Stocks remain right near all-time highs, and Q2 earnings season is under way.
This week, Federal Reserve Chair Janet Yellen heads to Congress to give her Semiannual Monetary Policy Report. She will address the Senate Banking Committee on Tuesday at 10:00 a.m. ET and the House Committee on Financial Services on Wednesday at 10:00 a.m. ET.
“Yellen will have little choice but to acknowledge the improvement in the labour market when she testifies next week,” said Credit Suisse economists. “With the unemployment rate plunging and with inflation trending higher, some in Congress will press her to explain why exceptionally accommodative monetary policy is still required to reach the Fed’s objectives.”
Here’s your Monday Scouting Report:
Earnings Season Starts, And Something Seems Off: “We’ve reached a point where it’s not getting any better but it’s not getting any worse — at least for the middle (class) and down,” said Wal-Mart U.S. CEO Bill Simon.
“Consistent with so many of our fellow retailers, we are experiencing a retail ‘funk,'” said The Container Stores’ Kip Tindell. “While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 — so we’re not alone in this.”
It’s still early in Q2 earnings season. Maybe the anecdotes will soon improve.
- Empire Manufacturing (Tues): Economists estimate this regional activity index fell to 17.00 in July from 19.28 in June. “We expect the Empire manufacturing index to moderate to 16.5 in July after two straight months of above-19 prints,” said Bank of America Merrill Lynch economists. “Manufacturing was quite sluggish from February to April, and these last two strong prints were likely boosted by pent-up production and demand. That said, broad economic fundamentals are still on a positive trend, suggesting a still-solid report in July.”
- Retail Sales (Tues): Economists estimate sales climbed 0.6% in June, while increasing by 0.5% excluding autos and gas. “Vehicle sales continued to strengthen in the month, which should apply upward pressure to retail sales,” said Wells Fargo’s John Silvia. “Gains are likely to be broad-based as well. Chain store sales posted a relatively large gain in June, and consumer confidence has reached its highest level in more than six years. Consumer prices also made solid gains in the month, which should push the headline number higher.”
- Producer Price Index (Wed): Economists estimate PPI climbed by 0.2%. Year-over-year, they estimate prices climbed by 1.8%, with core PPI climbing 1.7%. “Farm prices declined again in June and should put downward pressure on producer prices,” said Nomura economists. “However, the jump in energy prices should put upward pressure on headline PPI.”
- Industrial Production (Wed): Economists estimate industrial production increased 0.3% in June as capacity utilization climbed to 79.3% from 79.1%. “A small gain in factory hours worked in the employment report and industry figures pointing to a modest drop in motor vehicle assemblies ahead of a scheduled rise to an eleven-year high in July point to a 0.2% gain in manufacturing output after a 2.8% surge over the prior four months,” said Morgan Stanley’s Ted Wieseman. “Some upside in utility production after a sharp spring pullback following a surge in the winter and a continued strong trend in oil and gas drilling should provide additional boosts to overall IP.”
- NAHB Housing Market Index (Wed): Economists estimate this homebuilder confidence index ticked up to 50 in July. “Sentiment had been above 50 until February when presumably the harsh weather weighed on builder expectations,” noted BofA Merrill Lynch economists. “New home sales have improved, and it seems that the late start to the spring season will support the homebuilding industry.”
- Beige Book (Wed): The Fed’s collection of economic anecdotes will be published at 2:00 p.m. ET. Here’s Credit Suisse: “The pictures painted by recent Beige Books may not illustrate robust growth, but they suggest the economy is at least moving in the right direction (with that -2.9% Q1 GDP print looking like a significant aberration). The July 16 Beige Book may provide real-world anecdotes to supplement the better labour market data reported recently. Any observations from business contacts related to wage growth or pricing power also would be of particular market interest at this juncture.”
- Initial Jobless Claims (Thurs): Economists estimate weekly initial claims ticked up 310,000 from 304,000 a week ago. “Initial jobless claims continue to linger below 320k,” noted Nomura economists. “This suggests that layoffs have bottomed out and also corroborates the strong payroll growth and declines in the unemployment rate we’ve seen this year.”
- Housing Starts (Thurs): Economists estimate starts increased by 2.4% in June with building permits jumping 3.1%. “Building permits have trended higher and are running above the pace of starts,” noted BofA Merrill Lynch economists.”Moreover, homebuilder sentiment, as measured by the NAHB housing index, picked up over the month. New home sales also surged in May, which should incentivise greater building. After a rough start to the year, we think housing conditions have improved.”
- Philadelphia Fed Business Outlook (Thurs): Economists estimate the Philly Fed index fell to 16.0 in July from 17.8 in June. “The index has rebounded sharply after posting a decline in February on winter-related softness, and while we continue to expect broad-based improvement in manufacturing, we look for more moderating gains,” said Barclays economists.
- Univ. Of Michigan Confidence (Fri): Economists estimate this sentiment index climbed to 83.0 in July from 82.5 in June. “Rising equity markets, combined with moderately lower retail gasoline prices and financial market volatility, suggest that consumer sentiment should remain on a broadly upward trend,” said Barclays economists. “A rise to 83.0 in July would put the six-month moving average at 82.2, up from 81.9 in June, and be consistent with the recent uptick in consumer spending following only modest growth in the first quarter.”
Cost-cutting has been a major theme since the financial crisis. Leaner cost structures have helped widen profit margins, which have enabled corporations to boost profits despite meager revenue growth.
And based on the early commentary from the Q2 earnings announcements, cost-cutting continues.
“With earnings growth (4.6%) expected to rise at a faster rate than revenue growth (2.7%) in Q2 and in future quarters, companies (particularly in food-oriented industries) have continued to discuss cost- cutting initiatives to maintain earnings growth rates and profit margins,” writes FactSet’s John Butters.
For more insight about the middle market, visit mid-marketpulse.com.
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