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Don’t Head For the Hammock Yet: Busy Week Includes Apple Earnings, Jobs Data

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July 31, 2017

(Monday Pre-Market) It looks like another quiet summer week, interrupted only by dozens of key earnings reports, Treasury auctions, auto and truck sales, and the Fed’s favorite inflation indicator. Companies opening their books include Apple (AAPL) and Tesla (TSLA).

Oh, and there’s the little matter of a monthly jobs report to top things off Friday. Other than that, however, it’s probably OK to go back to the hammock with a good novel.

All jokes aside, the market’s coming off a week of record highs, spoiled only slightly by a little pullback early Friday as investors took some money off the table partly in reaction to Amazon’s (AMZN) earnings miss. Exxon Mobil’s (XOM) earnings also came as a bit of a disappointment. Some of the more defensive indicators, including bonds, gold, the VIX, and the yen, found buyers near the week’s close as caution came back into play (see below). It’s going to be interesting to see if that continues in the new week.

Whether it does could depend on any number of metrics. Earnings are far from over, and this week brings a host of big names like Archer Daniels (ADM), BP (BP), Pfizer (PFE), AAPL, Prudential (PRU), TSLA, Kraft Heinz (KHC), Kellogg (K), and Toyota (TM). AAPL comes after the close Tuesday, so fasten your seatbelts.

Until late last week, earnings had been humming along, with around three-quarters of companies beating Wall Street’s bottom-line estimates. Monitor that number as the coming week rolls on to see if earnings continue surprising to the upside.

While earnings might dominate the news, don’t forget that we have a bunch of fixed income auctions to get through this coming week as well, and that could represent a good opportunity to get a sense of demand for U.S. debt. There was a little weakness in one of the more recent short-term Treasury auctions, which some analysts blamed on growing concerns about whether Congress would pass legislation to raise the U.S. debt ceiling before it becomes an issue later this year. The failure of Congress to pass health care legislation last week puts the budget front and center as one of the next items of business, meaning attention could start turning toward the looming debt ceiling issue.

Congress could also be on the front burner as thoughts start turning toward the possibility of tax reform legislation. While health care seems to have nine lives, it’s also proved a real hot potato, and its most recent failure might raise questions about whether Congress can get together on taxes, another major initiative close to many investors’ hearts.

From a sector standpoint, health care actually moved higher Friday morning after the health legislation’s early morning death, while consumer discretionary took a dive following AMZN’s earnings report. Looking back over the last month, the leading sector is financials, which were up more than 3.5%, followed by telecom and energy.

Speaking of energy, the oil market has been on a roll, and that’s another one to watch as the new week begins. U.S. futures were marching toward $50 a barrel as of midday Friday, sparked by strong domestic demand. Wednesday’s weekly U.S. stockpiles report looms large.

Another report to watch this week is the Personal Consumption Expenditures (PCE) price index for June, which bows before the market opens Tuesday. With the Fed’s eye solidly on inflation, this report arguably grows in importance, and it’s often considered the Fed’s most favored inflation indicator. In May, the price index was up 1.4% from a year earlier, down from a 1.7% increase in April and well below the Fed’s 2% goal. One thing to consider going into Tuesday’s report is whether the government’s stronger 2.6% gross domestic product (GDP) growth estimate for Q2 might have given inflation a bit of a lift. We shall see.

The fun continues Tuesday with auto sales, though earnings from three of the biggest auto companies last week told investors much about the current environment, namely that sedan sales continue to flag. In general, light vehicle sales have been moving lower for some time, but aren’t too far below the huge levels of the last two years.

It’s all capped off Friday with the July employment report, and the way things have gone recently, this one could be hard to call. May job growth surpassed Wall Street’s expectations with a reading of 222,000 new jobs, but don’t forget that was one month after most investors found April’s growth disappointing. It’s probably better to focus on the year-to-date average monthly growth of 180,000 and see if Friday’s reading is near that, which would imply that steady job gains continue. There’s nothing in the last few weekly new jobless claims data to indicate any sort of slow-down. As always, we’ll also keep an eye on wage growth, which has been pretty sluggish lately. 

SPX

FIGURE 1:SPX STARTS WEEK NEAR RECORD HIGHS.

The S&P 500 Index (SPX), tracked here over the last three months through midday Friday, posted record highs last week but showed some signs of leveling off from its dizzying recent climbs. Technical support lies in the 2,423-2,441 range on any pullback, according to research firm CFRA. Data source: Standard & Poor’s. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Safety Flight? As stocks came off their record highs late last week, there were some signs of a flight to so-called “safer” assets, with gold up to its highest levels since early June, the yen rising vs. the dollar, and high-yielding stock sectors like telecom finding some buying interest. U.S. Treasury bonds, which had fallen Thursday, climbed a little early Friday, with the benchmark 10-year yield falling back below 2.3% by midday. The VIX, which indicates volatility, climbed to nearly 11. The question is whether these potential signs of investor caution — some of which might relate to weaker-than-expected earnings from a few key companies as well as the government’s slight downward revision of Q1 gross domestic product growth to 1.2% from the previous 1.4% — continue as the new week gets underway. Keep a particularly close eye on gold and bonds. Recent lows near 2.22% for the 10-year yield might represent support, while the $1,270 an ounce mark looks like a technical resistance area for gold.

Don’t Overlook Durable Goods: While it almost got lost amid the host of earnings reports, the headline June durable goods number easily beat Wall Street analysts’ estimates, rising 6.5%. Consensus had been for a 2.9% increase, according to Briefing.com. A major surge in orders for transportation equipment accounted for most of the gains, but with transportation subtracted, new orders for durable goods rose just 0.2%. Another aspect of the report — orders for nondefense capital goods excluding aircraft, which is sometimes regarded as a proxy for business investment — actually looked weak, falling 0.1%, though shipments of such goods did rise.

Get Ready for Chicago PMI, Housing Data: The new week starts out with a bang as Chicago PMI for July along with pending home prices both are due soon after the open Monday. Last month’s Chicago PMI reading of 65.7 was way above expectations and signaled possible strength in the Midwest manufacturing sector. We’ll soon find out if that reading — the highest in two years — was a blip or the sign of a more prolonged move higher. Keep in mind that the Kansas City Fed’s manufacturing production index looked weaker in July. Pending home sales fell 0.8% in June, burdened in part by rising housing costs and falling supplies.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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