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Challenges for Monetary Policy: Global Week Ahead

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I see three areas of trader focus in the Global Week Ahead.

First, stateside, on the U.S. corporate earnings slate, big-name retailers take center stage.

Major department store earnings continue to disappoint. However, big-box retailers may tell us a different story about retail.

Last week, Walmart surprised investors with strong Q2 earnings. It posted growth in numerous categories. As swaths of U.S. consumer tariffs loom on Sept. 1st and Dec. 15th, Walmart found a preliminary way to deliver strong results.

Big retail names to report this week: Home Depot, Kohl’s, Lowe’s, Target, Nordstrom and Dick’s Sporting Goods.

Traders should look for more clues.

How do these retailers plan to tackle the coming U.S. tariffs, as the self-created U.S. trade war with China rages?

Second, the Fed is in Jackson Hole, Wyoming for its annual summer confab.

This year’s theme, Challenges for Monetary Policy, appears a fitting one. The world’s central banks keep cutting policy rates in a bid to stir macro activity.

A mounting pile of negative-yielding debt — almost $17 trillion — indicates profound gloominess over the state of the world economy.

Some analysts expect no firm commitments from Mr. Powell and for markets.

 

  • Traders currently price an added 65 basis points of Fed cuts this year.
  • Others argue we could see yet another pivot — from a Fed that has recently wrong footed investors with its messaging.
     


“We would expect to see Powell and others use the venue as a platform to attempt to ‘out dove the doves’ and provide sufficient monetary accommodation via the forward guidance channel and stabilize …risk assets.”

-- Ian Lyngen, strategist at BMO Capital Markets, in the Financial Times


Third, inside the global markets last week, turmoil swept Argentine assets.

This followed the shocking defeat of President Mauricio Macri in the primary elections. It raises new fears. The crisis could spread to other emerging markets.

Watch out for that!

Next are Reuters’ five world market themes for the Global Week Ahead. I re-ordered these in importance to equities.

(1) Watch for More Red Flags Signaling U.S. and Global Recessions

Investors have been fretting that the U.S. inverted bond yield curve is pointing to a U.S. recession in the next couple of years, but warning signs pointing to more immediate trouble have been flashing this week elsewhere in the world.

In China, industrial output hit a more than 17-year low in July, highlighting again the damage from the protracted U.S.-China trade dispute.

Europe Inc. is suffering from recession, with profits in the three months to the end of June expected to fall for a second consecutive quarter, while data showed Germany’s economy went into reverse in the second quarter, reinforcing worries about the region’s macro and corporate health.

In another sign of deepening stress in the bloc, stocks in the big European banks plunged on Thursday to their lowest since 2012 at the peak of the Eurozone debt crisis.

They are now on the brink of hitting their lowest since the 1980s as negative rates, stiff regulation and rising costs take their toll.

With bond yields showing no signs of staging a major recovery any time soon, investors will likely remain cautious on the battered banking sector.

(2) Time for ‘Flash’ Manufacturing PMIs

If economists could take any consolation at all from the steadily worsening economic data worldwide, it was that the malaise has appeared confined to manufacturing.

Services, which comprise the bigger part of developed countries’ GDP, has held up pretty well. July numbers, though, were sobering — purchasing managers indexes (PMI), generally a good measure of overall economic health, hinted that factories’ sickness may be spreading.

So advance August PMI readings, due on Thursday, will draw scrutiny, especially with global bond markets flagging a looming economic downturn.

Take the United States. Manufacturing here slowed to a near 10-year low in July, to the neutral 50-mark on the PMI index yet services accelerated to 53, the IHS Markit data showed. But readings from the Institute for Supply Management suggested services were about to take a hit, with new orders hitting three-year lows.

In the Eurozone, a dismal manufacturing print of 46.5 contrasted with services at a relatively robust 53.2. But services were down from June, while composite PMIs that combine both sectors slipped to three-month lows of 51.5.

Globally, manufacturing PMIs are deep in the red, with only services holding the composite print above the 50-mark.

If the upcoming ‘flash’ PMIs confirm that the manufacturing downturn is affecting the services industry, bond markets’ assessment of the economic outlook may be correct.

(3) The Fed Releases Latest Minutes on Wednesday

On Wednesday, the U.S. Federal Reserve releases the minutes of its last meeting, revealing what policymakers said about the flattening Treasury yield curve and the strength of support for July’s quarter-point rate cut.

But given what has transpired in bond and stock markets since that meeting, the more relevant headlines should spring from the Fed’s annual Jackson Hole Symposium later in the week, with Chairman Jerome Powell to address the forum on Friday.

Now that the long-awaited inversion of the two-year/10-year yield curve has actually happened, there is some question whether the Fed will lean harder on the easing side to re-steepen the curve and quash recessionary interpretations.

The Fed looks boxed in. Wall Street has had a torrid few days, having lost more than 4% this month. All Treasury maturities now yield less than 2% for the first time ever.

Then add President Trump’s tweets about “clueless” Powell and the “crazy” inverted yield curve even as Washington’s trade wars dent business confidence.

Meanwhile, strong July retail sales and gangbuster Walmart earnings indicate the economy’s all-powerful consumer is undaunted. That argues against the Fed doing much more.

Still, futures traders see no chance the Fed will stand pat in September, with CME’s FedWatch tool showing about a 67% probability of a 25 basis-point cut and 33% odds for a 50-point cut.

