(Monday Pre-Market) The market rolls into mid-summer near record highs as it faces a cluster of earnings reports, central bank meetings, and a heavy economic calendar. It’s definitely going to be a full week.
Bank stocks remain at the head of the earnings parade, with Goldman Sachs (GS) and Bank of America (BAC) both stepping up to bat Tuesday followed by Morgan Stanley (MS) on Wednesday. We’ll see whether these results can round out the positive tone we saw from the big banks that reported Friday. Though bank stocks fell Friday (see below), other sectors continued to steam forward, with the S&P 500 Index (SPX) posting a new all-time high by midday.
Other sectors jumping into the earnings pool in the days ahead include health care, with Johnson & Johnson (JNJ) on Tuesday morning, and info tech as Netflix (NFLX) reports Monday and eBay (EBAY) and Microsoft (MSFT) both chime in Thursday. Friday brings two major components of the Dow Jones Industrial Average ($DJI) as General Electric (GE) and Honeywell (HON) report.
Mixed in with all these earnings are two key central bank meetings Thursday, as both the European Central Bank (ECB) and Bank of Japan (BOJ) release statements that day. There’s been some rumbling about the ECB possibly getting more hawkish (see below), so that one is definitely worth some attention. Another overseas development to watch is Chinese retail sales, which should be out by early Monday morning and could help set the tone for U.S. stock trading that day. China’s economy grew by nearly 7% in Q1, so we’ll see if that encouraged consumers there to go out and spend.
On the other hand, it looks like the Fed isn’t likely to make much news in the days ahead as it goes into its quiet period before the July 25-26 meeting.
From a data standpoint, housing starts and building permits for June both bow before Wednesday’s opening bell. Big banks reporting on Friday showed some softness in their mortgage businesses during Q2, but that might have been cyclical.
Bank stocks got slammed early Friday despite three of the biggest U.S. banks reporting stronger than expected earnings. There’s a sense that people might have wanted to see more bullish guidance, and concern about declining trading volume in this low-volatility environment.
What’s getting ignored is the fact that strong Q2 performance by banks didn’t happen in a vacuum and wasn’t necessarily a one-time bump. Loan activity improved, as did the credit card business, both of which can be signs of more optimism among consumers and businesses. Investment banking was another robust area for both JP Morgan Chase (JPM) and Citigroup (C).
Retail stocks got another shot in the arm Friday after a major banking firm put out a positive note about Wal-Mart (WMT). Shares of WMT, Gap (GPS), and Best Buy (BBY) all posted gains as Friday’s session advanced, helping continue a little retail rally that seems to be taking shape.
Still, the weak June retail sales data released Friday might give investors pause, as it was the second month in a row where the headline number fell. Retail sales in June were down 0.2%, following a 0.1% decline in May. While most categories of retail saw declines, the online sector once again posted pretty strong gains, a sign of where many shoppers are now headed.
And inflation shows no signs of life, as the Consumer Price Index (CPI) for June was flat. Core inflation, which strips out food and energy, was barely breathing with a rise of 0.1% for the month.
As the data remained soft and the market continued to digest Fed Chair Janet Yellen’s dovish comments to Congress earlier in the week, odds of more Fed rate hikes this year stayed at relatively low levels. Chances for a rate rise in September are below 9%, according to CME Group futures, while odds of a hike by the end of the year were at just above 50%. The Fed has previously forecasted three hikes this year, but some analysts are now looking for just the two we’ve already had, along with the beginning of some balance sheet reduction, which Yellen said will start in 2017.
Trump Bump for Steel Sector: Steel stocks made some gains recently amid heightened talk of possible U.S. import quotas. Shares of U.S. Steel (X) and AK Steel (AKS) were among those getting a boost. President Trump blamed China and other countries for the steel “dumping” he said is taking place. "They're dumping steel and destroying our steel industry, they've been doing it for decades, and I'm stopping it. It'll stop," President Trump told reporters, according to Reuters. "There are two ways — quotas and tariffs. Maybe I'll do both."
VIX, Dollar Slump, but Oil Revives: As stocks climbed last week, volatility sagged, with the VIX dropping back below 10 by the end of the day Thursday for the first time since late June and staying below 10 early Friday. It’s the first time the VIX has been under 10 in the month of July since 2005. Crude oil, however, held in there, rising to above $46 a barrel Friday despite increased output from both OPEC and the U.S. Some analysts gave rising demand credit for the gains, but a weak U.S. dollar might also be playing a part as well. The dollar index fell to new lows for the year by midday Friday at just above 95, down from over 100 back in January. Continued weak U.S. data and declining rate hike odds for the remainder of 2017 both appear to be hurting the dollar.
European Markets Not Taking Vacation: Though many Europeans like to take a few weeks off in the summer, the markets across the Atlantic don’t show any signs of cooling off, having just had their best week of the year. The pan-European Stoxx 600 is now up about 7% year to date and 14% year-over-year as European economies continue to recover from their long weakness. Investor funds keep pouring into European stocks, the Financial Times reported, and many analysts look for strong Q2 earnings from European companies. Stocks in Europe also got a boost this week from Fed Chair Janet Yellen’s dovish comments, analysts said. Meanwhile, the benchmark German 10-year bond yield rose back above 0.5% amid growing talk that the European Central Bank (ECB) could soon adopt a more hawkish stance, which would likely reinforce thoughts that Europe’s economy is improving.
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