Next week, markets will have their eyes glued to central banks. In particular, investors are eagerly anticipating the ECB meeting next Thursday as well as Fed Chair Powell’s speech that same day. On Wednesday, we’ll get the Fed’s Beige Book and the BoC will likely raise rates once again.
With little economic data being released in the US and Europe, all eyes will be on Asia. In China, Friday’s inflation rate report is highly anticipated while Japan has a continuous stream of surveys and indicators being released this week. Across the pond, the UK will announce its new Prime Minister on Monday.
QUOTE(S) OF THE WEEK
“I certainly was not excited to see the stock market rallying after our last Federal Open Market Committee meeting,” he said. “Because I know how committed we all are to getting inflation down. And I somehow think the markets were misunderstanding that”. – Fed Kashkari via Bloomberg
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Monday – ISM services
The second quarter’s services activity almost certainly fell to 55.0 in August, which is more than a reversal of the 1.4-point increase in July. Even so, a widening span and a notable drop in the ISM services PMI would indicate that non-oil companies are hesitant to hire new workers. When businesses are cautious about hiring new employees because of low demand for their goods or services, it can lead to an increase in the ISM’s Services Purchasing Managers Index (PMI).
Thursday – Trade balance
The July trade deficit was $70.0b, down from $79.6b the previous month. The July advanced goods trade deficit shrank to $89.1b, the least since October. This is due to a 3.5% decline in imports from the previous month ($279b) while exports remained relatively unchanged. Looking at the specifics, consumer goods imports fell the most in nearly two decades, suggesting declining demand as high inflation and rising interest rates put pressure on customers.
Global Spotlight
The United Kingdom will have a new Prime Minister come September 5th, as the governing Conservative Party announces its leadership contest winner. The Queen herself will appoint the new leader on September 6th. The polls suggest that Foreign Secretary Liz Truss will defeat former Chancellor Rishi Sunak in the Conservative Party leadership race. Truss has promised significant tax cuts for families and enterprises, which Sunak has stated would cause inflation and severely decrease state revenue, putting the British government’s ability to pass policies to assist low-income households and small businesses deal with rising costs at risk. Truss is considered to be very Brexit-focused, and has said she will introduce legislation that would go around customs controls at the Irish Sea and possibly stop the implementation of the EU-U.K. Northern Ireland protocol. Even though the European Union has always preferred a negotiated solution, they have threatened to fine Britain and put taxes on British imports if the United Kingdom violates the protocol in any way.
The result of the plebiscite will be known in mid-May. Chileans will be able to decide whether or not to approve a new constitution. On September 4, 2018, Chile will hold a referendum on whether or not to adopt a new constitution that would profoundly change the country’s political structure and business climate. The new charter’s vague language will almost certainly need accompanying legislation, which would lead to an extended period of regulatory uncertainty if the proposed constitution is adopted. Similarly, if the constitution is rejected, left-wing and right-wing political forces will likely push for their constitutional amendments, resulting in greater political tensions.
The Kenyan Supreme Court will announce its ruling on Raila Odinga’s lawsuit to overturn the results of the Aug. 9 presidential election on Sept. 5. Odinga, a five-time presidential aspirant and the runner-up Aug. 9, contends that several irregularities — including problems with voting machines, hacking of the Independent Electoral and Boundaries Commission website and erroneous vote tallies — necessitate a new vote. The Supreme Court will rule on the Aug. 9 election results (possibly acknowledging that some irregularities occurred, although not enough in number or scope to call for a new election), with the outcome being determined by whether or not they are upheld. If the court upholds Ruto’s victory, violence is less likely; Odinga has stated he will obey the court’s decision, lowering the chance of civil conflict.
The European Central Bank raises interest rates. For the second time this year, the ECB is expected to raise interest rates on September 8 by 50 basis points, bringing its deposit rate out of the negative territory for the first time since 2014. Inflation is projected to rise at least another half-point, with an even bigger jump — 75 basis points — increasingly likely, as inflation in the Eurozone shows no sign of slowing down. Inflation reached an all-time high of 9.1%, more than four times higher than the ECB’s 2% target and considerably above expectations. While the eurozone economy is already in a technological recession, without ECB intervention, price growth would not be able to be prevented and inflation lowered without an economic downturn. The US Federal Reserve has also taken major measures to curb inflation.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Earnings
The S&P 500 is expected to add about 8.5% in earnings over the next year, according to MarketWatch’s calculations. The growth rate drops to -2.1 if the energy sector is excluded. In 22Q2, share-weighted earnings for the S&P 500 are expected to be $475.4B, compared with $438.1B (based on year-ago earnings of the current 503 constituents) in 21Q2 the estimated earnings growth rate for the S&P 500 for 22Q2 is 8.5%. If the energy sector is eliminated, estimates decline to -2.1%. Earnings are anticipated to be $475.4B in 22Q2, up from $438.1 billion (based on present-day profits of its 503 members) in 21Q2.
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 22Q2 Y/Y earnings are expected to be 8.5%. Excluding the energy sector, the Y/Y earnings estimate is -2.1%.
- Of the 496 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.4% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
- During the week of Sep. 5, 2 S&P 500 companies are expected to report quarterly earnings.
Macro Market
Growth
As it stands, we predict 1.3% growth in GDP for 2022 followed by a year of negative growth at -0.1% in 2023. The economy will then start to recover 2024 with an estimated 1.9% growth; this is due to the Federal Reserve becoming accommodating and cutting interest rates during 2H2023.
Inflation
With a sharper slowdown and higher unemployment rates, we anticipate that inflation will now moderate at a faster pace than before. By the end of 2022 (4Q/4Q), headline PCE is projected to be 4.8% , while core should reach 3.9%. In 2023, those numbers are expected to be 2.4% and 2%, respectively; which puts inflation broadly in line with the Fed’s 2% mandate by 2024.
Federal Reserve
We are predicting 50bp interest rate hikes at the September and November meetings, followed by a 25bp hike in December, bringing the target range to 3.50-3.75%. We anticipate that as inflationary pressures begin to subside, the Fed will start cutting rates during the second half of next year.
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