US equity markets move smartly higher to close at record highs

The broad-based move higher by US equity markets last week was largely fueled by three factors: the perception of easing trade tensions between the United States and China, indications from Fed Chair Powell that monetary accommodation was on the horizon, and expectations that Q2 earnings season will deliver on solid revenue and EPS growth.

The trade higher, on Friday in particular, was impressive given that the large-caps, mid-caps, and small-caps all took part. The Dow Industrials gained 0.9% while the Nasdaq and S&P 500 gained 0.6%. The small-cap Russell 2000 traded 0.8% higher on the session. The Dow Industrials closed above 27,000 for the first time on Thursday, only to add an additional 243 points on Friday.


The trade confirmed the current market outlook for US equities: uptrend.

In last week’s round of talks and testimony, Fed Chair Powell provided market watchers with reason to bid up equity prices––and bid up they did. However, the talks provided by Chair Powell and by other prominent Fed governors also provided conflicting arguments in regards interest rates. On the one hand, the case was made that the US economy has continued to expand at a healthy pace as evidenced by record low unemployment data, among other data points; on the other hand, the principal driver of concern with regard to an economic slowdown comes from the trade-related issues most clearly identified in the US/China trade stalemate. Additionally, mention of a continued slowdown in global growth was a highlighted concern.

It is not clear that this week’s earnings calendar will provide much insight into the impact of slowing global growth on US economic activity––but it may. The Q2 earnings calendar this week will be largely, though not exclusively, focused on financials. This week’s Q2 earnings calendar will provide a detailed look into the state of the financial sector––banking most specifically. Citigroup, Goldman Sachs, JPMorgan Chase, Wells Fargo, and Bank of America are among those reporting.

As I have suggested is the case, financials are important for the tone they set, not necessarily for the insight they provide into global growth. The tone set this week by financials will likely inform much of the balance of earnings season, as is normally the case. That tone has to do with the long-anticipated timeline on any expected domestic economic slowdown and the impact of both US/China trade and slowing global growth. In the event financials this week provide a counter-argument to slowing growth, it is reasonable to expect forecasts for a recession to receded further back into the calendar, and by extension, expectations for further easing by the Fed in 2019.

Q2 earnings aside, the street is clearly expecting the Fed to cut sooner rather than later. The next FOMC meeting is scheduled for July 30 & 31. Though a half-point cut has been effectively taken off the table due to June’s stronger than expected June employment report, the street is expecting the Fed to cut by 25 bps at month end. In that event, and if history is any indication of what to expect in coming quarters, equity gains should moderate through Q3 and Q4.

Retail Sales for June released at 8:30 am. Econoday consensus is 0.1% versus May’s 0.5%. Less autos, 0.3% versus 0.5%. Less autos and gas, 0.4% versus 0.5%.
Industrial Production for June is released at 9:15 am. Econoday consensus is 0.1% versus May’s 0.4%. Manufacturing, 0.2% versus 0.2%. Capacity Utilization, 78.2% versus 78.1%.

Housing Starts for June are released at 8:30 am. Econoday consensus is 1,260 M versus May’s 1,269 M. Permits 1.300 versus 1.294 M.
The EIA Petroleum Status Report for the week ending 7/12 is due out at 10:30 am. Last week, the report reflected draws in crude oil inventories (-9.5 M bbl) and gasoline (-1.5 M bbl). Distillate inventories ticked up by 3.7 M bbl.
Beige Book, which is released two weeks before the FOMC meetings, is due out at 2:00 pm. This week’s release will likely inform the interest rate narrative (monetary policy) that has dominated the trading of all asset classes domestically.

Weekly Jobless Claims are due at 8:30 am. Last week’s data reflected a 4-week moving average of 219.25 K. The weekly total saw a drop of 13 K claims over the previous week. The widely watched Philadelphia Fed Business outlook Survey is released at 8:30 am. Econoday consensus for July is 4.5. June’s reading was 0.3.

Flickr photo: kees torn
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