With the European Central Bank the latest major central bank to hold interest rates steady and the Federal Reserve scheduled to release minutes from its last meeting, investors have plenty to chew on today from monetary policy makers.
European Central Bank holds rates steady
Consumer Price Index increases 0.4% in March
Delta beats expectations on top, bottom lines
(Wednesday Market Open) With the European Central Bank the latest major central bank to hold interest rates steady and the Federal Reserve scheduled to release minutes from its last meeting, investors have plenty to chew on today from monetary policy makers.
For now, as it waits for earnings season to start up in earnest later this week, the market seems happy with the wait-and-see approach from the ECB, which echoes the dovish stance taken by the Fed that has helped boost stocks so far this year.
At the last Fed meeting, the central bank held rates steady and sent strong signals that there might be no more rate hikes at all this year, citing slowing economic growth. Today, with the minutes, investors may try to glean more about policy makers’ outlook on the economy, inflation, and interest rates, but they may not find anything surprising.
The dovish stance from the central banks comes as global economic growth is forecast to not be as robust as once thought amid a continuing trade war between the United States and China.
In economic news today, U.S. consumer prices increased the most in more than a year in March as the price of rent, food and gasoline climbed, according to U.S. Labor Department data released this morning. The Consumer Price Index (CPI) increased 0.4% in March, the highest increase since January 2018. Still, inflation remains fairly tame with modest increases in wages so far, despite a tight labor market.
After Tuesday’s news flow, it may seem like the market is facing a case of “if not one thing, then another,” especially in the case of international trade.
The ongoing trade row between China and the United States has overhung the market for months, resulting in billions of dollars in tariffs between the world’s two largest economies and causing worry about global economic growth. And while it still remains arguably the most important issue facing the market, investors and traders got thrown a curve ball yesterday in terms of another trade issue.
On Tuesday, President Trump said the United States would put tariffs on $11 billion of European Union products amid an ongoing dispute over subsidies for airplane makers.
The amount is small compared to the hundreds of billions of dollars in tariffs already imposed between the U.S. and China on goods from each other. But it comes at a particularly sensitive time when the Fed and European Central Bank have lowered their growth forecasts and as some economic data has pointed to slowing economic activity in Europe, Asia, and the United States.
And the International Monetary Fund cut its outlook for 2019 global growth on Tuesday, due in part to trade issues. The fund now sees the global economy growing by 3.3% this year compared to its previous forecast of 3.5%.
The tariff and IMF news helped pressure stocks Tuesday, with the Industrials sector the day’s worst performer. Part of the pressure on Industrials came from Boeing (BA) and the airline industry.
Woes continued for Boeing (BA) as shares of the plane maker—whose 737 Max jet was involved in two fatal crashes—slid more than 1.4% after the company said there had been no orders of the plane in March, the month of the latest crash.
American Airlines (AAL) also lost altitude Tuesday, falling nearly 1.7% after citing the 737 Max groundings in lowering its revenue forecast. The company is expected to report earnings later this month.
One thing keeping visibility limited for airlines that operate 737 Max planes is the unknown surrounding when the 737 Max planes might be cleared to fly again, perhaps keeping clouds overhanging the shares of companies that operate them.
In airline news this morning, Delta (DAL) shares were up more than 2% after the company reported earnings and revenue that beat analysts’ expectations. DAL reported record $10.47 billion in revenue and unadjusted profits increased 31% to $730 million.
Figure 1: Gold (candlestick chart) on Tuesday gained ground as some investors sold equities likely due to worries about U.S. trade with Europe and the IMF cut its global growth outlook. The precious metal is often considered a “safe-haven” investment that often will rise in price amid uncertainty in other parts of the market. The dollar (blue line) was also slightly lower, which tends to help dollar-denominated gold by making it less expensive for buyers holding other currencies. Data Sources: CME Group, ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Spotlight on Banks: After this morning’s scheduled testimony before Congress, big bank executives still have to run the gauntlet of earnings season. With big banks starting their reporting season later this week after having been punished recently as longer-term yields have been on the decline, it could be interesting to see what executives have to say about how their companies are going to make money as long-term rates are expected to stay low. They can only cut expenses so much with automation in branches. Investors may also want to tune in to see what executives might say about whether the slowdown in Europe and Asia might affect their overseas businesses.
Earnings Recession? In a similar way that an economic recession is commonly defined as two consecutive quarters of economic contraction, an earnings recession can be thought of as two consecutive quarters of declining corporate profits. With many analysts on Wall Street expecting negative earnings growth for the reporting season ramping up now, it’s worth asking whether the declines could continue for two quarters. Investment research firm CFRA doesn’t think so. “We think the S&P 500 will miss a recession by a hair as Q2 EPS are projected to eke out a 0.7% advance,” CFRA said.
Participation Grade: The U.S. labor market has been tight for some time, which can lead to inflationary pressure if employers have to raise wages in a competitive jobs market. But, despite the tightness, rising wages haven’t moved the inflation needle into problematic territory. One reason for that could be that as unemployment in recent years has declined, labor force participation has increased, Fed Vice Chair Richard Clarida said in prepared remarks Tuesday. “These increases in participation have provided employers with a significant source of additional labor input and may be one factor restraining inflationary pressures,” he said. “Whether participation will continue to increase in a tight labor market remains uncertain.”
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