Traders and finance professionals are working on the opening bell of the New York Stock Exchange (NYSE) Floor on January 2, 2019.
Drew Angerer | Getty Images
Economic sluggishness and earnings growth will be a recurring theme in the markets over the coming week as investors wait for Fed interest rate cuts at the end of the month.
More than a quarter of the S & P 500 companies reported earnings in the coming week, the second big week of the second quarter reporting season. The FAANG names, such as Alphabet and Amazon, and McDonald's blue chips at Boeing and United Technologies are among the 130 companies reported.
There are also key economic data, including Friday's second-quarter GDP, which is expected to slow to 1.8% from 3.1% in the first quarter, according to Refinitiv. On Thursday, durable goods are reported and will include an update on business investment. There are also existing home sales on Tuesday, new home sales on Wednesday and leading economic indicators on Thursday.
But there will be no Fed speakers after a parade of central bank officials last week, including Fed Chairman Jerome Powell. The most powerful comments were, however, made Thursday by Fed Chairman John Williams, who launched a debate on how the Fed could cut rates at its meeting of 30-31. July – 25 or 50 basis points.
Although the New York Fed later said that Williams' remarks were not about current policy, market professionals have taken into account his comments on how central bankers should "act quickly."
Fed officials will not be speaking publicly in the coming days of policy meetings, but market professionals will have a lot to debate. Futures on federal funds had a 50 basis point cut in July of 43%, after reaching 70% Thursday afternoon.
"Of course, the Fed will dominate next week, I think we will have a reduction of at least 25 basis points, I think we will not get a 50 basis point discount. The Fed was burned when it was daring, "said Tony Roth, director of investments at Wilmington Trust.
Roth said he thought the market was already forecasting a quarter point cut and that he did not see the Fed's rate cut as much as a long-term catalyst for equities. . If it drops by half a percentage point, it expects a short-term pop-up.
Economists estimate that the Fed will reduce interest rates even though recent data has improved. This is due in part to the fact that Powell pointed out that the Fed was focusing on the global economic downturn, the trade wars and the low inflation rate, and that it would do what it took to make sure that it was safe. economy remains expanding.
"The only real catalyst that would really help the market would be a trade deal with China," Roth said. "I think this probability is less than 10% We are very pessimistic about the possibility of a real agreement with China before the [2020 presidential] election."
So, in a vacuum before the Fed meeting, the market will monitor profits. When profits were generated last week, equities eased off their record series as some companies lowered their forecasts and most of them exceeded their earnings and earnings estimates.
On Friday morning, according to Refinitiv, 77% of some 80 companies reported had exceeded their earnings estimates and 65% exceeded their revenue forecasts. On the basis of actual reports and forecasts, earnings per share of S & P Group companies are expected to increase by 1% in the second quarter. This is up from expectations that earnings growth would be slightly negative this quarter.
"If you look at the numbers, we are above the averages for the highs and the net times, but at the same time, when we look at the revisions, every day we get revisions for the third and fourth quarters, and they The earnings recession is a big concern when you reach the third and fourth quarters and next year, "Roth said.
Roth said he was currently neutral on risky assets and that he was witnessing a slowdown in growth in smaller US companies likely to spread through the food chain.
"We are seeing the fundamental flaws of the economy in small businesses and in the labor market of small businesses, and on top of that, you have these big macro risks", such as trade and the upcoming elections, has Roth said.
Earnings growth was moderate in the second quarter, as was the pace of economic gains. If growth were to materialize as expected, it would be the first quarter where growth was less than 2% since the first quarter of 2017. Economists watch the evolution of consumer spending over the quarter after a recent recovery, as well as the decline in corporate inventories. .
