Welcome to “The Week Ahead” blog post, where we bring you the key insights and forecasts to better navigate the markets. The past week saw the S&P 500 technically enter a bull market, yet Bank of America Corp’s Michael Hartnett cautions that this isn’t indicative of an imminent major equity rally. Drawing comparisons with the markets in 2000 and 2008, Hartnett suggests we might be witnessing a substantial rally ahead of a potential significant collapse. From a technical perspective, the current uptrend in U.S. equities could raise a few eyebrows, but according to Hartnett, it might not be all doom and gloom.
The S&P 500, up 15% this year to 4,425.84, could potentially gain another 150 points before Labor Day on September 4, according to Hartnett. This projection contrasts his earlier prediction, which did not materialize, of the S&P 500 dropping to 3,800 by March 8. One of the major surprises of the first half, as Hartnett admits, has been the strong performance of AI-powered tech stocks, which investors turned to in a defensive move.
While this cautionary note might have some investors on edge, a counterpoint from Citigroup Inc. strategists led by Beata Manthey suggests that the U.S. market could continue to outshine its European counterparts, despite a concentrated rally. The S&P 500 and growth shares have historically demonstrated an ability to perform well even when market breadth narrows.
As we look ahead, the Federal Reserve’s actions and a potential rise in the unemployment rate past the 4% mark will be key factors to watch. Meanwhile, we’ll also keep an eye on the inflows and outflows across various asset classes and regions, with U.S. stocks leading inflows in the past week and utilities seeing the most significant outflows. Stay tuned as we navigate these dynamic markets together.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Housing Starts
On Tuesday, June 20, 2023, at 8:30 ET, the market will focus on the high-impact announcement of the U.S. Housing Starts for May. Housing Starts reflect the number of new residential construction projects that have begun during the particular month. It’s a critical indicator of economic strength, offering insights into the state of the housing market, consumer spending, and builder confidence. The actual figures show 1450K new projects, surpassing both the Briefing.com forecast and consensus, which stood at 1400K and 1401K respectively. This positive deviation indicates a robust housing market and suggests increased economic activity, as construction typically leads to employment growth and stimulates purchases of goods and services. The housing market has direct ties with sectors such as banking, manufacturing, and retail, hence the high trading impact of this announcement.
Building Permits
Also on Tuesday, June 20, 2023, another high-impact announcement set for 8:30 ET is the release of Building Permits data for May. Building permits represent the number of new authorizations issued by local governments for the construction of residential buildings. It’s a leading indicator of future construction activity and the overall health of the economy. The actual data shows 1435K permits issued, marginally outperforming the Briefing.com forecast and consensus estimates of 1425K and 1416K, respectively. Increased building permits signal future increases in housing starts, indicative of a flourishing housing market, which in turn is often a bellwether of the economy’s overall trajectory.
EIA Crude Oil Inventories
On Wednesday, June 21, 2023, at 10:30 ET, traders will be awaiting the EIA (Energy Information Administration) Crude Oil Inventories report for the week ending June 17. This announcement bears significant impact on energy traders. The report measures the weekly change in the number of barrels of commercial crude oil held by US firms. The level of inventories influences the price of petroleum products, which can have an impact on inflation and other economic indicators. As of now, the actual figures are not available, but the previous week saw a surplus of 7.92 million barrels. A higher than expected reading can be seen as bearish for crude oil prices, while a lower than expected reading can be seen as bullish.
Initial Claims
On Thursday, June 22, 2023, at 8:30 ET, the market will be closely observing the Initial Claims data, another high-impact announcement. Initial Claims is a report issued by the U.S. Department of Labor that measures the number of individuals who filed for unemployment insurance for the first time during the past week. This is the nation’s earliest economic data, reflecting the level of joblessness and providing the most timely insight into labor market conditions. For the week ending on June 17, the actual figures show 255K new claims, which is lower than both the Briefing.com forecast and consensus estimates of 259K and 262K respectively. A lower than expected number signals a strong job market and could lead to a rally in market indices.
Existing Home Sales
Later on Thursday, June 22, 2023, at 10:00 ET, the Existing Home Sales data for May will be released. This report indicates the number of completed real estate sales transactions on single-family homes, townhomes, condominiums, and co-ops. This report has a significant trading impact as it provides an insight into the demand for housing, a key indicator of economic strength. For May, 4.25 million existing homes were sold, slightly lower than the Briefing.com forecast and consensus estimates, both of which were 4.28 million. It’s important to note that while the sale of new homes triggers widespread economic activity, including new construction and furnishing purchases, the sale of an existing home does not have the same economic impact.
Macro Market
Growth
Reflecting on the current economic climate, I’ve made the decision to shift our forecast for the anticipated slowdown in the US economy forward by two quarters. It’s now my estimation that we’ll see a rise in real GDP growth to 1.1% 4Q/4Q for this year, marking a significant improvement from the previously predicted -0.2%. As for 2024, I’m now predicting 4Q/4Q growth to level out at 0.0%, as opposed to the earlier forecast of 0.9%. I’m of the belief that we’ll witness a negative growth turn for two quarters in the first half of ’24. However, I anticipate this will be mild, with only -1.0% and -0.5% q/q saar for 1Q 24 and 2Q 24, respectively.
