Taking A Pause: Earnings, Data Keep on Rolling, But Hectic Pace Could Ease

The coming week might seem quieter after all the data and the Fed meeting of the previous week. But there’s still key inflation data on tap and some important earnings.

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Key Takeaways

  • Investors likely on watch for key inflation data due out later in coming week
  • Metals prices have been sagging as the dollar and Treasury yields strengthen
  • Geopolitics could still be a factor in the days ahead as China and the U.S. continue to spar [Geopolitics could still be a factor in the days ahead as China and the U.S. continue to spar]

(Monday Pre-Market) The coming week might provide a refreshing change for any long-term investors who’ve had their fill after gorging on last week’s banquet of a Fed meeting, a payrolls report, and the constant background noise of earnings. 

While earnings continue to roll along in the days ahead, fewer of the really big names report, aside from Disney (DIS) after the close Tuesday. For anyone counting, we’re about 80% of the way through earnings season. Hopefully long-term investors checked their portfolio allocations at mid-year, made necessary adjustments, and feel comfortable not watching every headline during this busy time.

Also, investors continue to digest Friday’s payrolls report, which looked better than the headline number of 157,000 jobs created in July might have some people believe. The government said the economy is averaging 224,000 new jobs a month over the last three months. That’s way above what’s needed to keep up with population growth.

Earnings Keep Their Edge

There’s really not much to complain about with earnings. They’ve been mostly solid, with a few notable exceptions. So far, 79% of S&P 500 companies have beat on EPS and 73% on sales. Those figures look strong compared with the historic trend.

The market is likely to continue to trade on earnings until the season is over, unless there’s  proof that something else is happening. That something else could be a geopolitical flare-up, a major tariff decision by either China or the U.S., or perhaps something unknown now. After earnings season wraps up, focus might begin turning toward the next Fed meeting in late September and the rumble of the U.S. midterm elections in early November.

Though the week begins with a bit of quiet on the data front, that changes Thursday and Friday when investors get a look at July producer and consumer prices, respectively. Recent price-related data, including the payrolls report and Personal Consumption Expenditure (PCE) prices, arguably didn’t show too much to worry about as far as inflation. 

However, the June producer price index released last month did raise some concerns, with prices up 3.4% year-over-year. That was the biggest jump since 2011. Investors might want to keep an eye on the July report Thursday, and for any signs that companies might start passing along price increases to consumers.

Fed Hike Seems Baked in For September

All of this, along with Friday’s payrolls, is probably getting a close look from the Fed. Speaking of which, there’s now a 93.6% chance of a Fed rate hike by the time of next month’s meeting, according to CME Group futures. That’s up a little from a week ago. So it seems that nothing in the payrolls report really changed investors’ views much about the chances for a near-term move. Chances of a fourth hike by the end of the year reached around 70% at the end of the old week, and some analysts expect the Fed to keep moving ahead with rate hikes steadily next year. That’s pretty much in line with the Fed’s latest “dot chart,” which will be updated next month.

If these rate hikes are slowing the economy, it’s hard to find evidence yet. The Atlanta Fed’s GDP Now indicator currently predicts 4.4% U.S. economic growth in Q3, up from the government’s estimated 4.1% Q2 GDP. The GDP Now number was even higher earlier last week, reaching 5% but then falling back on signs of slower real consumer spending growth and real private fixed investment growth.

Geopolitics Still A Possible Factor

It wouldn’t be all that surprising if the drumbeat of geopolitics continues in the coming days, and lately it seems like every time there’s another tariff headline the markets turn lower. However, stocks remain near their all-time highs, and have been bouncing back pretty quickly after trade-related losses. Also, volatility has been waning in recent days, with the VIX falling below 12 by late Friday. 

As far as companies and the impact of tariffs, it’s interesting to see that of the 70 S&P 500 companies that mentioned tariffs so far on their earnings calls, 24 are in the industrials sector, according to FactSet. Multinationals like Boeing (BA) and Caterpillar (CAT) remain potentially vulnerable to tariff developments, and the big population of such companies in the Dow Jones Industrial Average ($DJI) may have been one factor sometimes pressuring the $DJI vs. other major indices recently. 

FIGURE 1: Gold Dust: Over the last month, gold (candlestick) has been under pressure as both the dollar (purple line) and the 10-year Treasury yield (blue line) have climbed. Data Source: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

It’s All Fun and Games: Friday’s nonfarm payrolls report showed 157,000 jobs created in July, about 32,000 below consensus. Coincidentally, that number (32,000) was called out by the Bureau of Labor Statistics in its summary of retail jobs. The BLS said job gains in merchandise, clothing and food/beverage were “offset by a decline of 32,000 in sporting goods, hobby, book, and music stores, reflecting job losses in hobby, toy, and game stores." Some economists say the chief culprit could be Toys ‘R’ Us, which officially shut its doors at the end of June. News reports put the company’s workforce that lost their jobs last month as between 31,000 and 33,000. Some might see the Toys “R" Us bankruptcy as another casualty of the “Amazon Effect" — firms unable to find their footing in the new retail model, which includes a hybrid of brick-and-mortar outlets and e-commerce. Solid gains in retail, offset by one major bankruptcy — perhaps something to keep in mind as retail firms close out the earnings season in the next couple weeks.   

Staples Show a Little Life: After lagging the broader market most of the year to date, consumer staples seemed to find their mojo toward the end of the week. The beleaguered sector was one of the market leaders Friday, perhaps drawing some help from the July payrolls report. Though job growth in July wasn’t stellar, the 2.7% year-over-year rise in wages came in near the high end of the recent range, perhaps a sign that consumers could have more money to spend as back-to-school season starts in earnest. In addition, upward revisions to the previous two payrolls reports showed average jobs growth a very healthy pace of 224,000 a month. Solid earnings from Clorox (CLX) on Thursday also seemed to help clean up the red ink for staples. However, the maker of cleaning and other household products recently raised prices and continues to face what it calls “significant cost headwinds,” so it could remain one to watch. Some of the biggest staples companies, including Wal-Mart (WMT) and Target (TGT), are due to report results later this month.

Metals Mashed: A lot of attention turned to the gold market last week as the shiny metal saw its price fall back toward $1,200 an ounce after surging to $1,350 as recently as April. Gold is trading at its lowest levels since early last year, hurt in part by the stronger dollar and rising U.S. Treasury yields. However, the real story might be more about gold’s cousin, copper, which fell to near its lowest levels in a year last week below $2.73 a pound and down 17% from a four-year high set in June. Copper is often seen as a barometer of economic demand because it’s used in so many industrial products. At this point, concerns about China’s economy might be weighing on the metal more and more. The Chinese stock market is really taking it on the chin, and had another rough week last week amid as more trade salvos shot back and forth across the Pacific. If China’s economy sneezes, you can’t rule out other economies catching a cold, so copper could remain a commodity to watch as we monitor China’s situation.


Good Trading, 

JJ

@TDAJJKinahan 

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