By the end of the year, money markets are 78% positive that the target Fed funds range will be 50-75 basis points lower than the current 2.00-2.25%.

(4) Yen Getting Stronger, Causing Concern

As if Japan’s economy didn’t already have enough headwinds, a rising yen has joined the mix.

The past week’s gyrations in U.S. Treasuries, including a short-lived inversion that whipped up recession fears, plus weaker stock markets, rising volatility and more Trump capriciousness on the trade war with China have sent investors scurrying into the safe havens of gold and the yen.

While Japan’s growth has been picking up ever so slightly, the headwinds from an upcoming sales tax hike, trade tensions with neighbor South Korea and the threat of U.S. tariffs on its auto exports are set to keep consumption and trade weak in the second half of the year.

Next week’s trade data is expected to show exports fell for the eighth month in July, while a Reuters manufacturing sentiment index should reflect rising concerns.

Meanwhile, the Bank of Japan appears helpless as a worldwide decline in bond yields drags its 10-year yield to below the minus 0.2% floor it has set as part of its yield curve control policy, and as the yen rises 3% in a matter of days.

If it really wants to cap the rising yen and put a floor under yields, it needs to stop buying the bonds it mops up as part of its quantitative easing policy. But that would erode its credibility and backfire on the economy.

(5) Italian Prime Minister Addresses Senate Tuesday

Global bond market developments have of late overshadowed Italian political shenanigans, but that may soon change.

Prime Minister Giuseppe Conte addresses the Senate on Tuesday, after it frustrated Deputy Prime Minister Matteo Salvini’s attempt to pull the plug on his coalition with the 5-Star Movement and trigger snap elections.

Meanwhile, 5-Star politicians themselves are discussing forming a coalition with the opposition Democratic Party.

The prospect of election uncertainty had sent Italy’s 10-year bond yield premium above Germany to 239 basis points a week back.

It’s retreated since then to around 200 bps. But if President Sergio Mattarella decides there’s no way of creating a stable government, early elections will be called, probably for late October.

Zacks #1 (STRONG BUY) Rank Stocks –

(A) JD.com (JD - Free Report) :
This $37.6B market stock is currently pricing at $31 a share. The share price has been consolidating around this level since April. It may be time for a new share price leg higher (to $45?), in particular, if an announcement of Chinese stimulus arrives this week or next.

The company is a Mainland Chinese e-commerce competitor to Alibaba inside China. I see a Zacks Value score of B and a Zacks Growth score of A.

(B) DaVita (DVA - Free Report) : This is a $9.2B market cap U.S. kidney dialysis stock, currently pricing at $58 a share. The Zacks Value score is A and the Growth score is B.

I see another quantitative attraction. The Zacks Industry Rank is a sweet #33 out of 256 (top 13%).

(C) Aercap (AER - Free Report) : This is a huge Netherlands-based aircraft leasing company. Shares are ADRs for U.S. buyers. It has a Zacks Value score of A.

Can stocks with global businesses like this get any “lift” while the rest of Europe suffers? Let’s watch and see if an announcement of a German fiscal stimulus boosts a stock like this, in the days and weeks ahead.

Key Global Macro—

It’s a light August week for data releases.

On Monday, Eurostat released its consumer-price indices  (HICP) for July. The composite HICP reading was +1.0% y/y in July 2019, down from +1.3% y/y in June. A year earlier, it was +2.2% y/y.  

Obviously, we are back to European Union (EU) deflation. Not good.

 

  • The lowest annual rates were registered in Portugal (-0.7%), Cyprus (0.1%) and Italy (0.3%).
  • The highest annual rates were recorded in Romania (4.1%), Hungary (3.3%), Latvia, and Slovakia (both 3.0%).
  • Compared with June, annual inflation fell in fifteen Member States, remained stable in two, and rose in eleven.
     


On Wednesday, the U.S. National Association of Realtors (NAR) releases July existing home sales. Look for this to rise +2.3% m/m to 5.3 million units.

The Fed releases its latest minutes.

The large Swiss bank UBS expects the Fed minutes will illustrate a more detailed picture of which FOMC members wanted larger cuts, while some saw no need.

“We infer that the decision was contentious. We expect that ‘some’ FOMC members (in our view, including the Chair, Williams and Clarida) pushed for a larger rate cut, while several (meaning at least 6) saw no reason to cut.”

On Thursday: U.S. initial jobless claims could come at 216,000 versus 220,000 in the week prior. Continuing Claims could be 1.726 million. These are quite low.

Expect the Markit U.S. Manufacturing PMI for August to be 50.5 versus 50.4 in July). That’s still barely in expansion. A shocker here would be a “40” print.

Expect the Markit U.S. Services PMI for August to be 52.8 versus 53.0 in July).

The U.S. Leading Indicator Index for July should be +0.2% versus -0.3% in June.

On Friday, the focus in the morning will be on Fed Chairman Powell when he delivers his speech in Jackson Hole.

Powell is expected to clarify the Fed’s future monetary policy path and explain whether or not the Fed plans on continuing to cut rates.

The latest U.S. new home sales data come out. Look for a flat 644K sales in July, versus 646K in June.

Outside the USA, economists will closely watch consumer inflation data coming out of Japan. They expect it to remain stuck at a two-year low of +0.6% — no closer to the central bank’s long-elusive target of +2.0%.

 

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