Wall Street pushed onward to new record highs last week as US Fed chair Powell all but assured markets there’d be a rate cut later this month. That said, it still seems likely the Fed will only cut by 0.25% – rather than the 0.5% the market had once been been hoping for (and which is now only a 20% probability according to market pricing). Helped by a slightly stronger than expected US CPI inflation report, bond yields edged higher over the week, though the $US eased which saw gold prices rebound.
Almost forgotten amid the intense Fed focus, the Q2 US earnings reporting season leaps into view this week – and the omens are not great. According to FactSet, earnings will decline by 3% on year-ago levels, which is a downgrade from an anticipated decline of 0.5% only three months ago. Indeed, there’s also been a modestly higher than average level of negative guidance in recent weeks.
As usual, major banks will kick off the reporting season, and lower bond yields will not have helped their profit margins in recent months. But especially in light of the trade wars, transport stock reports – such as for Union Pacific railroads – will also be a focus this week. But to the extent there are signs that the slowdown in US-China trade has hurt earnings, Wall Street might nonetheless rejoice – if it means the chances of deeper Fed rate cuts this year are higher.
In the same light, a likely soft Chinese Q2 GDP report today (with annual growth anticipated to slow to 6.2%) could also be market positive to the extent it boosts expectations of further Chinese policy stimulus.
Welcome to “Bizarro World” where bad news is good news!
The Australian market remains less bizarre, with local stocks edging lower last week in the face of soft economic reports – and the reality that the RBA seems likely to now hold rates steady for at least a month or two.
The NAB Index of business conditions edged up only slightly last week to remain at below average levels, while the Westpac measure of consumer confidence dropped despite talk of tax cuts and lower interest rates. It seems households are more worried about the reasons the RBA is cutting rates – such as the deteriorating employment outlook. In this regard, although the NAB measure of employment intentions lifted last month – as did this month’s measure of ANZ measure of job ads – the trends for both suggest a rise in unemployment seems likely in the months ahead.
We’ll get more information on the RBA’s thinking – as if it were needed – with minutes from its last meeting due tomorrow. After a strong bounce in employment in May, there’s a risk Thursday’s labour force report may well show the first employment decline since March last year. In terms of RBA thinking, however, the key will be what happens to the unemployment rate – if it edges up to 5.3%, talk of a third consecutive rate cut could grow.
Have a great week!