This Week, Market Eyes China Talks, Fed Meeting As Earnings Continue

After record-setting closes last week, the market this morning seems to be anticipating another busy week of earnings, a calendar full of economic reports and a rate decision from the Federal Reserve.

Trade talks between the U.S. and China also appear to be at the fore as representatives from the world’s two largest economies are scheduled to continue negotiations in Beijing. Ahead of the meeting, Treasury Secretary Steven Mnuchin told The New York Times that the two sides are “getting into the final laps” and have “made a lot of progress.” 

On the Chinese data front, numbers showed that industrial profits in the Asian nation rose in March. It’s a good sign from an economy that has gotten beaten up by the trade war that has sparked worries about global economic growth.

The news comes ahead of a week that’s packed with U.S. economic data reports. This morning, data on March core personal consumption expenditures, which are the Fed’s preferred gauge of inflation, came in below a Briefing.com consensus expectation for a 0.1% rise. Consumer confidence figures are due out later in the week and might be interesting to compare with last week’s consumer sentiment numbers. 

Perhaps the most closely watched number could be the nonfarm payrolls figure from the Labor Department. The report is another major benchmark for the economy, and it could be interesting to see whether we get another stronger-than-expected reading like we did last time.

In other big economic news this week, the Fed is expected to hold interest rates steady at its two-day policy setting meeting, CME futures prices suggest. Still, investors and traders are likely to parse the language accompanying the decision to see if they can glean any insight into the central bank’s thinking on the trajectory of the economy and interest rates. 

The week also includes earnings from Apple Inc AAPL, Alphabet GOOG, McDonald’s Corp MCD, General Electric Company GE, and Merck & Co, Inc. MRK, among many others. 

This earnings season has been characterized by very low expectations. But many companies have been reporting better earnings than were forecast, forming a big part of why the SPX and COMP closed at record highs. 

The optimism is building on two issues that have already been helping the market rise strongly this year after slumping drastically late last year. One is that, even though the trade war between the world’s two largest economies is dragging on, market participants seem to be seeing light at the end of that tunnel. Also, the Fed’s dovish pivot—after fears last year that the central bank would end up being too aggressive despite low inflation—has boosted market sentiment. 

GDP Porridge Just Right

The U.S. market finished up last week on a positive note, with the S&P 500 (SPX) and Nasdaq (COMP) posting record closes on Friday and the Dow Jones Industrial Average ($DJI) also gaining ground after strong U.S. economic data.

The gains came after the Commerce Department in its first estimate of Q1 GDP said the benchmark measure of economic activity rose at a 3.2% annual rate. A Briefing.com consensus had expected a growth rate of 1.9%.

The strong print helped to allay fears about a faltering domestic economy amid worries about European and Chinese economic growth as the U.S.-China trade war drags on. 

It also marks a resurgence of the Goldilocks economic scenario. The strong GDP number comes as the Fed has become much more dovish amid signs of muted inflation. So the picture Friday’s data seems to paint for the U.S. economy is one where growth isn’t too hot or too cold.

Earnings Season Continues

The market was also helped by Amazon.com, Inc. AMZN reporting a blowout quarter. Its shares rose more than 2.5% after the online retailing giant’s earnings per share handily beat expectations.

The gains helped boost the Consumer Discretionary sector, a cyclical segment of the market that tends to do better as the economy performs more robustly, and vice versa. If people are feeling better about their job situation and spending power, they might be more inclined to splurge on an online shopping spree.

Or, they might buy a truck. The biggest gainer in the sector on Friday was Ford Motor Company F, which rallied more than 10.7% after reporting stronger-than-forecast earnings and revenues amid strong demand for pickup trucks and SUVs in North America. 

But not all was rosy in earnings land. Exxon Mobil (XOM) reported profit that was roughly half of what it earned a year ago, and the earnings were well under analysts’ forecasts. Revenues also came up short, helping push the oil giant’s shares down more than 2% and helping make the energy sector the day’s biggest loser by far.

Oil prices also weighed on the sector as the U.S. crude price fell nearly 3% after President Trump said he had told OPEC the cartel had to bring down gasoline prices. The fall in oil prices comes after a sharp gain recently as the Trump administration said it would not extend waivers that would have allowed several countries to keep on buying Iranian oil.

Crude prices continued to fall this morning. If the pressure continues, airlines and other transportation companies would stand to benefit from a resulting fall in fuel prices. 

Meanwhile, in M&A news in the industry, Anadarko Petroleum Company APC said it would resume talking with Occidental Petroleum OXY, which has offered $38 billion for Anadarko compared with Chevron Corporation’s CVX roughly $33 billion bid. 

Figure 1: Oil prices dropped sharply Friday after President Trump said he had told OPEC to lower fuel costs. Crude has been supported this year by OPEC-led supply cuts and U.S. sanctions on Iran and Venezuela. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

GDP Drilldown: Trade has been in the news for months now as the United States and China have slapped tit-for-tat tariffs on billions of dollars of goods from each other and headlines about negotiations between the world’s two largest economies have captivated Wall Street. Trade also figured prominently in the surprisingly strong GDP reading on Friday. The United States’ exports of goods and services rose 3.7% on a seasonally adjusted annual rate while imports declined by the same percentage. That left net exports to contribute more than 1 percentage point to the headline GDP number. But it’s probably worth noting that the net export component is a volatile piece of the GDP puzzle. Plus, the government still has two more chances to revise the number.  

Texas Sized Exports: They say everything’s bigger in Texas. That proved true for exports from the Lone Star State in January and February. Exports from the state topped $50 billion during the period, representing roughly 20% of all U.S. exports, according to data from WISERTrade reported by CNBC. Exports during the period grew 9% from the previous year, handily beating national export growth of 2.6%, the article noted. What drove the Texas-sized exports? You guessed it: oil and gas. If you’ll recall, oil prices were on the rise in January and February, and, according to the article, Texas oil and gas exports jumped in value by 45%. As oil prices have continued to gain ground amid OPEC-led supply cuts and U.S. sanctions on Venezuela and Iran, it could be interesting to see whether the next batch of data will show Texas exports continuing to outstrip the national figures. 

Going Shopping? Friday was a good day for U.S. economic news. On top of the sterling GDP report, the University of Michigan’s consumer sentiment index for April showed a reading of 97.2 when a Briefing.com consensus had expected a print of 96.7. That’s a good sign for the U.S. economy, which is heavily dependent on consumer spending. The strong number may have added to help from AMZN earnings to help boost the consumer discretionary sector by 0.93% on Friday. “The key takeaway from the report is that 44% of consumers said they were feeling better about their financial prospects for the year ahead,” Briefing.com said. “That is the highest level for that reading since 2004 and another indication that should quiet recession talk.”

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