Monday, July 7, 2014
With not much on the economic calendar this morning, last week's
strong jobs report will likely remain the dominant theme in today's
session as well. Attention will soon shift to the second quarter
earnings season, with
(AA) unofficial kick-off to the reporting cycle after the close on
The sharp drop in the U.S. unemployment rate, now at its lowest
level since just before the financial crisis, and the improving
pace of job creation bodes well for the economy in the second half
of the year. The question is whether this improving backdrop
will force the Fed to raise rates than would otherwise be the case.
We will likely not find anything new in the minutes of the Fed's
June meeting that are coming out on Wednesday. But if the pace of
job creation remains elevated, then the Fed will have to step up
and prepare the markets for that day. With yields on longer-dated
treasuries nowhere near what would be considered 'normal,' the
market has a lot of catching up to do.
The Q2 earnings season won't ramp up till next week, though this
week's reports from Alcoa and
(WFC) will add to the early reports from the likes of
(ORCL) and others. Estimates for Q2 have come down, largely in-line
with the negative revisions trend that has been in place for quite
But more important than the growth rate in Q2 is the outlook for
the second half of the year and beyond. The consensus expectation
is for a material growth ramp-up in the second half of the year to
+8.5% total earnings growth from the first half's +2.1% pace.
Corporate guidance, which has persistently been on the weak side in
recent quarters, will determine whether those expectations will
hold or will need to come down. Thursday's strong jobs report
raises hopes that guidance this time around will start reflecting
this improving backdrop. We will find soon enough if that is the
Director of Research
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