Monday, July 15, 2019

July-August 2019 Outlook: Summer Run Down

July-August 2019 Outlook: Summer Run Down
Tue, 09 Jul 2019 15:49 PM EST

As we progress through the back half of the year many uncertainties continue to hang over the markets. In the months ahead, uncertainty will ebb and flow around hopes for trade deals with China and other partners, as well as other unplanned events such as a possible direct confrontation with Iran.
The key issue for the next couple of months will be the give-and-take between the performance of the economy, domestically and internationally, and the Fed’s decisions on monetary policy. Market expectations are still set on at least 50 basis points of Fed easing through year end, with some minor disagreement about the timing. But if the data on employment remains favorable and inflation picks up just a bit the Fed could extend its pause indefinitely rather than waste its limited resources for easing that could be better used during a future economic downturn.
Without further ado, here’s a list of some significant dates and events to watch for this summer:

July 10: Fed Chair Powell testifies before Congress
The Fed has been under pressure from market participants and President Trump to start cutting rates amid continued weak inflation and uncertainties over trade issues and growth. Trump went as far as to call the Fed “our most difficult problem.” Under this level of scrutiny, Chair Powell will have to tread cautiously as he explains the Fed’s dovish turn despite a strong stock market and a solid rebound in the June employment report. Powell may decide to stress global concerns during his testimony, which would signal the Fed is on track for a July rate cut. Should he push back against the notion of a July rate cut, it could lead to an equity sell off.

July 11: US CPI data
The White House and many on Wall Street have argued that the Fed should focus on price indicators rather than employment. CPI data has remained persistently below the 2% Fed target, despite a healthy jobs market and the central bank’s willingness to tolerate “symmetric” above-target inflation. This month’s inflation data is expected to remain tame, but an upside surprise could curtail hopes for Fed rate cuts this year.

July 16: Earnings season begins
Tuesday, July 16 is the unofficial kick off of the Q2 earnings season, as the first big Wall Street banks report their results along with blue chip names like JNJ. The bank stocks have struggled amid a decade of low rates and now face the prospects of interest rates contracting again, an environment that doesn’t give much hope for financial stocks to take a leadership role. Notably, the embattled Deutsche Bank will report its results on July 24 as it continues to attempt restructuring its way back to health. The US consumer still appears to be healthy but there are some signs of a slowdown in committing capital at the corporate level as executives contend with a high level of uncertainty related to geopolitics and trade issues, so there is some expectation that corporate earnings won’t show much growth.

July 17: Robert Mueller testifies before Congress
Mueller has said he will not provide any testimony that goes beyond the bounds of his report, but for much of the general public this may be the first time they hear the former special counsel describe the potential incidents of obstruction of justice that were enumerated in his report. The testimony will also include questions about the supporting materials that the report is based on, which could lead to some more embarrassing details that could distract President Trump from other matters (Trump has a campaign rally scheduled the same day as Mueller’s testimony). If nothing really new comes to light, however, this could be the last gasp for the impeachment movement among left-wing Democrats as the 2020 election becomes the central focus of US politics.

July 22: UK Conservatives announce result of leadership vote
The election of Boris Johnson appears to be a foregone conclusion, as he is polling well ahead of his rival, Jeremy Hunt, despite an embarrassing domestic incident at Johnson’s flat last month that raised some character questions. The new PM will have his work cut out for him as he plans to somehow wrangle new concessions out of the EU before the Brexit extension expires in October. EU leaders have repeatedly said they won’t budge on the agreement made with PM May, though there may still be some wiggle room in the implementation phase and as new trade arrangements are established with the independent UK. The greater threat is that PM Johnson, faced with no new concessions from Europe, will opt for a ‘no deal’ Brexit, certainly the most disruptive outcome for global markets.

July 26: US Q2 Advance GDP
The first reading on US Q2 GDP will be another key data point in calibrating Fed policy. The Atlanta Fed’s Q2 GDPNow forecast has dwindled to just 1.3% after recent disappointing readings on personal income and international trade. In Q1, the Advance GDP number surprised to the upside – at 3.2% it was five-tenths higher than the final GDPNow – adding some doubt to the predictive value of the Atlanta Fed forecast.

July 31: FOMC rate decision
Fed funds futures are now overwhelmingly pricing in a 25 basis point cut at the end of July. Fed rhetoric to this point has priced out the notion of a one-time 50 basis point ‘insurance’ cut to preempt a recessionary turn in the economy. Even Bullard, the dissenter at the May meeting, has downplayed the notion of moving more than a quarter point at a time given the generally strong economy. The Fed is also loath to prematurely use up the ammunition it has built up over the last two years, so the focus will move to whether the Fed has an appetite to provide more cuts in September and December as the futures markets are predicting. During his post-decision press conference, Chair Powell will likely be cautious about promising more rate cuts until he sees the incoming data and developments to the outlook.

August 2: US employment report
Apart from a US/China trade deal, more strong jobs data is the event that could likely ease pressure on the Fed to cut rates this autumn. The solid non-farm payrolls rebound in the June data took some of the wind out of the sails from pundits who were banking on a series of rate cuts this year. If the next few payrolls reports confirm continued labor market strength, the Fed will be at liberty to dial back its dovishness, especially if there are some signs of wage inflation accompanying the jobs data. In the alternate case, should payroll growth start to ebb – as many economists predict when the labor market is at ‘full employment’ – the Fed could have more justification for additional rate cuts.

