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Weekly Market Wrap

By David Morrison  |  03/08/2018 14:17
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This article looks ahead to potentially market-moving events next week, and back at central bank meetings, recent data releases and the US/China tariff showdown

Look-ahead


The second quarter earnings season is beginning to wind down now. However, amongst the major corporates reporting next week are Coca-Cola, Commerzbank, Costco, Domino’s Pizza, Glencore, HSBC, Office Depot, Tyson Foods and Walt Disney.

With well over half of the companies in the S&P 500 having now reported, the earnings season has once again proved relatively solid. According to FactSet, over 80% of the index’s constituents have beaten expectations on earnings while 77% have done so on revenues.

But there have been some concerns, particularly from the tech sector, that corporations may struggle to repeat their stellar performances going forward. Facebook, Twitter and Netflix have all disappointed in one way or another and overall forward guidance has been downbeat. This has led to some sharp sell-offs in their respective stock prices although these were offset to some extent towards the end of the week by better news from Apple, Tesla, Amazon and Alphabet (Google).

But Wall Street analysts are proving reluctant to raise their forecasts for earnings and revenues in the third quarter. This is proving to be a headwind and is, along with the ongoing US/China trade tariff tit-for-tat, a reason why the US majors have failed to take out their all-time highs despite a strong earnings season.
With Non-Farm Payrolls out of the way, next week is a quieter one for economic data releases. However, look out for monetary policy meetings from the Reserve Bank of Australia (expected to hold at 1.50%) and the Reserve Bank of New Zealand (also expected to hold at 1.75%). On Thursday we have US Producer Prices (another inflation indicator) while on Friday we have UK Preliminary GPD for the second quarter and Manufacturing Production. Also, on Friday we have US CPI, undoubtedly the market’s favourite inflation measure.

Weekly round-up

Non-Farm Payrolls


The Non-Farm Payroll report for July was a disappointment coming in at +157,000 on expectations of an increase of 190,000 jobs. The headline Unemployment Rate slipped back to 3.9% from 4.0% and continues to hover around a 17-year low. Once again, Average Hourly Earnings were in focus. These pushed back up to +0.3% month-on-month (+2.7% year-on-year), suggesting a mild pick-up in inflationary pressures from wage growth. Overall, the market reaction was muted and an hour after the report the dollar and stock index futures were back to where they were prior to the release.

But what was interesting was the sudden pick-up in precious metals which happened even as the dollar marked time. This could have been due to the rise in wage growth triggering inflation fears, or it could have been down to large unrelated purchases in the US futures market. But despite this both gold and silver continue to look vulnerable to further selling with gold now below $1,220 and silver struggling to break back above $15.50.

There are two main consequences to the higher hourly earnings number. Firstly, it raises concerns that corporations’ costs will rise as wages remain one of the biggest outgoings for most companies. As the lack of any strongly positive forward guidance suggests, it’s going to prove difficult for companies to post another set of strong year-on-year earnings comparisons given the exceptional strength in earnings and sales in the second half of 2017. Any pick-up in wage costs will make life even more difficult, unless there’s an offsetting increase in revenues.

The second consideration is how rising inflation may influence the Fed’s monetary policy. On one hand, the Fed has made it clear that it’s prepared to tolerate inflation overshooting its 2.0% target for some time. This implies the US central bank won’t be in any rush to accelerate rate hikes, nor dial back on balance sheet reduction, even if inflation does push above target for some time. On the flip side this also means that the Fed will be encouraged to go full steam ahead with its current programme of monetary tightening unless something dramatic happens to throw it off course.
 
Central banks

Last week saw monetary policy meetings from the Bank of Japan (BOJ), US Federal Reserve and the Bank of England (BoE). The BOJ tweaked their target peg for the 10-year Japanese Government Bond (JGB) giving itself greater leeway before it is forced to intervene to keep the yield around zero. This helped to steady the yen which had risen sharply on the back of a jump in yields which led to the BOJ to intervene on several occasions by purchasing JGBs.

The US Federal Reserve kept rates unchanged as expected but released a notably hawkish statement following its monetary policy meeting. The US central bank upgraded its view of the economy from "solid" to "strong” and downplayed the recent flattening of the US Treasury yield curve. Second quarter GDP came in at an impressive +4.1% while Core PCE (the Fed’s preferred inflation measure) slipped back slightly to +1.9% annualised, just below the Fed’s 2% target. A 25 basis-point rate hike in September is now priced in while the probability of a further rise in December has also risen.

The BoE raised rates by 25 basis-points in line with market expectations. However, there was some surprise that the MPC voted unanimously for a hike which causing a knee-jerk rally in sterling. But the pound quickly reversed this move and fell sharply as the Bank estimated the equilibrium interest rate (r*) which suggests that rates are unlikely to rise much further given current inflation projections.

Chinese data continues to disappoint with Manufacturing and Non-Manufacturing PMIs slipping and coming in below consensus forecasts. The Shanghai Composite continues to struggle and has fallen back into ‘bear market’ territory. Investors remain worried about the overhanging threat of US tariffs on Chinese exports and this has also seen the yuan hit its lowest level since May 2017. The ongoing sell-off in the Chinese currency only raises the likelihood that Trump will continue to expand the scope and size of tariffs.

Key events
 
Monday -             EUR German Factory Orders, Euro zone Sentix Investor Confidence survey

Tuesday -             AUD RBA Rate Statement; EUR German Industrial Production, German Trade Balance; USD JOLTS Job Openings

Wednesday -     JPY BOJ Summary of Opinions; CNY Trade Balance; USD Crude Oil Inventories; NZD RBNZ Monetary Policy Statement

Thursday -           CNY CPI, PPI, M2 Money Supply, New Loans; USD PPI, Unemployment Claims, Wholesale Inventories

Friday -                 JPY Preliminary GDP; AUD RBA Monetary Policy Statement; GBP Preliminary GDP, Manufacturing Production, Goods Trade Balance, Prelim Business Investment; USD Core CPI.
 
 
 
Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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