Stocks could continue to trend upwards this week, despite the start of terrible earnings reports. They are old news, and comments about the May-June recovery and the outlook should be more important. These comments are likely to be cautiously optimistic, although this is not entirely certain. Expectations for this week's US economic data are somewhat mixed.
Corporate Earnings in Q220 should be terrible, a result of the economic shutdown. All the key macroeconomic evidence is bad (see table below). Real GDP Growth is expected to drop by more than 10% (y/y), based on the Atlanta Fed model's latest projection of -35.5% (q/q, saar). Oil company profits should be hurt by the drop in oil prices. The surge in the dollar, along with economic weakness abroad, will hurt overseas earnings. And, while the jump in Average Hourly Earnings likely reflects a compositional shift, as many low-wage workers lost their jobs, profit margins were likely hurt in many industries.
But, headline earnings will not likely be what the market focuses on. Instead, the focus should be on what companies say about the extent of the May-June improvement and what they expect ahead. The large drop in Q220 corporate earnings is old news. Some early corporate comments indicated better-than-expected gains in May and June. These may be heard again. But, they may be tempered by parts of the country having pulled back on some business activity in the last couple of weeks,
Consensus estimates of this week's US economic data are somewhat mixed. While they all look for growth, some data are not expected to be as strong as in the prior month. Speedups are seen in the June Core CPI, Industrial Production and Housing Starts. But, Retail Sales and Philadelphia Fed Mfg Index are seen slowing. Core CPI is expected to speed up to +0.1% m/m in June from -0.1% in May. The underlying Core PPI Ex Trade Services, released on Friday, already shows the start of recovery in some prices, like airfares and car rental rates. IP is seen accelerating to +4.3% m/m in June from +1.4% in May. It should be helped by the broadening in manufacturing re-openings, particularly motor vehicle factories. Housing Starts are expected to climb to 1.15 Mn Units in June from 0.97 Mn in May. In contrast, Ex Auto Retail Sales are seen slowing to a still-strong +4.5% m/m from +12.4% in May. A stronger print would seem to be the risk, however, given the jump in job growth that month. Phil Fed Mfg Index is expected to slow to 20 in July from 27 in June. This would still be a high level.
Consensus looks for Initial Claims to fall to 1.250 Mn from 1.314 Mn in the prior week. But, there is a risk that Initial will rise. This is because the prior week's decline could have resulted from faulty seaaonal adjustment of the holiday week (contained July 4th). If so, there could be an offsetting rebound in this week's report. And, if this is the case, Initial should fall in the subsequent report. All these w/w movements would be noise. But, if consensus is right and Initial Claims fall in this week's report, it would be important evidence that the recovery is moving ahead well.
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 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
Q120 -5.0 -16.5 +2.9 3.1 2.3 47.2
Q220 -10.6 * -53.5 +6.8 6.6 1.3 39.9
* Based on Atlanta Fed Model's latest projection
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