The stock market today appears on track to open on a positive
note, but a lot will depend on what the June manufacturing ISM
report coming out a little later will shows. The consensus
expectation is for the survey to show modest improvement from the
prior month's contactionary reading. Overnight data out of Asia
and Europe presented a mixed picture, but markets seem to be
going back to a Fed-centric framework where positive or negative
economic data may not mean what the headlines say.
The Bank of Japan's Tankan business sentiment survey showed its
highest reading in more than two years. This is the first reading
of this quarterly survey since BoJ initiated its aggressive
easing program in April and is likely indicative of improving
trends in Japan's underlying fundamentals. Unlike Japan, the
outlook for China does not appear be that upbeat, with both the
official and private-sector PMI measures for June showing
negative momentum in the factory sector.
While questions about China's growth outlook precede the
assumption of power by China's new political leadership earlier
this year, the country's new leaders appear to be more concerned
about stamping down speculative excesses than nudging growth
higher. It is not clear at this stage what these diverging growth
outlooks for China and Japan mean for global growth, but
uncertainty about China is no doubt problematic for the markets.
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The ISM survey coming out a little later is no doubt a top-tier
report, but this holiday-shortened week's calendar is full of
other important economic data as well. Markets will be closed on
Thursday for July 4th and open only half the day on Wednesday,
but we have the June non-farm payroll report coming out on
Friday. We will get a preview of Friday's jobs report Wednesday
morning from the ADP report and a host of other economic data,
including speeches from Fed officials.
Trading volumes will likely be on the light side this week, which
typically exacerbates volatility. And all of this comes ahead of
the start of the Q2 earnings season next week. Expectations for
Q2 earnings growth remain low, improving the odds that positive
earnings surprises will likely be in-line with historical
averages. But a lot will depend on top-line growth and guidance
for the third quarter and second half of the year.
Please note that while estimates for Q2 earnings kept coming down
as the quarter progressed, we haven't seen much downward
adjustments to expectations for Q3 and the second half of the
year. It will be interesting to see how the market responds to
negative estimate revisions in the current backdrop of less
certainty about the Fed.