Inflation
I’ve revised our forecasts in relation to core personal consumption expenditure (PCE) inflation. I now project that PCE inflation will close out the year 40bps higher at 3.8% 4Q/4Q, and subsequently 20bps higher next year at 2.4% 4Q/4Q. After careful analysis, my belief is that we will see the attainment of price stability in the early months of 2025.
Federal Reserve
In terms of the Federal Reserve’s action, I anticipate a 25bp hike in July followed by an additional 25bp increase in September. This would bring us to a terminal rate of 5.5-5.75%. It’s not beyond the realm of possibility that the Federal Reserve may choose to schedule the final hike for November. As for the initial rate cut and the cessation of quantitative tightening (QT), I now foresee these happening in May 2024, a two-month delay from the earlier prediction of March 2024.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
In the realm of aggregate estimates and revisions for 23Q1, expected year-on-year earnings are projected at a minimal 0.03%. However, upon excluding the influence of the energy sector, this estimate dips into negative territory at -1.7%. With regards to the S&P 500 companies, 76.8% out of the 499 that have reported their 23Q1 earnings thus far, have managed to surpass analyst estimates. This presents a significant upswing compared to the long-term average of 66.3% and is even slightly higher than the prior four-quarter average of 73.5%. Notably, the week of June 19 will see five S&P 500 companies releasing their quarterly earnings reports.
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q1 Y/Y earnings are expected to be 0.03%. Excluding the energy sector, the Y/Y earnings estimate is -1.7%.
- Of the 499 companies in the S&P 500 that have reported earnings to date for 23Q1, 76.8% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%.
- During the week of June. 19, five S&P 500 companies are expected to report quarterly earnings.
Global Spotlight
Blinken’s Beijing Encounter
Antony Blinken, the U.S. Secretary of State, will travel to Beijing for a meeting with China’s Foreign Minister Qin Gang and possibly President Xi Jinping on June 18. This visit, a rescheduling of a previous trip planned for February 2023 but cancelled due to the unexpected incident of a Chinese spy balloon, is the first by a U.S. Cabinet member in four years and signifies a step forward in U.S.-China dialogue amid competitive economic landscapes. Recent remarks by Minister Qin blaming Washington for tense relations reveal potential hurdles in the upcoming talks, which may devolve into blame-shifting rather than conflict resolution. Regardless, Blinken’s trip might set the stage for a higher-level meeting between Presidents Xi and Biden. The true test of easing tensions, however, will be whether these discussions can endure the forthcoming U.S. economic sanctions on China.
China’s Premier’s Euro Tour
Chinese Premier Li Qiang will make his first international trip since assuming office in March, traveling to Germany and France next week, according to an announcement from China’s Foreign Ministry on June 15. Premier Li will lead a delegation in Berlin on June 20 for government consultations with Germany, followed by his participation in the New Global Financial Pact Summit in Paris on June 22-23. The Premier’s visit comes at a time when China aims to fortify its ties with key European nations, in light of the U.S. urging Europe to adopt a harder stance on China. Germany, despite identifying China as a growing global security risk in its inaugural national security strategy, continues to trade heavily with Beijing. Concurrently, France is pushing the EU to enact anti-dumping and anti-subsidy tariffs on China’s electric vehicle exports to Europe.
Modi’s Washington Sojourn
Indian Prime Minister Narendra Modi will meet U.S. President Joe Biden in Washington from June 21-24, marking the first state visit by an Indian premier since 2009. He is also scheduled to meet with a group of U.S. CEOs. It is hoped that the visit, replete with grand ceremonial displays, will culminate in several defense and high-tech agreements, signifying the strengthening of bilateral ties and shared geopolitical objectives. Possible agreements on topics such as artificial intelligence, semiconductor supply chains, telecommunications standards, and maritime security will be discussed under the recently established Strategic Trade Dialogue, aiming to harmonize export controls. Nevertheless, the strategic convergence between the two countries, particularly their joint effort to contain China in the Indo-Pacific region, is somewhat limited by issues including India’s ongoing friendly ties with Moscow.
Lula’s Euro-Diplomacy
Brazilian President Luiz Inacio Lula da Silva is scheduled to meet with the leaders of France and Italy on his diplomatic tour from June 20-23. It is expected that President Lula will urge the European leaders to support the Amazon Fund, a mechanism used for development projects and combating deforestation in the Amazon Rainforest. He is also likely to advocate for the resumption of negotiations towards the finalization of an EU-Mercosur trade deal, a move that both France and Italy have expressed concerns about due to potential negative impacts on their agriculture sectors.
Turkish Monetary Measures
The Turkish Central Bank’s Monetary Policy Committee will convene for its first meeting since the inauguration of President Recep Tayyip Erdogan’s new government on June 22. Market observers anticipate that under the leadership of the finance-friendly technocrat Mehmet Simsek, the bank may shift towards a more pragmatic interest rate policy, potentially increasing the policy rate to 20% from the current 8.5%. After a significant reduction in the policy rate from 19% to 8.5% in 2021, inspired by Erdogan’s belief in low interest rates for stimulating economic growth, Turkey is grappling with high inflation and depleted foreign currency reserves. Therefore, Erdogan appears to be more open to conventional financial policies, provided they steer towards economic stabilization and attract foreign currency inflows.
Stratfor.com
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