surge in business investment. Morgan Stanley Chief Economist Chetan Ahya.
The impact of the trade war is also evident in the data of the industry. General Motors Co
GM + 0.89%
and Ford Motor Co
F + 0.00%
Last week, their quarterly sales in China fell. GM's vehicle sales in China for the June quarter fell 12.2%, while Ford's sales fell 21.7%. For the first quarter of this year, Ford's sales in China dropped by 35.8 percent and GM's sales by 17.5 percent.
The slowdown is also hitting the trucking industry in the United States. After a stellar year in 2018, truck deliveries have fallen in the last six months, according to the Cass Freight Index. "In the end, more and more data indicate that it's about the beginning of an economic contraction," said Donald Broughton, founder of Broughton Capital and senior analyst of the company. Cass Freight index.
Ebbing revenue growth
US companies will release their second quarter results later this month, giving investors a more accurate picture of the health of the economy. Earnings per share contracted in the first quarter and analysts' estimates based on company forecasts predict a further decline for the second quarter, according to data from FactSet.
"According to the GDP report, real corporate profits for all companies peaked in the third quarter of 2018, at $ 2,321 billion," according to Ned Davis of Ned Davis Research. "They fell to $ 2.311 billion in the fourth quarter and fell to $ 2.252 billion in the first quarter of 2019."
Yet US benchmark indexes hit unprecedented highs last week, although bond yields have fallen to levels signaling a future recession.
The seemingly contradictory phenomena could perhaps be explained by the share buybacks by companies, which contribute to fueling the recovery of equity markets and mask a decline in corporate profits for nearly a year, according to Davis.
However, operating income per share from the S & P 500 index continued to grow, "thanks to very creative accounting, including massive redemptions," added Davis.
In the 12 months to March 2019, corporate redemptions totaled $ 823.2 billion for a gain of $ 1,129.4 billion. For the same period last year, redemptions totaled $ 575.3 billion on earnings of $ 986.5 billion. According to the S & P Dow Jones indexes, US companies bought $ 4.7 trillion worth of treasury shares from 2009 to 2018.
Lily: Gap between S & P 500 gains and disappointing US market data is largest ever
Powell and possible anger
Faced with what the Federal Reserve Chairman Powell has called the "opposing currents" of Trump's trade war, hitting recent economic data and corporate earnings, markets expect the central bank to cut interest rate later this month.
The danger is that any fall in interest rates could trigger a market crisis, similar to the so-called "slowdown crisis" of 2013, which triggered a surge in US Treasury yields after investors learned that the Fed was putting a brake on its quantitative easing. Program (QE).
Powell's half-yearly testimony to Congress next Tuesday and the release of the June FOMC meeting minutes Wednesday may provide more clues.
"A rate cut in July is still inevitable," said Luke Bartholomew, investment strategist at Aberdeen Standard Investments. "Employment growth remains a positive element among a fairly diverse set of US data. However, markets are now expecting a reduction, so they will get out of bed if they do not get it. "
But at the Fed's June meeting, the median forecast of Fed officials was not to lower rates in 2019 and some voting members of the interest rate setting committee, such as vice-chairman Fed Chairman for Supervision, Randy Quarles, have publicly sought to justify a rate. Cut.
"The level of certainty [that the Fed will cut in July] is not justified, "said John Vail, chief strategist at Nikko Asset Management, highlighting recent comments by US Federal Reserve Vice President Richard Clarida, who said in June that the central bank could not not be "handcuffed" by the markets.
Vail nonetheless admitted that the stock markets seemed to be able to hope for a reduction in rates. "At least in the short term, the markets believe that they can have their cake and eat it too," he said.
Read: It's "hallucinatory" to expect a Fed rate cut by half a point now, but economists are still waiting at a quarter-point cut of point
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