With the Federal Reserve set to cut interest rates by 25 basis points at its policy meeting this month, we wonder if it’s a case of better to travel than arrive. The move to a looser monetary policy will shield the US economy from the escalation of risk brought about from rising global trade tensions which are weakening global growth forecasts. However, corporate earnings in the US have been buoyed by business friendly fiscal policies and this together with the liquidity driven rally in equities as bond yields fall in anticipation of falling interest rates, have added fuel to the fire.
The S&P 500 has risen over 18% this year already and while equities remain the asset class of choice at this stage in the economic cycle, we remain vigilant for points of inflection. Much of what we will be looking at this week will be the company reporting season in the US where 145 of the S&P 500 will report and other highlights will include:
Monday: A very quiet day for data with only the June Chicago Fed national activity index in the US due for release. Halliburton will report earnings.
Tuesday: Data releases include final June machine tool orders in Japan, July CBI survey data in the UK, July consumer confidence for the Euro Area and the May FHFA house price index, July Richmond Fed survey and June existing home sales data all in the US. Companies reporting earnings include Harley Davidson, Coca-Cola, United Technologies and Visa. The next UK PM is expected to be announced while the IMF will release the latest World Economic Outlook.
Wednesday: The July flash PMIs in Japan, Europe and the US will be the main data focus. Away from that July confidence indicators are due in France, June M3 money supply data due for the Euro Area and June new home sales data due in the US. Earnings highlights include Boeing, Caterpillar, Ford, Facebook and AT&T. Former Special Counsel Mueller will testify before the House Judiciary and Intelligence committees on Russian election interference.
Thursday: The ECB monetary policy meeting will likely be the focal point of the day. As for data, in Europe we get the July IFO survey in Germany and CBI survey data in the UK. In the US the preliminary June durable and capital goods orders data is due in the US along with June wholesale inventories, July Kansas Fed survey and latest jobless claims data. As for earnings, Amazon, Google and Intel will report.
Friday: The focus of the data will be the advanced Q2 GDP revisions in the US. Prior to this the only data due in Europe is the July consumer confidence print in France. Earnings releases are also due from McDonald's and Twitter.
Whilst noting that equities have been on a firm run this year, we also note that the UK trades at a pretty significant discount to the US market. The FTSE 100 is currently on 13x forward earnings as opposed to 18x for the S&P 500. Brexit concerns explain some of this discount but we also believe that most of the potential bad news for the UK is now in the price. Sterling will be the mechanism used to protect the economy against further shocks and we also note that when sterling devalues the stock market tends to react positively.