Earnings Season Commences
The major domestic stock indexes fell last week as the second-quarter corporate earnings reporting season began in earnest amidst the summer doldrums. The narrowly focused Dow Jones Industrial Average fared best, while consumer staples and materials shares outperformed within the S&P 500. Energy stocks declined as domestic crude supplies fell less than expected and reports surfaced that Iran had approached the U.S. with an offer to allow greater monitoring of its nuclear program in exchange for allowing a resumption of Iranian oil exports. The large communication services sector was also weak, dragged lower by a plunge in Netflix shares following news that subscriptions declined in the U.S. and rose much less than expected internationally.
A report from Citigroup on Monday heralded the unofficial start of second-quarter earnings reporting season, with 56 companies in the S&P 500 delivering results. Both Thomson Reuters and FactSet currently expect overall earnings for the S&P 500 to be roughly flat for the quarter versus the year-earlier period, which isn’t all that bad considering the high bar set by 2018’s earnings surge.
Nevertheless, many appeared to continue to focus primarily on macro concerns and, in particular, whether the Federal Reserve would cut interest rates by 25 or 50 basis points (0.25% or 0.50%) at its July 30–31 policy-setting meeting. Early in the week, Fed officials offered mixed signals over how aggressive they would be in cutting rates, with Fed Chairman Jerome Powell pledging that policymakers would “act as appropriate amid increased uncertainties,” while Dallas Fed President Robert Kaplan told The Washington Post that he only favored a “modest tactical adjustment,” which was generally interpreted as only one quarter-point cut this year.
The balance of “Fed-speak” seemed to tip in a dovish direction on Thursday, however, when New York Fed President John Williams said in a speech that “it pays to act quickly to lower rates at the first sign of economic distress.” Fed Vice Chairman Richard Clarida then told Fox Business that “you don’t have to wait until things get so bad to have a dramatic series of rate cuts.”
By Thursday afternoon, futures markets were pricing in a 71 percent chance of a 50-basis-point cut at the end of July, according to CME data. Stocks rallied in response, helping erase a downturn earlier in the day. Late Thursday, however, a New York Fed spokesperson clarified Williams’s remarks were “not about potential policy actions at the upcoming FOMC meeting,” leading markets to, again, price in a 25-basis-point move.
The week’s economic data were mostly positive. Retail sales recorded a second month of solid gains in June, and two gauges of regional manufacturing activity rose much more than expected. Overall housing starts fell from the month before and came in below expectations, but single-family starts, which are generally considered to have a bigger impact on the economy, increased.
The dovish signals from the Fed pushed the yield on the benchmark 10-year U.S. Treasury note sharply lower.
Stock markets in Europe came under pressure throughout the week from fresh U.S.-China trade tensions, as talks between the two countries stopped after President Trump threatened to impose tariffs on a further $325 billion of Chinese imports and talks ground to a halt over Chinese telecom company Huawei Technologies. While the pan-European STOXX Europe 600 and the UK’s FTSE 100 managed to eke out gains, the exporter-heavy German DAX dropped about 0.5 percent, while Italy’s FTSE MIB lost about 2.4 percent. In Japan, the Nikkei 225 dropped 1 percent.Chinese equities closed last week roughly unchanged, despite Friday gains after expectations grew for aggressive rate cutting by the Fed.
From the headlines…
An S&P 500 earnings scorecard.
Coal is struggling because wind and solar are cheaper.
Bonds today are a “Giffen good” and defy the rules you learned in Econ 101.
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