The week ahead: earnings season and China growth shock in focus

There may be no show-piece Fed speech or meeting to watch for this week, however, economic data releases and US corporate earnings season will be a key driver of price action and could reveal crucial information about what direction markets might take as we move through the summer months. Thus, it’s worth paying attention to this week’s nuts and bolts data releases, which may seem banal, however at this stage of the economic cycle they are vital pieces of information for your trading tool box. Below we look at three events and give you our view on what they mean for the markets.

1, Understanding US earnings season when the bar is low 

Earnings season kicks off for Q2 in earnest this week, highlights include Citigroup reporting on Monday, United Airlines, JP Morgan, Wells Fargo, Goldman Sachs and Johnson and Johnson reporting on Tuesday, Bank of America, Netflix and eBay on Wednesday and Microsoft and Morgan Stanley on Thursday. The bulk of companies reporting this week are from the financial sector, which is expected to be the second-best performing sector in Q2. Thus, although earnings expectations have been slashed by analysts in recent months, if the financial sector does well this week then it could ease fears that US corporates are experiencing a profit recession for the first time in 3 years. US companies are expected to report an earnings fall of between 0.5% and 2%, depending on the analysts that you follow, after dipping by 0.3% in Q1. 

The sectors that are most at risk are materials, technology, energy and industrials, they are, unsurprisingly, those that are most impacted by the US-China trade spat, the strong dollar and the slowdown in economic growth. The top performing sectors are expected to be defensive, including telecoms and healthcare, with some analysts bullish on financials. 

Interestingly, reduced expectations for last quarter may allow for some price appreciation if we get any upside surprises. When the bar is this low, that cannot be ruled out. Thus, if companies are beating fairly low estimates for their earnings then we may see the S&P 500 extend its move above 3,000 even further. 

It is worth noting that the US stock market rallied into fresh record-breaking territory last week even though a corporate earnings recession is expected. Is the market not worried about poor results from American firms? Not exactly, traders look past last quarter’s earnings and are more interested in what the future holds. The recent price action in US stocks, including the S&P 500’s move above 3,000, suggests that the market is optimistic that a rate cut from the Federal Reserve, a decline in the dollar (the dollar index fell from 97.60 – 96.70 last week), and an end to the US-China trade spat could all boost future earnings in the US. Indeed, at the time of writing, analysts are expecting a hefty uplift in US corporate earnings in the second half of this year, with a 2% increase expected for the whole of 2019. This means that even if Q2 results are poor, as long as the forecast for earnings remains strong for 2019 as a whole, then US stocks could still rally this week. 

2, Chinese growth scare, is it really that bad? 

China releases a raft of economic data at the start of this week including its Q2 GDP print. This is expected to fall further to 6.2% YoY, lower than the 6.4% recorded in Q1. This number is worth noting as it would be the lowest GDP print since records began in the late 90’s. This is likely to be driven by a weak manufacturing sector caused by the US trade tariffs. While a weak headline GDP figure is likely to hog the headlines, a hobbled manufacturing sector is to be expected when China is engaged in a trade war with its biggest customer. More interesting for financial markets will be the other data that is released. Will the Chinese consumer continue to remain strong and will construction remain resilient? If so, then the blow from a weak GDP figure could be muted, and we may not see Asian stocks, the Aussie dollar or the NZD dollar, all of which are sensitive to the Chinese economy, fare too badly. If the weak GDP number triggers an immediate round of stimulus from the PBOC, who tends to adjust policy outside of official meetings, then global risk assets could be boosted at the start of this week, which may include US stocks, German stocks, the FTSE 100 and the US dollar. 

3, Can the pound’s recovery continue? 

GBP/USD rallied 130 pips in the second half of last week after the US dollar finally lost some steam on the back of dovish comments from Fed chair Jay Powell. While we continue to think that the dollar is likely to bounce back in the medium term, in the short term this does give the pound a break from the continuous battering it has received in recent weeks. This week sees the release of some critical UK economic data including labour market data, inflation and retail sales. Could a second week of better than expected UK economic data also help to lift sterling? Retail sales for June are expected to fall for the month, but rise on an annual basis, with the ex-fuel figure expected to show a decent increase from 2.2% in May to 2.7% in June. The labour market is also expected to remain robust, with the unemployment rate remaining steady at 3.8%, while earnings are expected to have risen to 3.5% from 3.4%, which would be the highest rate of wage growth for 10-years.

With wage inflation rising sharply this year, all eyes will be on inflation data that is released on Wednesday. Compared with other major economies where inflation has been running slightly below target rates in recent months, the UK inflation figure has been hovering above the 2% target rate for most of the last 2 years. This is significant since the BOE’s mandate is to maintain stable inflation. The YoY CPI figure for June is expected to be 2%, however, if upward pressure is building, as the wage data may suggest, this could make it harder for the BOE to cut interest rates as expected later this year. If inflation is higher than expected for June, we would expect this to boost the pound further as the market rushes to price out some expectation for a rate cut from the BOE in August. If this happens then a move back towards 1.2720 – the high from end of June – could be possible for GBP/USD. Although GBP/USD has started off the weak on the backfoot, dropping 20 pips immediately at the open, any GBP weakness could be bought into if the economic data surprises on the upside. We would, however, be wary of GBP longs, in the event that inflation falls unexpectedly, as this would likely push GBP/USD back below 1.25.