On your mark, get set, go?

Last week’s continuation of the US equity market reversal that has defined our post-Christmas rally has been most recently fueled by the shift in monetary policy outlook and guidance by the Fed (which we have discussed recently). It has also been driven by renewed investor confidence as a result of stronger than expected recently released economic data.

In the case of economic data, last week we received several reports that speak to a stronger than expected underpinning to the current state of the economy than many had believed. Additionally, It is essential to consider last week’s economic data releases in light of the previous week’s significantly stronger than expected employment report.

On Tuesday the NFIB Small Business Optimism Index for December reflected a healthy reading of 104.4, above the Econoday consensus of 104. And fractionally off November’s 104.8. Also released on Tuesday, international trade figures for November were released reflecting a modest narrowing of the current imbalance from $-55.5B in October to $-53.9B. As I suggested would be the case in last week’s note, the FOMC Minutes, released on Wednesday, were largely a non-event given the previous week’s talk by Fed Chair Powell. The EIA Petroleum Status report reflected a welcome draw on crude oil inventories (-1.7M bbl) though gasoline (8.1M bbl) and distillate (10.6M bbl) inventories did rise significantly. The net effect of which, in combination with crude production cuts by OPEC, helped to continue to stabilize crude prices at these relatively depressed prices (WTI, $51.70/bbl). Weekly jobless claims for the week of 1/5 came in at 216k, well below the prior week’s revised 233k. The last significant economic release of the week, CPI for December, released Friday, delivered on the narrative that suggests that inflation remains in check.

The CPI reading for December is significant for those looking to glean the future flight path for interest rates and equities, as a by-product.


In each measure of metric the report matched up with Econoday consensus:

CPI – M/M change: -0.1%
CPI – Y/Y change: 1.9%
CPI – M/M less food & energy: 0.2%
CPI – Y/Y less food & energy: was 2.2%

This week:

Producer Prices (PPI-FD) for December are released tomorrow. Econoday consensus is calling for a modest M/M contraction of -0.1% – disinflationary. Y/Y the PPI-FD is expected to be 2.5%. Retail sales for December are expected to reflect a M/M gain of 0.2%. Industrial production for December is due out Friday. Econoday consensus is calling for 0.3% – down from November’s 0.6%.
The bigger story this week will be Q4 earnings as we kick off the results for the final quarter of 2018. As is customary, financials will be the first sector out of the gate. Citigroup reports today. Consensus EPS forecast is $1.55 up from last year’s $1.28. J. P. Morgan and Wells Fargo report on Tuesday. JPM consensus is $2.20 versus last year’s Q4 results of $1.76. WFC consensus is $1.17 versus last year’s $0.97. Bank of America (c. $0.63) and Bank of New York Mellon (c. $0.94) report on Wednesday. Given the degree of uncertainty that continues to hang over the market about where we are in this economic cycle, investors will be paying particular attention to earnings results posted by financials this week.

Metrics of increasingly particular importance in regards financials this earnings season are cost of deposits, net interest margin, and revenue growth. In effect, financials this earnings season will need to deliver a constructive message across all of those metrics in addition to EPS. Additionally, earnings calls will be dominated with calls that focus heavily on guidance in addition to those metrics. It wasn’t too long ago that investors were mainly just focused on EPS and revenue growth. That has changed, dramatically due to concerns over where we are in the cycle.

Chart: Courtesy US Bureau of Labor Statistics
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