This market is running out catalysts that can push it higher.
The Q1 earnings season is now effectively in the background even
though plenty of reports are still to come and the key April
economic data is also now out. The earnings picture has been
so-so for a while, but many in the market (read: the bond market)
seem to have a hard time buying into the improved U.S. economic
outlook that recent data seems to suggest. Today's soft data out
of China and ongoing tensions in Ukraine add to these worries. No
doubt pre-open sentiment is pointing towards a soft start for the
China's unofficial final PMI survey for April from
) showed modest improvement from the March level, but came short
of expectations and the preliminary April read. Importantly, the
survey puts the country's manufacturing sector still in
contractionary territory, likely indicating that earlier signs of
a rebound may have been premature.
There was growing optimism in the market some time back at the
government's mini-stimulus announcement where they planned to
invest in railroads and offer tax breaks to small businesses.
That package doesn't seem to have had much impact at this stage
as the final HSBC PMI survey shows a decline from the preliminary
April read, though it's probably too early to write-off the
effect of that package. But the bottom line is that China's
growth outlook is far from certain.
On the Q1 earnings front, we have entered the final stretch of
the reporting cycle as the bulk of the reporting season is now
behind us. It has overall been a weak season, with growth very
anemic, few companies beating top-line expectations and no
improvement on the guidance front. As a result, estimates for Q2
have started coming down, a trend that has been in place for
almost two years. Hard to envision earnings serving as a catalyst
for this market till this forward outlook materially improves.
The Q1 weakness came as no surprise to this market and is not the
reason for the market's double-mindedness; it's the uncertain
future outlook. After all, market prices reflect future
expectations, not current conditions. With margins already in
record territory, the only way the earnings picture will change
in any meaningful way is if we start seeing stronger revenue
growth, which will happen if the global economy will start
Friday's jobs report and other recent economic readings like the
ISM surveys show that we could ignore the shockingly weak Q1 GDP
report and look ahead to improved growth momentum in the coming
quarters. Even if we ignore the uncertain Chinese outlook, not
everyone is buying into the supposedly positive outlook for the
U.S. economy either. That's the way how most people will
interpret the bond market's reaction to the jobs and other recent
U.S. data. One could claim that the bond market is wrong in this,
but I have difficulty in making that claim.
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