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It’s Earnings Season Again: Big Banks A Highlight, But Fed Speeches In View Too

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July 11, 2017

(Tuesday Market Open) The overriding theme this week is big bank earnings, with some Fed speeches sprinkled in as well. There’s a lot of excitement in the market to finally get earnings season underway, and some of the largest U.S. banks start reporting Friday.

Before all that, however, the earnings vanguard marched into view with PepsiCo (PEP) today. PEP beat analysts’ sales and earnings estimates and raised its guidance for the year, starting the new season off on a positive note.

The key economic number today is the monthly Job Openings and Labor Turnover Survey (JOLTS) for May. Monthly JOLTS became highly anticipated for a while after Fed Chair Janet Yellen talked about its importance, but it’s lost a little of its luster given the continued impressive employment situation highlighted by last week’s monthly payrolls report. Nevertheless, it’s worth a look, and so are wholesale inventories for May, which also come out at 10 a.m. ET.

Speaking of Yellen, tomorrow marks the start of her testimony to Congress. She continues on Thursday. Yellen seldom delivers surprises on these occasions, but the question-and-answer format opens things up slightly, meaning she might be asked to comment more specifically on the Fed’s balance sheet plans and on inflation. Before Yellen speaks, two other Fed speakers step up to the podium today, with Fed Governor Lael Brainard and Minneapolis Fed President Neel Kashkari on tap.

Two other big stories to watch today: The first is Snap (SNAP), a stock that IPO'd with much fanfare in March. The stock closed below the $17 IPO last night for the first time, and is down another 3% in pre-market trading.  The other story, and one we’ve talked about a lot, is the continued struggle of crude oil. The $44 level remains a support point, and U.S. crude futures fell below it early Tuesday.

Looking back on trading Monday, financials ended a little lower as the S&P 500 (SPX) posted small gains.  Info tech bounced back from recent weakness, rising 0.8%, but lately it’s been a choppy run for that sector. We’d need to see a few days of gains for it to start looking like a turn-around from the weakness that’s weighed on tech for the last month or so. Analysts expect tech sector earnings to be among the strongest of Q2, and those numbers start coming in over the next few weeks.

The U.S. dollar rose slightly Monday but keeps skating along not far off the yearly lows. Weaker expectations for U.S. Q2 gross domestic product (GDP) growth might be playing into that (see below). Bond yields remain near recent highs and gold near recent lows. European markets came under pressure early Tuesday following a rise in many Asian stock markets.

The VIX climbed back above 11 early Tuesday, but volatility remains below last week’s spike. The prolonged period of low volatility that’s characterized 2017 hasn’t gone away despite recent geopolitical jitters.

Dollar

FIGURE 1: IN SYNC.

The U.S. Dollar Index, tracked here through Monday on the thinkorswim® platform from TD Ameritrade, is dragging along near recent lows, but that hasn’t helped gold (blue line), which also sank toward the low end of its recent range over the last few days. Often, a weak dollar injects some power into the gold market, but that isn’t the case now. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Q2 Earnings Engine Begins to Rev Up: With bank earnings this Friday, let’s take a look at overall expectations for Q2 earnings across all sectors. Earnings growth is expected to rise 6.2% year over year, representing the fourth-consecutive quarter of year-over-year increases, according to S&P Capital IQ. Six sectors are expected to see year-over-year increases, led by energy, information technology and financials, the firm said. Year-over-year EPS declines are expected to be largest in the consumer discretionary, industrials, and utilities sectors. The roughly 6.2% rise in EPS expected in Q2 pales next to the 15.5% rise in Q1, but comparisons are a bit tougher. Keep in mind that even with these big EPS gains included, the S&P 500 (SPX) would be trading at more than 19 times trailing earnings, a 13% premium to the median since 1988, according to Sam Stovall at research firm CFRA.

Inflation? Maybe by 2020: One big market mystery this year is the case of the missing inflation. We’re likely to get a better sense of near-term price numbers later this week with June producer and consumer price index data. Looking further out, things seem pretty sanguine for the next year, at least according to a nationwide June survey of consumer expectations released Monday by the New York Fed. The median consumer inflation expectation looking out over the year ahead was 2.5% in June, down from 2.6% a month earlier. However, asked about their inflation expectations looking three years out, consumers look for 2.8% growth in prices, up from 2.5% a month earlier. Respondents under the age of 40 helped drive the higher three-year expectations, the New York Fed said. As many investors might know, inflation expectations can often help fuel actual price action, so this survey remains worth watching.

Watching GDP Forecasts: The first part of this week is a little light on data, though things tune up in a big way Thursday and Friday with producer and consumer prices along with retail sales for June. Looking farther ahead, it’s time to start thinking about Q2 gross domestic product now that we’re in Q3 and have the final government estimate for Q1 in hand (1.4%). The Atlanta Fed’s GDP Now indicator pegs Q2 GDP growth at 2.7%, a nice bounce from the sluggish Q1 growth but still well below where the indicator was a couple months ago when it forecast 4% growth. Weak auto sales and manufacturing data have helped drag it down. The New York Fed’s Nowcast has Q2 GDP growth far lower, at 1.96%. Some analysts say this relatively slow GDP growth is reflected in the U.S. dollar, which stayed near its 2017 lows Monday.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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