The market isn’t far from all-time highs, but volatility remains elevated. This could be a sign of investor anxiety over trade. Meanwhile, core producer prices for May topped estimates.
FIGURE 1: RISK BUSINESS SLOWS: Both the dollar index (candlestick) and gold prices (purple line) have retreated slightly over the last few days from their recent highs as many investors seem more inclined to put money into “riskier” assets. Data Sources: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Energy Dive: It can often be a warning sign of weakness in the economy when crude goes soft, the way it did for a couple of weeks before last week’s late rally. U.S. crude seems to be stabilizing above $53 a barrel, but that’s still well below the April high for the year of above $66 and last fall’s high above $76. It’s also not far above recent five-month lows just above $50.
There was an interesting graphic in USA Today last week showing renewables gaining on fossil fuels. This doesn’t necessarily have a huge impact on crude, considering crude still runs most of the world’s cars and trucks, not to mention that battery-powered planes don’t appear to be on anyone’s close horizon. However, the move to renewables for power generation could mean hard times for crude’s cousin, natural gas, as wind and solar are becoming more price-competitive vs. natural gas in the electricity markets. If you haven’t looked lately, natural gas futures are really struggling, with the front-month contract recently falling to a three-year low. Cheaper natural gas could give consumers a break as they cool their homes this summer, perhaps putting more money in their pockets for other purchases.
Believe It Or Not: Earnings Season Approaching: The start of Q2 earnings is just over a month away, but that doesn’t mean it’s too early to start thinking about what type of results companies might deliver. In Q1, S&P 500 earnings fell 0.4%, according to FactSet, the first quarterly decline since Q2 2016. On the plus side, 76% of companies came in above analysts’ earnings per share estimates, above the five-year average of 72%. Health Care was the best sector performer with 9% growth.
In a worrisome sign, 86 S&P 500 companies have issued negative EPS guidance for Q2. FactSet said. It’s still early, but S&P Global Market Intelligence says it sees Q2 EPS falling 1.1%. We’ll see if those estimates change, but the pattern in recent years is for companies to beat early analyst projections. If earnings fall two quarters in a row, we’ll have what’s called an “earnings recession” on our hands, something that hasn’t happened since the 2015/2016 timeframe.
Two of a Kind: Arguably the most important two data points this week come Wednesday and Friday with the consumer price index (CPI) for May and retail sales for May. If the soft jobs report and recent tepid manufacturing data reflect a slowing economy, one might expect similar softness to show up with the inflation and retail sales numbers. Analysts expect a 0.1% rise in headline CPI, according to Briefing.com, and a 0.2% rise in core CPI. Headline and core were 0.3% and 0.1%, respectively, in April. If numbers come in light, it could raise more concerns about consumer activity.
The same could be said for retail sales, which have fallen in two of the last three monthly reports. They were down 0.2% in April, but analysts expect a big May comeback with 0.7% growth, according to Briefing.com. Some of the pressure in the April report came from weak automobile sales, and excluding those, core retail sales actually rose slightly. However, the jobs report means consumer health is going to probably get a closer look, so any weakness in retail sales might have more market impact than normal, especially on sectors like Consumer Discretionary and Info Tech.
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