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July 17, 2019

A Penny Earned

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<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >A Penny Earned</span>

A penny earned.  Stocks slid on Trump trade comments yesterday as investors turned their focus on earnings.  After some positive pre-bell earnings surprises stocks started the session in the black but quickly turned down on freshly sparked trade fears.

 

MY TWO CENTS

 

  1.  Old themes still govern the markets.  Yesterday’s session was teed up to be a positive one with all but one major earnings announcement beating Wall Street estimates, and then it happened.  The President, in a cabinet meeting, announced that “we have a long way to go” in reaching an agreement with China and added further that he could increase tariffs if he needed to.  That long-forgotten, but mostly eclipsed by the Fed pain reared itself and caused markets to sell off, albeit in a subdued manner.  But lest we forget the cost of the trade war, we will get plenty more reminders in the upcoming earnings announcements.  Balancing out the trade fear theme was a steady march of Fed governors who all seem to be inclined to lower interest rates.  Some are more aggressive than others, but most seem to be in the “at least one 25 basis point cut” camp.  Capping off the dove-fest was Chairman Powell himself, speaking at a dinner in France, who echoed his “we will act appropriately to sustain the expansion” motif.  He assured the audience that the Fed was “carefully monitoring” the situation.  OK, well we should be glad that they are monitoring the situation and acting appropriately, but more importantly, those words are dovish in Fed-speak.  The chance of at least two -25 basis point rate cuts by December is 91%, while the chance of three cuts is 58.7% (which is pretty good odds), according to Fed Funds Futures.  the Fed will meet in 14 days to vote on policy.

 

  1.  Mixed messages.  As I lament in my note constantly, not all things are cut and dried when it comes to the economy and the markets.  Yesterday’s economic numbers are a perfect example.  The Census Bureau’s release of Retail Sales showed a monthly increase of +0.4%, even with last month’s revised figure despite expectations of +0.2% growth.  In contrast, month over month Industrial Production came in flat after growing by +0.4% underscoring the weakness in manufacturing.  The numbers are a reminder that the current expansion is being driven by the consumer, which is good considering that consumers make up around 2/3 of GDP.

 

MARKETS

 

Stock traders were underwhelmed with comments made by the President regarding trade negotiations with China and traded the major indexes down in yesterday’s session.  The S&P500 dropped by -0.34%, the Dow Jones Industrial Average slipped by -0.9%, the Russel 2000 edged up by +0.01%, and the NASDAQ 100 sold off by -0.5%.  Bonds traded off and 10-year treasury yields climbed by +2 basis points to 2.1%.  Crude oil continued its fall, dropping by -3.29%, as gulf producers came back on line and some hints that Iran might be willing to negotiate with US officials.  On-again-off-again Bitcoin dropped a second day in a row, losing -11.34%, after Facebook’s Libra coin was assaulted by… almost everyone with a Washington DC zip code.

 

WHAT’S NXT

 

- This morning we will get housing numbers from the Census Bureau.  Housing Starts are expected to have receded by -0.7% month over month compared to last month’s decline of -0.9%.  Building Permits are expected to have grown by +0.1% for the month of June compared to May’s +0.3% increase.

-  This afternoon we will get the Fed Beige Book, which offers anecdotal information on economic conditions across different Fed regions.  It will be carefully watched as recent reports have been suggesting a slowdown in business investment activity.  Not to be dismissed, business investment still represents around 20% of the GDP.

-  A G-7 meeting starts today in France which brings together global central bankers.  Kansas City Fed President Esther George will speak today.

-  This morning pre-bell earnings had beats by Bank of NY, PNC Bank, and Bank of America.  We will also hear from US Bancorp, eBay, and Kinder Morgan.  After the bell, we will get releases from Netflix, Alcoa, United Rentals, and IBM, amongst others.

daily chartbook 2019-07-17