"The data we need is not the second quarter.What is at stake is the growth and the magnitude of the Fed rate cut.I do not think the second quarter will have a big impact on the Fed's thinking, "said Marc Chandler, chief markets strategist at Bannockburn. Global Forex. "It 's really the third quarter' s progress." It seems to me that the economy has slowed down in April and May and recovered in June with data on the economy. employment, retail sales and the manufacturing sector. "
Chandler said investors would also focus on the European Central Bank, which some economists believe could reduce its overnight deposit rate to -0.5 percent from today's -0.4 percent. Chandler said the probabilities of rate cuts are about 50%, which many also expect to see appear in September.
"While we wait for the Fed to determine whether it's 25 or 50 basis points and the ECB regulates all of its forms … emerging markets are progressing," said Chandler, noting Russia and Turkey could cut their rates over the next few days after similar measures passed last week by South Africa, South Korea and Indonesia.
"It just makes the story more global, you see the trade figures of China, Japan, Singapore and South Korea falter, you see that China's exports are suffering. Asia suffer, "he said. "The big surprise for China and Japan has also been on the import side – the decline in imports is really that of somebody else. [drop in] exports."
Rate reductions and currency wars
The strength of the dollar has been a consequence of the trade war and the Fed's action could help reverse the trend.
"If the Fed does not move, you will end up with a stronger dollar," which will have an impact on corporate earnings, Roth said.
"The dollar is strong enough and will be an increasingly important hurdle for US companies." It has not been much appreciated for 12 months, but if we observe a divergence in monetary policy between the United States and the US, rest of the world, see a carry trade develop where people would like to buy assets in the United States, "he said.
The dollar index was slightly higher this week, but Wall Street has focused on President Donald Trump's negative comments on the currency's strength. While Trump criticized the Fed, he also complains that other central banks are manipulating their currencies to give them a commercial advantage. Trump said the Fed should already cut rates, which it has not done since December 2008.
A number of Wall Street strategists said they now thought it was possible for the US government to intervene to weaken the dollar, but that would be unlikely.
Calendar for the coming week
Earnings: Halliburton, RPM International, TD Ameritrade, Steel Dynamics, Celanese, Cadence Designs, Whirlpool, Cal-Maine Foods, Bancorp Zions, Lifestyle Property Equity
Earnings: Coca-Cola, Travelers, United Technologies, Hasbro, AutoNation, Lockheed Martin, JetBlue, Fifth Third, Visa, Snap, Biogen, Chipotle Mexican Grill, Financial Discovery, Teradyne, FirstEnergy, CIT Group, Kimberly-Clark, PulteGroup, PulteGroup, Quest Diagnostics, Harley Davidson, Polaris, Sherwin-Williams
8:30 am: non-manufacturing by the Philadelphia Fed
FHFA real estate price at 9:00
10:00 am Sale of existing homes
13:00. 2 year auction
Earnings: Boeing, Caterpillar, AT & T, Facebook, Ford, Tesla, DeutscheBank, F5 Networks, Raymond James, Kaiser Aluminum, Graco, Las Vegas Sands, UPS, Northrop Grumman, Alexion Pharma, Hymn, Boston Scientific, FreeportMcMoran, Norfolk Southern, Northern Trust, Nasdaq OMX, Six Flags, NextEra Energy, LVMH
9:45 manufacturing PMI
9:45 am PMI services
10:00 am Sale of new houses
13:00. 5-year note auction
Earnings: Alphabet, Amazon.com, 3M, Intel, Starbucks, Inveb, Ambev, AstraZenca, Bristol-Myers Squibb, Comcast, Hershey, American Airlines, Nokia, Royal Caribbean, Tractor Supply, Brunswick, New Zealand, Diageo, Cenovus , Southwest Air, Expedia, Mattel, Air Alaska, Boston Beer, Petrobras, MGM Resorts,
8:30 am The first complaints
8:30 am Durable goods
8:30 AM Advanced Economic Indicators
10:00 am vacant dwellings
13:00. 7-year note auction
Earnings: McDonald's, Twitter, Abbvie, Nestle, Colgate-Palmolive, Illinios Tool Works, Lear Weyerhaueser, Cabot Oil and Gas, Phillips 66, Goodyear Tire
8h30 GDP T2 (advance)