August 3: Congressional recess begins
The US Congress is out of session for all of August and the first week of September, which means legislators have only a few weeks left to pass bills this summer. The most pressing issues are related to spending, particularly raising the debt ceiling. Technically the debt ceiling was already blown through several months ago and the government is now relying on the Treasury Department’s special measures to avoid default. A recent estimate from the Bipartisan Policy Center said that the Treasury could breach the borrowing limit in early September because the government has brought in less tax revenue this year than was projected. The implication is that this divided Congress needs to pass a debt ceiling bill before the summer break or find itself with only a matter of days in September to act, a situation that could send a chill through economic markets.

August 9: UK Q2 GDP
More signs of weakness in the UK economy because of Brexit uncertainty could put pressure on the new PM to avoid a messy separation and perhaps ask the EU for another extension, despite his campaign pledge that the separation must occur by October 31 without further delay. Meanwhile unions are pushing the Labour Party to seek a second referendum on approving the PM’s strategy of either a new deal or no deal, and for Labour to openly campaign for scrapping Brexit altogether.

August 21: FOMC Minutes; Fed Jackson Hole Symposium
The Fed will have another chance to massage market expectations for policy late in August as it releases the minutes from the July meeting and as many senior global central bank figures meet at Jackson Hole. If the data and sentiment have deteriorated by late August, Fed speakers could start signaling a willingness to provide more accommodation in the months ahead.

Early September: Iran threatens to further reduce nuclear compliance
After announcing it would increase enrichment of uranium past the 3.7% cap required under the JCPOA nuclear accord it was reported that Iran plans to incrementally scale back commitments to the 2015 nuclear deal every two months to keep up pressure on European leaders. The enrichment level is still well below the 20% threshold needed for a nuclear bomb, but makes it clear Tehran is willing to chip away at the JCPOA as it faces continued economic pressure from American sanctions. With tensions already mounting from tanker attacks reportedly carried out by Iranian proxies and the downing of a US surveillance drone, it seems like it may only be a matter of time before Iran crosses a red line that provokes a military response from the US.

Later 2019: US/China Trade Deal?
US/China trade discussions may go into a quiet period with no significant pressure to reach any conclusions perhaps until Trump and Xi are expected to see each other again at the mid-November APEC leaders’ summit in Chile. Both leaders still want to forge a trade agreement of some kind, and the sides were reportedly agreed on 90% of the details before talks fell apart earlier this year. That would seem to indicate that a breakthrough could come at any time, as long as the leaders are willing. Mr. Trump’s resolve to get an optimal deal is stiffened by the strength of the stock market, his primary metric for his own Presidency, but he would probably like to get a resolution to the China trade dispute to bolster his credentials for re-election as the businessman President. Mr. Xi is feeling some economic and political pressure back at home but remains firmly in control and could still conceivably try to ‘run out the clock’ on the Trump Administration and take his chances with a potential Democratic White House in 2021. Beijing may be seen as backsliding if it escalates restrictions on US companies with manufacturing operations in China or steps up rhetoric related to Taiwan and the South China Sea. Any signs that the two sides are actually getting close to sealing a deal will boost the animal spirits of the markets, though it should be noted that President Trump seems eager to open up new fronts in the trade war with India, Vietnam and the EU (he has described the latter two as “even worse” than China on trade).

9: Fed Chair Powell and Fed dissenter Bullard speak; China CPI
10: UK May GDP; UK Manufacturing Production; Fed Chair Powell Congressional testimony; FOMC Minutes
11: BOE Financial Stability Report; ECB minutes; US CPI; China Trade Balance
12: US PPI

14: China Industrial Production
16: UK Unemployment Rate; German ZEW Economic Sentiment; US Retail Sales; China Q2 GDP
17: UK CPI; US Housing Starts & Building Permits; Robert Mueller testifies before Congress
18: UK Retail Sales; Philadelphia Fed Manufacturing Index
19: Preliminary University of Michigan Consumer Sentiment

22: EU Flash Manufacturing & Services PMIs; German Ifo Business Climate; UK Conservatives announce result of leadership election
25: ECB Monetary Policy Decision; US Durable Goods Orders
26: US Q2 Advance GDP

29: BOJ Monetary Policy Decision
30: German Preliminary CPI; US Personal Income & PCE Price Index; US Consumer Confidence; China Manufacturing &Non-manufacturing Indices
31: EU CPI Flash Estimate; Chicago PMI; FOMC Monetary Policy Decision; China Caixin Manufacturing PMI
1: UK Manufacturing PMI; BOE Inflation Report; BOE Monetary Policy Decision; US ISM Manufacturing PMI
2: US Payrolls & Unemployment
3: Congressional recess begins

5: UK Services PMI; US ISM Manufacturing PMI
8: China CPI
9: UK June & Q2 GDP; UK Manufacturing Production; US PPI

12: China Trade Balance
13: UK Unemployment Rate; US CPI; China Industrial Production
14: German Preliminary Q2 GDP; UK CPI
15: US Retail Sales; Philadelphia Fed Manufacturing Index
16: US Housing Starts & Building Permits; Preliminary University of Michigan Consumer Sentiment

20: German ZEW Economic Sentiment
21: FOMC Minutes; Fed Jackson Hole Symposium (21-23)
22: ECB Minutes
23: EU Flash Manufacturing & Services PMIs; German Ifo Business Climate; US Manufacturing PMI

26: US Durable Goods Orders
27: US Consumer Confidence
29: German Preliminary CPI; US Preliminary Q2 GDP
30: EU CPI Flash Estimate; US Personal Spending & PCE Price Index; Chicago PMI; China Manufacturing & Non-manufacturing PMIs