Strong Apple Results Compete With Trade Worries For Investor Sentiment Ahead Of Fed

Earnings season and trade tensions appear to be sparring for the market’s attention even as investors await word from the Federal Reserve after the central bank’s two-day meeting concludes this afternoon.

On the earnings front, strong results from Apple Inc. AAPL appear to have helped to ease some worries about the tech sector. But concerns about trade between the U.S. and China apparently have flared again after Bloomberg reported that the Trump administration is considering hitting $200 billion in Chinese imports with a 25 percent tariff instead of a levy of only 10 percent.

Worries about trade between the world’s two largest economies have dogged Wall Street as some worry the fallout could dent global economic growth. At the same time, keep in mind that negotiations are ongoing, so increased tariffs aren’t set in stone.

Apple Belts a Long One

In baseball, going three for five would be a great day at the plate. After Apple Inc. AAPL earnings late Tuesday, you could argue that the “FAANGs” had a “three for five” earnings season. Yes, Netflix, Inc. NFLX and Facebook Inc. FB disappointed many investors, and their stocks got punished in a big way. On the other hand, Alphabet Inc. GOOG GOOGL, Amazon.com, Inc. AMZN, and now AAPL all looked pretty good. AAPL shares rose 4 percent in post-market trading right after it reported record revenue for its June quarter, and market capitalization for the company is edging close to the $1 trillion mark.

On a raw numbers basis, AAPL’s earnings easily beat Wall Street analysts’ estimates. Adjusted earnings per share of $2.34 and revenue of $53.26 billion compared with third-party consensus analyst estimates of $2.19 and $52.34 billion. With AAPL, however, it’s not the raw numbers that tell the whole story. Analysts and investors want to know how the iPhone did. 

In this case, iPhone unit sales of 41.3 million missed the consensus view of 41.8 million, but iPhone revenue of $29.91 billion outpaced estimates, and the average iPhone selling price of $724 was up about 20 percent from a year earlier and beat analysts’ expectations for $693. 

 Beyond iPhones, AAPL’s Services business, which includes results from the App Store, Apple Music, and the company’s other services, reached $9.55 billion, well above expectations for $9.2 billion and a 31 percent year-over-year rise. Furthermore, AAPL raised guidance for the current quarter to between $60 billion and $62 billion, slightly above Wall Street’s consensus estimate. In all, there seemed to be a lot to like here, and AAPL can sometimes help move the market thanks to its overwhelming size.

It’s Fed Day

The Federal Open Market Committee (FOMC) meeting concludes at 2 p.m. ET today, but it looks to be a pretty bland affair. Most economists have indicated they don’t expect any change in policy after the Fed hiked rates by 25 basis points back in June. That was the second hike of the year, and futures prices point toward more by the end of the year, but not this time. Fed funds futures have priced in a mere 3 percent chance of a rate hike today. 

We’ll have reaction after the meeting and analyze anything that might come out of the statement. As always, the Fed’s latest take on economic growth and inflation is what the headlines are likely to emphasize. Remember, the Fed has indicated it might be willing to let inflation run a little above its 2 percent target for a while, and Personal Consumption Expenditure (PCE) prices rose 2.2 percent over the last year. That’s fresh data from Tuesday, so we’ll see if the Fed has anything to say about it.

Inflation Hitting Staples Sector?

Speaking of inflation, maybe diapers, of all things, could be a leading indicator. Procter & Gamble PG announced Tuesday it plans to raise the price of Pampers by 4 percent. There’s been a lot of people out there talking about inflation this year, and this could indicate that investors might need to take that talk more seriously. When P&G starts talking about raising diaper prices, that could be the opening salvo.

 What P&G didn’t talk about also stood out: Tariffs. The company didn’t spend any time on its earnings call talking about how tariffs might affect its business in any kind of way, nor did it mention currency. Coca Cola (KO) and some other companies, on the other hand, have talked about a rise in costs from tariffs this earnings season, but it’s been a mixed bag and perhaps not as big a factor as some thought.

Eclipsing 3%

Bond prices have fallen back this morning, and the yield on the 10-year Treasury eclipsed 3 percent for the first time since early June. That’s an important psychological mark and could bode well for banks if the yield rises meaningfully above 3 percent and stays there. If that happens, it may be worth watching whether the financial sector takes more of a leadership role in market activity.

FIGURE 1: Eclipsing 3 Percent: The yield on the benchmark 10-year Treasury has been climbing steadily over the past few weeks, eclipsing the closely-watched 3 percent level for the first time in several months this morning. Chart plots the 10-yr Treasury Index, which tracks 10x the 10-yr rate. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Jobs Report Friday

If estimates for Friday’s July jobs report prove close to reality, it doesn’t look like there’s much there to disturb market equilibrium. The average Wall Street analyst estimate is for jobs growth of 190,000, just a bit below June’s growth of 213,000, according to Briefing.com. Wages are seen growing 0.3 percent, while the unemployment rate slips to 3.9 percent, from 4 percent a month ago. A key number to watch, as we noted the other day, might be year-over-year wage growth. Last month it looked pretty benign at 2.7 percent, but anything 3 percent and over could potentially get some people worrying about inflationary pressures and possible Fed response.  

Still, the Fed’s favored inflation monitor—Personal Consumption Expenditure (PCE) prices—looked very vanilla for June at just 0.1 percent for both the headline and core numbers. On a year-over-year basis, the PCE and core PCE Price Indexes held steady at 2.2 percent and 1.9 percent, respectively. By that measure, it doesn’t appear that recent job growth is pushing prices up much beyond the Fed’s stated inflation goal of 2 percent. The year-over-year core PCE inflation number hasn’t hit 2 percent in more than five years.

Finally Winding Down

After AAPL earnings yesterday, the Fed meeting today, and July payrolls on Friday, investors can finally look ahead to what might be more placid times on Wall Street. By the end of this week, the bulk of major S&P 500 earnings will be behind us, and the Fed doesn’t meet again until late September. Still, there’s plenty of company reporting to come, with focus likely to shift toward the consumer discretionary and consumer staples sectors in the weeks ahead as many of the major big box and department stores prepare to share their results. When staples companies report, one thing to consider listening for this time of year is any indication on how back-to-school shopping season is coming along.

Yield Curve Watch

The gap between two-year and 10-year Treasury bond yields remains historically narrow, but hasn’t gotten much narrower over the last week or two. As of this morning, there was about a 31 basis point difference between the two. This gap remains one to watch carefully, because some economists think an inverted yield curve, if it does occur, could signal economic weakness. Futures prices show little chance of a Fed rate hike today, but it’s the constant trickle of rate hikes that’s helped bring the gap so close. Meanwhile, the Bank of Japan left its rates unchanged Tuesday, a move that had been expected by most analysts.

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