Summary and Price Action Rundown
Global risk assets turned lower overnight ahead of the busiest day of corporate earnings season, which will feature reports from IT giants, while investors mull yesterday’s Federal Reserve decision, await key economic data, and monitor wrangling on Capitol Hill over the latest pandemic stimulus bill. S&P 500 futures point to a 1.3% lower open after yesterday’s 1.2% rally took the index back into slightly positive territory for the year as it continues to fluctuate below last Wednesday’s peak for the pandemic. Equities in the EU and Asia also retreated overnight. The ongoing dollar downtrend is pausing today, while longer-dated Treasury yields are sinking, with the 10-year yield at 0.55%, its lowest level since early March. Brent crude prices are sliding below $43 per barrel amid demand concerns.
Federal Reserve Remains Focused on Downside Risks
With policy settings remaining unchanged as expected, investors focused on the resolutely dovish tone of accompanying communications and the Fed’s commitment to extend its ultra-accommodative policies, which further depressed Treasury yields and the dollar. The FOMC voted unanimously to maintain policy rates in a range of 0-0.25%, matching market expectations, but the dovish atmospherics weighed on Treasury yields across maturities, pulling 10-year Treasury yields to their lowest level since early March. Sliding interest rates, along with the Fed’s dim growth outlook, sent a broad dollar index to its lowest level in nearly two years yesterday, although it steadied overnight. The accompanying statement reiterated the Fed’s commitment to use its “full range of tools to support the US economy in this challenging time” and to achieve the objectives of its dual mandate, namely full employment and price stability at 2% inflation. Regarding the anticipated policy pivot this fall, the Fed’s communications provided only hints, with Chair Powell indicating that any enhanced guidance would be referenced to existing policy frameworks. On the timing, he noted that the FOMC was still conducting its monetary policy strategy review but would conclude in the “near future,” suggesting that the September meeting would be the venue for rollout. Chair Powell also stated that the Fed will sustain its historic easing until confident economy has “weathered recent events.” In the meantime, he “thinks the most central fact or the most central driver of the path of the economy is the virus,” and as such “in the broad scheme of things, there will be a need both for more support from [the Fed] and more fiscal policy.” In the near term, Chair Powell said the Fed does not see inflation on the horizon yet, calling the pandemic “a disinflationary shock” though he noted that “there’s a lot of discussion over how this might lead to inflation over time.”
Equities Fluctuate Ahead of Key Earnings Releases
Amid the busiest stretch of second quarter (Q2) earnings season, US stocks continue to alternate between gains and losses this week, with caution reemerging ahead of today’s consequential reports. With Q2 earnings season thus far sending mixed messages amid a high degree of upside surprises on headline numbers but lackluster details and guidance, today’s bevy of reports from high-flying tech giants and an array of other corporate bellwethers could provide greater directionality to the broader stock indexes. The spotlight is on Apple, Amazon, Google, and Facebook, all of which report after the closing bell. Shares of these four tech giants all rallied 1-2% yesterday despite already lofty valuations and the grilling their CEO’s received before the House Judiciary Committee on antitrust, data privacy and anticompetitive practices. Other companies issuing results today include UPS, DuPont, Eli Lilly, Comcast, Valero Energy, Proctor & Gamble, Mastercard, and Yum! Brands before the opening bell, with reports due from Ford, Shake Shack, US Steel, Expedia, MGM Resorts, Caterpillar, and Exxon Mobil alongside the tech giants after markets close. Yesterday, AMD was a standout performer, capitalizing on the travails of its competitor Intel, while Starbucks also impressed analysts despite a revenue plunge. Results from traditional economy bellwethers GM, GE, and Boeing, however, were less upbeat and shares of all three retreated following their releases. With 229 of S&P 500 companies having reported, 83.4% of results have featured a positive earnings-per-share (EPS) surprise and 65.5% have topped revenue estimates. However, aggregate growth of sales and earnings are down 9.6% and 14.2%, respectively, thus far year-on-year.
US Economic Data in Focus – GDP for Q2 is expected to plummet 34.5% after a 5.0% Q1 contraction, although estimates range from -25% to -40%. Meanwhile, after last week’s tally of initial jobless claims increased for the first time since March, another increase is expected in today’s reading of new filings for the week ending July 25th, from 1.416 million to 1.445 million.
EU Growth Figures Meet Expectations – German GDP was slightly worse than expected, contracting 10.1% quarter-on-quarter versus a -9.0% forecast, following a 2.0% retrenchment in Q1. EU economic confidence gauges were relatively steady. The euro is dipping just below two-year highs versus the dollar.