Summary and Price Action Rundown
Global risk assets are modestly positive this morning amid the ongoing barrage of major corporate earnings reports, while investors await a Federal Reserve decision and monitor wrangling on Capitol Hill over the latest pandemic stimulus bill. S&P 500 futures indicate a 0.2% higher open after yesterday’s decline took the index back into slightly negative territory for the year, while choppiness continued in the tech-heavy Nasdaq. Equities in the EU and Asia were mixed overnight. The dollar is extending its downtrend, while longer-dated Treasury yields are edging up, with the 10-year yield at 0.59%. Brent crude prices are up toward $44 per barrel.
Federal Reserve Decision in Focus
Though no major changes are expected to current monetary settings, analysts will be highly attuned for any signals on impending policy shifts at the September meeting. In a bit of housekeeping yesterday, the Fed announced it would be extending its credit lending facilities through the end of the year. The myriad of facilities originally set to expire at the end of September will now run through to 2021. Later today, at the conclusion of the July meeting, the FOMC will release its key interest rate decision, with no change expected again. At the June meeting, the Fed left the target range for its federal funds rate unchanged at 0-0.25%, matching market expectations. However, the accompanying communications were more dovish than anticipated, and all but two of the FOMC participants expected it would appropriate to keep rates at zero through 2022. Meanwhile, the Fed reinforced its commitment to maintain “smooth market functioning” by promising to maintain its Treasury and mortgage purchases “at least at the current pace” of $80bn Treasuries and $40bn of mortgage backed securities (MBS) a month “over coming months,” as opposed to the open-ended period of the pandemic response in April minutes, easing from its peak of purchasing $300 billion in securities during the early days of pandemic-related shutdowns in the US. With interest rates and quantitative easing likely to remain steady, the focus will be on any additional information on a potential pivot to enhanced guidance or perhaps even some degree of specific yield-curve control at the September meeting. Additionally, the Fed Chair Powell will likely continue to advocate for augmented fiscal support to underpin the expansion.
Earnings Convey Mixed Messages
Amid the busiest stretch of second quarter (Q2) earnings season, caution took hold yesterday after a decidedly mixed set of results as analysts brace for key releases from IT giants and other household names later this week. Yesterday featured the earnings releases before the opening bell from 3M, DR Horton, Pfizer, Raytheon, JetBlue, and McDonalds, which reflected widely varied performance. On the downside, 3M, McDonald’s, and JetBlue missed on earnings consensus estimates, though the latter two beat depressed revenue projections. Industrial conglomerate 3M had the worst share price response, losing 4.8% after reporting a plunge in demand across its business lines and an organic revenue decline of 13%. McDonald’s saw store sales drop 24%, though noted its drive-thru and delivery performance offset major losses. Its shares fell 2.5%. DR Horton, Pfizer, and Raytheon all beat earnings and revenue projections for the second quarter, though only Pfizer stock managed to rise as the others were hit by profit-taking. After yesterday’s closing bell, Visa, Starbucks, Aflac, eBay, and AMD also reported mixed results, though AMD and Starbucks outperformed notably, sending their shares higher in pre-market trading. With 194 of S&P 500 companies having reported, 83.5% of results have featured a positive earnings-per-share (EPS) surprise and 65.8% have topped revenue estimates. However, aggregate growth of sales and earnings are down 8.7% and 14.9%, respectively, thus far year-on-year.
Additional Themes
Strategic Government Support Lifts Kodak – Amid increased urgency from the pandemic, the Trump administration’s policy push to re-shore strategic manufacturing from overseas took a step forward. Eastman Kodak stock jumped 207.6% yesterday after soaring over 300% at the outset of trading after it was announced that the company had received a $765 million government loan to expedite domestic production of drugs for several medical conditions. The loan is reportedly part of an effort to reduce US reliance on foreign sources of medication and drugs according to the International Development Finance Corporation (the successor to the Overseas Private Investment Corporation). The loan has been issued under the Defense Production Act. The loan has a 25-year term and is estimated to create around 350 jobs.
Pandemic Relief Bill Negotiations Grind Onward – With the battle lines drawn over key issues such as augmented unemployment benefits, aid for states and municipalities, and relief for renters, House Speaker Pelosi, Senate Minority Leader Schumer, Treasury Secretary Mnuchin, and White House Chief of Staff Meadows have been meeting. Though all are aiming for a package by the end of the week, concerns about timeline slippage are growing. Both the House and Senate appear poised to wait until agreement to try to pass anything further.