Equity markets rallied to fresh highs last week, with the S&P 500® Index gaining in four of the last five weeks. Investors were encouraged by the trade truce reached between Presidents Trump and Xi at the G-20 meeting. While no clear progress was made on the sticking parts of the trade deal, the U.S. agreed to delay implementation of the next tranche of tariffs while discussions continue.
Beyond China, the clear driver of investor behavior is Fed policy. Investors remain convinced that a rate cut is coming at the July 31 meeting, with the Fed futures curve embedding 100% chance of a cut, with a very slight chance of two or more. For the year, the curve continues to embed a much more dovish policy than Fed guidance and economists’ estimates, with a 45% chance of three or more cuts. We could get a clearer view of the Fed’s direction this week, with Chair Powell’s semi-annual monetary policy testimony to Congress on Wednesday and Thursday. Additionally, the minutes from the recent FOMC meeting will be released on Wednesday. President Trump continues to ramp up criticism on the Fed and Powell, leading some to suggest that Trump’s intended nominations to the Fed board, Judy Shelton and Christopher Waller, could also be in line to replace Powell when his term ends in 2022, or even sooner.
The outlook for Fed policy was potentially complicated a bit on Friday with a much better-than-expected jobs report. Nonfarm payrolls jumped by 224k in June, the best in five months and much better than the 160k estimate and May’s read of 72k. The unemployment rate ticked up to 3.7% because of growth in the labor force, while wages were higher by 3.1% from a year ago, which was a bit light of expectations.
A major source of demand for equity shares may be reaching a peak, as share buybacks fell for the first time in seven quarters. The first quarter saw repurchases of $206 billion, down from $223 billion in the fourth quarter, led by industrial and consumer-facing industries. The decline could be a sign of the “sugar rush” from tax legislation may be waning, or the trade dispute is causing uncertainty. If buybacks decelerate, it is not clear where the demand will come from, as retail investors have sold $154 billion in mutual funds so far in 2019.
Concerns over global growth have driven bond yields to fresh lows. JP Morgan’s global manufacturing PMI fell to 49.4 in June, the second month below the 50 threshold and the lowest number in nearly seven years. Yields in Europe fell to fresh lows, led by the German 10-year at -0.38%. The U.S. 10-year continues to be driven lower in sympathy, touching 1.95% last week.
Second quarter earnings season unofficially begins this week, with expectations having been reset. Consensus estimates show a decline in earnings of 3% despite 4% sales growth. If earnings growth is negative, it would mark the second-straight negative quarter, following the very slight decline in the first quarter. History shows that actuals tend to beat estimates by an average of 3%, suggesting that earnings should likely be roughly flat. The weakest sectors are expected to be materials (-17%) and technology (-12%).
What to Watch
In addition to Chair Powell’s testimony and the FOMC minutes, there are some important economic data points scheduled this week. The NFIB Small Business Index and JOLTS job opening reports are on Tuesday, while CPI inflation is released Thursday and PPI inflation on Friday.
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