Monday, April 15, 2019, 12:31 PM, EST
- Empire Manufacturing Index 10.1 vs. 8.0 expected.
- Earnings from Citigroup, Goldman as the first full week of 1Q earnings season begins.
- Mnuchin said China and the U.S. "getting close to the final round of concluding issues."
- Fed's Evans sees rates low until 2020.
Last week the season unofficially kicked off with results from JP Morgan and Wells Fargo. JPM CEO Jamie Dimon was bullish on the economy, which helped stocks to a 269 Dow point gain Friday. It's worth repeating his take here: "If you look at the American economy, the consumer is in good shape, balance sheets are in good shape, people are going back into the workforce, companies have plenty of capital… It could go on for years… There's no law that says it has to stop… There may be a confluence of events that somehow causes a recession, but it may not be 2019, 2020, 2012."
Bulls are hopeful that the U.S. can continue to (slowly) grow and that the global economy can get some help from China stimulus. Most analysts are expecting a decline in 1Q earnings but the key will be (hopefully) some bullish guidance for the second half of the year.
I thought I'd spend a paragraph or two on each of the next four days discussing the 1Q earnings season. I'm thinking today we can set the stage for Q1 earnings expectations, Tuesday can cover what the few companies that have released so far have said, Wednesday can be about revenue expectations and Thursday we can cover the Q2 and 2H 2019 outlook. Friday stock exchanges are closed in observance of Good Friday.
So setting the stage for the much-awaited 1Q earnings season. First of all, the bar is not high. When we wrote our 1Q report at the end of March, 1Q earnings were estimated to fall 3.7% while Q2 earnings were hanging on by a thread at 0.1%. Analysts have been cutting 1Q estimates just about every week since December, and the current expectation is tha t earnings
will fall 4.3% for the quarter. Comps are tough of course due to the tax law changes that helped results in 2018. I f earnings
decline as expected, it will be the first quarterly decline in earnings since Q2 2016.
Still, because rates and rate expectations have fallen since December due to the Fed's change in stance, markets are willing to be patient until earnings return to positive territory in the second half of the year. In fact, just today Chicago Fed President Charles Evans that he can see rates staying flat into 2020. He says he's happy to let things play out until cost pressures lead to higher inflation, which is running below the 2% target.
This is why guidance for the second half of the year is so important. No one is expecting much from this quarter so even some small positive outcomes could help stocks. One-year forward P/E's have recovered from their December lows below 15 and sit at about 17X expected 2019 earnings. Still, P/E's remain below September 2018 levels despite the lowered earnings expectations (chart below). Tomorrow we'll cover what companies are saying in their earnings conference call
s so far.
Today, Citigroup beat on 1Q earnings and traded marginally higher pre-open before slipping in the regular session as their CFO said that trading rebounded in the quarter. Goldman's first-quarter profit rose 2% from a year ago, beating analysts' expectations, but shares fell pre-open due to lower than expected sales and trading revenue. On that note, equity trading volumes have been very light which some interpret as skepticism about the rally while others think this means buyers will come in from the sidelines. As the week goes we'll see releases from 46 S&P 500 companies including Bank of America, BlackRock, Morgan Stanley, American Express, Johnson & Johnson, Netflix, IBM, United Continental, PepsiCo, Honeywell, Alcoa and Taiwan Semiconductor to name a few bellwethers.
More broadly, stocks are mixed with Staples, Healthcare and Utilities trading in positive territory while Financials, Energy and Industrials are lower. Overall, seven sectors are trading lower against four higher. There is not enough new news on the China or earnings front to meaningfully move stocks. Many will be watching for Wednesday's release of China's GDP, industrial production and retail sales data.
In merger news, Waste Management is buying Advanced Disposal Services for about $2.9 billion and Siris Capital will buy digital printing firm EFI for $1.7 billion. On Chin trade, U.S. Treasury Secretary Steven Mnuchin said the countries were "getting close to the final round of concluding issues." More telephone conversations are scheduled for this week. Meanwhile Crude Oil is trading slightly lower to about $$63.41 after the longest run of weekly gains in three years. Production curbs and hoped-for global growth are helping prices.
Day Time Event Period Survey Actual
Monday 8:30am Empire Manufacturing Apr 8 10.1
Tuesday 9:15am Industrial Production MoM Mar 0.20%
Tuesday 10:00am NAHB Housing Market Index Apr 63
Wednesday 7:00am MBA Mortgage Applications Apr. 12
Wednesday 10:00am Wholesale Inventories MoM Feb 0.30%
Wednesday 2:00pm Federal Reserve Beige Book
Thursday 8:30am Retail Sales Advance MoM Mar 1.00%
Thursday 8:30am Retail Sales Ex Auto MoM Mar 0.70%
Thursday 8:30am Retail Sales Ex Auto and Gas Mar 0.40%
Thursday 8:30am Philadelphia Fed Bus. Outlook Apr 11
Thursday 8:30am Initial Jobless Claims 13-Apr 205,000
Thursday 8:30am Continuing Claims 6-Apr 1.72 mm
Thursday 9:45am Markit US Manufacturing PMI Apr P 52.8
Thursday 9:45am Markit US Services PMI Apr P 55
Thursday 10:00am Business Inventories
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Brian's Technical Take
March 20th was the date of the last FOMC when the Fed surprised markets by reducing its 2019 rate hike expectations from two to zero while forecasting an end to its balance sheet reduction, QT, by September. The dovish tone drove the curve sharply lower and inverted the 3M - 10 Yr Treasury spread for the first time since 2007. This led the rate sensitive financials to experience their worst weekly performance since 2011, while the broader S&P 500 Index experienced its largest pullback since the rally that began off the December loss.
While the direction of the move in rates was less clear, the magnitude was expected. In the February 26th MIDDAY UPDATE we highlighted the extreme coiling price action of the 20-year duration Treasury bond ETF (ticker TLT) which we were able to measure by the low spread between the upper and lower Bollinger Bands. "Time will tell which direction this plays out, but the treasury market could be on the cusp of a significant transition from consolidation to trend. The battle lines are clearly defined and the growing pressure between buyers and sellers is high. If recent history is a reliable guide, the ensuing move is going be powerful."
The dovish FOMC in late March drove the TLT ETF above major technical resistance at the 123 level. The TLT has shown an extreme sensitivity to this level on countless occasions since the summer of 2017. Now as bond prices have seen a relatively modest pullback through the first half of April, the TLT is now retesting the 123 breakout level. If prior resistance now turns into support, common technical price action, the TLT could be ready to resume its uptrend and thus yields lower. Over the short term that may not bode well for regional bank KRE ETF which has rallied more than 12% off their late March lows.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.