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Financial Sector To Kick Off Earnings Season, But Economic Data Also Loom

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April 11, 2016

(Monday Pre-Market) Financial sector earnings are likely to grab headlines this coming week, but there’s also important data on the way that may help give investors a better reading of the U.S. economy. And crude oil continues to be a big factor in the stock market’s ups and downs.

One key data marker is March retail sales early Wednesday. So far this year, this benchmark has delivered mixed results, but traditional brick and mortar stocks have done well. In February, retail sales fell 0.1%.

There’s also the Producer Price Index (PPI) on Wednesday morning, and the Consumer Price Index (CPI) on Thursday. Both PPI and CPI fell in February, but core CPI, which excludes volatile food and energy components, rose in both January and February, and was up 2.3% year over year through February, the largest year-over-year gain in nearly four years.

On the earnings front, the focus is likely to be on the big financial stocks, with JP Morgan Chase (JPM) reporting before the open on Wednesday; Wells Fargo (WFC) reporting before the open on Thursday, and Citigroup (C) reporting before the open Friday. Financial sector stocks were among the early gainers Friday, up nearly 1%, but the sector is down nearly 8% year to date, and expectations are for all three of the big companies mentioned above to come in with earnings below year-ago levels. In fact, consensus is for earnings well below last year’s in the case of JP Morgan and Citigroup.

At the quarter’s outset, expectations were for a 1.5% increase in year-over-year earnings for the financial sector. But early this month, FactSet said it expects an 8.5% drop in year-over-year earnings. Other analysts aren’t as bearish, but still expect a significant earnings drop for the sector. Downward revisions have hit some of the sector’s biggest companies, including Bank of America Corp. (BAC), JP Morgan, and Citigroup.

Financial stocks didn’t get any help from the Fed in the first quarter. The Fed pulled back its projections from four rate hikes to just two for 2016, and didn’t raise rates at its March meeting. Financial stocks typically benefit from higher interest rates, particularly at the long end of the curve.

While we’ve seen some hawkish comments from a few Fed officials recently, the most recent word late last week was dovish. Both Fed Chair Janet Yellen and New York Fed President William Dudley said Thursday and Friday that they advocated a gradual approach to interest rate hikes. The Fed seems to remain focused on weakness overseas and its possible effect on the U.S economy. Ten-year Treasury yields, which tend to rise when there’s more confidence about the economy, fell below 1.7% at one point last week, back near the year’s lows, but climbed back above that level by midday Friday.

Banks aren’t the only sector reporting next week. Metals giant Alcoa (AA), will lead off the earnings season after Monday’s close. Alcoa’s earnings have become like the Cincinnati Reds, which traditionally play the first Major League baseball game of the season. It’s a harbinger of earnings action beginning, but banking stocks likely hold more interest to many investors next week after the turbulent first quarter.

S&P 500

FIGURE 1: PIVOTING AROUND 2050.

The S&P 500 (SPX), plotted here through midday Friday on the TD Ameritrade thinkorswim® platform, was pivoting above and below the key psychological level of 2050. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Oil Makes a Reversal: After sagging at the start of last week to the lowest levels since early March, U.S. crude oil futures soared Friday by 6% at one point, helped in part by falling U.S. crude stockpiles, an interruption to a U.S. pipeline, and dovish comments from Fed officials. The market got a boost when both Fed Chair Yellen and New York Fed President Dudley made remarks that sounded optimistic about the economy and advocated a gradual approach to interest rate hikes. A strong U.S. economy accompanied by a cautious rate hike policy can sometimes set the stage for rising oil prices.

Oil Up? Stocks Rise Too. After searching for a catalyst earlier last week, the stock market seemed to find one on Friday: Oil. The stock market has been correlated closely with oil most of this year, and some of the strength we saw in equities Friday came in part from rising oil prices. Energy stocks were among the leaders, up more than 1.8% by midday Friday. Oil again could be a big factor in the coming week, and it will be interesting to see what the government says about U.S. stockpiles in its weekly supply report Wednesday as the U.S. heads into the spring and summer driving season. There’s also the planned April 17 supplier meeting, when we’ll find out if key OPEC and non-OPEC suppliers can agree on a production freeze. Remember, of course, that oil prices are still down about 20% from a year ago, even with Friday’s rally. But crude enjoyed a vigorous spring rally last year.

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com

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