Stock Market Faces Some Hurdles in Coming Weeks

The stock market will face a number of hurdles in the next few weeks that could keep it in a trading range.  Q319 corporate earnings are expected to be soft in the aggregate.  US/China negotiations may very well remain on edge, as the major issues (whether China will change its business/government practices) are not easily reconcilable and the US does not appear to want a partial settlement.  Key US economic data risk strengthening in early October, which could reduce the odds of further Fed easing this year.

Corporate Earnings 
Macro evidence supports the consensus expectation of a y/y weakening in Q319 corporate earnings.  Consensus appears to be -3.7% y/y for Q319, versus an actual -0.4% in Q219.  Slower growth in the US and abroad are partly responsible.  Also, oil company earnings should be hurt by the larger y/y drop in oil prices.  A mitigating factor appears to be that profit margins may have improved, as the Core CPI sped up by more than Average Hourly Earnings.  Another mitigating factor is that the dollar did not appreciate as much as in Q219 on a y/y basis, so that the currency-related drag from earnings abroad lessened.

Earnings weakness, however, could be dismissed as temporary in the aggregate, based on evidence that US economic growth is picking up.  And, the consensus estimate now appears to be for a y/y increase in Q419 corporate earnings.
                                                                                                                                         Markit
                                                                                                                                          Eurozone              Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level)
Q117            1.9                +65.3                  2.3                              2.7          2.2                55.6
Q217            2.1                +13.1                  3.1                              2.5          1.8                56.8
Q317            2.3                 +6.0                 -1.9                              2.5           1.7               57.4
Q417            2.5               +12.7                 -4.1                              2.5           1.7               59.7

Q118            2.6               +21.5                 -6.6                              2.7           1.9               59.1
Q218            2.9               +41.0                 -1.8                              2.7           2.2               55.9
Q318            3.0               +45.4                 +5.1                             2.8           2.2               54.3
Q418            3.0                 +6.7                 +6.5                             3.3           2.2               51.7

Q119            3.2                -12.8                 +7.9                             3.2           2.1               51.9 
Q219            2.7                -12.2                 +5.9                             3.1           2.1               47.8    
Q319            2.3                -19.6                 +3.5                             3.2           2.3               47.3

Upcoming Key US Economic Data
Some evidence points to a rebound in the September Mfg ISM and a speedup in September Nonfarm Payrolls, both due in the first week of October.   A variation in the Chicago PM has done a good job predicting the direction of the Mfg ISM, and it points to an increase in the next Mfg ISM report.  Unemployment Insurance Claims data -- the broadest high-frequency measure of economic performance -- have moved down so far in September.  They point to a speedup in September Payrolls.  The rebound in the August Nonfarm Workweek supports one, as well.  The GM strike began after the September Payroll Survey Week, so it should not subtract from this month's print.

Fed and the Treasury Yield Curve
Stronger key US economic data will temper any expectations of further Fed easing this year.  But, they won't eliminate them.   The Fed is focused on downside risks, not current US economic performance.  This week's release of Flash September Markit Mfg Purchasing Manager Indexes (PMIs) will provide evidence whether European economic growth is improving, as was hinted in the August data.  They probably have to improve a lot (with the EU and German PMIs moving above 50) to have a significant impact on Fed views of the risks.

While Powell has been highlighting downside risks to the outlook stemming from weak global economic growth and uncertainty from the US/China negotiations, a bigger downside risk may be the outcome of next year's US Presidential election.  A Democratic victory could lead to large disruptions in the structure of the economy that require very easy Fed monetary policy to offset.  This risk may help explain why the Treasury yield curve declines through 5-year maturities -- through the first term of the next Administration.  A Trump victory has the opposite risk.  He could push the economy so hard as to boost inflation.