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Monday, July 1, 2013

The stock market today appears on track to open on a positive note, but a lot will depend on what the June manufacturing ISM report coming out a little later will shows. The consensus expectation is for the survey to show modest improvement from the prior month’s contactionary reading. Overnight data out of Asia and Europe presented a mixed picture, but markets seem to be going back to a Fed-centric framework where positive or negative economic data may not mean what the headlines say.

The Bank of Japan’s Tankan business sentiment survey showed its highest reading in more than two years. This is the first reading of this quarterly survey since BoJ initiated its aggressive easing program in April and is likely indicative of improving trends in Japan’s underlying fundamentals. Unlike Japan, the outlook for China does not appear be that upbeat, with both the official and private-sector PMI measures for June showing negative momentum in the factory sector.

While questions about China’s growth outlook precede the assumption of power by China’s new political leadership earlier this year, the country’s new leaders appear to be more concerned about stamping down speculative excesses than nudging growth higher. It is not clear at this stage what these diverging growth outlooks for China and Japan mean for global growth, but uncertainty about China is no doubt problematic for the markets.

The ISM survey coming out a little later is no doubt a top-tier report, but this holiday-shortened week’s calendar is full of other important economic data as well. Markets will be closed on Thursday for July 4th and open only half the day on Wednesday, but we have the June non-farm payroll report coming out on Friday. We will get a preview of Friday’s jobs report Wednesday morning from the ADP report and a host of other economic data, including speeches from Fed officials.

Trading volumes will likely be on the light side this week, which typically exacerbates volatility. And all of this comes ahead of the start of the Q2 earnings season next week. Expectations for Q2 earnings growth remain low, improving the odds that positive earnings surprises will likely be in-line with historical averages. But a lot will depend on top-line growth and guidance for the third quarter and second half of the year.

Please note that while estimates for Q2 earnings kept coming down as the quarter progressed, we haven’t seen much downward adjustments to expectations for Q3 and the second half of the year. It will be interesting to see how the market responds to negative estimate revisions in the current backdrop of less certainty about the Fed.

Sheraz Mian
Director of Research

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