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On 30 July 2019 - US steady to lower, Europe off as market awaits Fed; Asia better

Anne D Picker

Anne D Picker - Econoday

Earnings a bit soft; US economic data come in strong.

US markets

US stocks were ending steady to lower Tuesday on disappointing corporate earnings, as the waiting game continued ahead of Wednesday’s Federal Reserve policy announcement. The Dow industrials eased by 0.08 percent, the S&P 500 fell 0.3 percent, and the NASDAQ was off 0.2 percent. 

Markets continue to price in a 25 basis point Fed rate cut Wednesday. Attention will focus on guidance from the Fed on the policy outlook. Former New York Fed President Bill Dudley wrote Tuesday the Fed may stop after cutting 25 basis points, given recent economic data. More solid data Tuesday added to perceptions that aggressive rate cuts may not be needed. Traders are also watching US-China trade talks underway in Shanghai, and hopes for a substantive deal are fading, a distinct economic negative. 

Tech stocks suffered with semiconductors off the most, on trade worries after President Trump warned China not to wait until after the 2020 presidential election to make a deal on trade. Earlier, he said China has not fulfilled its promises in the trade talks, including its pledge to buy more US farm products. Other losers Tuesday included consumer discretionary stocks, with retail and auto shares leading the way down.  

Health care stocks suffered especially hospitals on an earnings miss at Healthcare Inc. (HCA, down 9.2 percent). Lab instrument maker Waters Corp. was down 2.8 percent on a revenues miss, and diagnostic equipment maker PerkinElmer was down 8.3 percent on both an earnings and revenue miss. Financial shares were depressed by weakness in online brokers and credit cards, with Capital One a notable loser (down 5.9 percent) after announcing a huge data breach.

Consumer staples did better, led by Procter & Gamble, which rose 3.8 percent on strong sales despite an $8 billion write-down of its Gillette razor business. Pharma giant Merck rose 1 percent on a revenues beat. Energy shares rose as oil prices continued to advance. Oil driller Haliburton rose 4.6 percent.

In US economic news, consumer confidence jumped sharply in July to a 135.7 level that easily surpassed Econoday's consensus range. July's result is the best of the year and puts the index back near its cyclical highs that were hit near the end of last year.  Meanwhile, pending home sales surged by 2.8 percent. Pending sales don't necessarily follow in lockstep with final sales but June's gain will definitely underpin expectations for the existing home sales report in both July and August. And the personal income and outlays report showed solid strength throughout though easing strength in June. There was only modest price pressures in accompanying inflation data that won't raise objections to a rate cut at tomorrow's FOMC .

These data reflect observations at 4:00 PM US ET:  Dated Brent spot crude rose US$1.19 cents to US$64.90 while gold rose US$10.30 to US$1,443.60. The US dollar was little changed. The yield on the US Treasury 30-year bond yield fell 1 basis point to 2.58 percent while the yield on the 10-year note was unchanged at 2.06 percent.

European markets

Most European equities markets declined Tuesday on gloomy corporate forecasts and earnings disappointments, while UK markets outperformed on sterling’s weakness amid expectations for the UK to crash out of the EU with no deal. The Europe-wide STOXX 600 fell 1.5 percent, the German DAX dropped 2.2 percent, the French CAC fell 1.6 percent, and the UK FTSE 100 was down 0.5 percent.  Cyclical stocks like autos, tech, banks and construction underperformed, while consumer staples and real estate fared better.

German airline Lufthansa dropped 6 percent after reporting an earnings miss and predicting difficult business conditions.  Bayer, the German chemical firm that acquired agriculture giant Monsanto recently, was off 3.3 percent citing problems tied to the US-China trade war and after flooding in the US hit farm product sales. BBA Aviation was a big winner, up 6.2 percent, on news it would spin off its aircraft parts business to a private equity firm. British Petroleum was up 3.1 percent after its earnings beat estimates.

Trading remained cautious ahead of Federal Reserve and Bank of England policy meetings this week, and as markets awaited news from US-China trade talks under way in Beijing. On the Brexit front, UK Prime Minister Boris Johnson and his EU counterparts remain at odds over the terms of UK departure, with the Oct. 31 deadline approaching. 

In economic news, the German GfK consumer sentiment index deteriorated in July and is expected to weaken further next month. At 9.8, down from 10.1 in June, the July reading was in line with its preliminary estimate while August was seen at 9.7, equaling the lowest mark since April 2016. Meanwhile, German consumer prices were firmer than expected in July. A 0.5 percent monthly increase lifted the annual inflation rate from June's final 1.6 percent to 1.7 percent, a couple of ticks above its average over the first half of 2019. The flash HICP was less robust, posting a 0.4 percent monthly gain that was weak enough to reduce yearly inflation from 1.5 percent to 1.1 percent. Separately, Eurozone economic sentiment (ESI) fell again in July, according to the EU Commission's latest survey. At 102.7, the headline index was down 0.6 points versus its unrevised June outturn to touch its lowest level since March 2016.

Asia Pacific Markets

Major Asian markets closed higher Tuesday, with investors focused on US-China trade talks, today's Bank of Japan policy meeting, and the upcoming Federal Reserve policy decision. The Nikkei and Topix indices posted gains of 0.4 percent and 0.5 percent respectively after the BOJ left policy on hold but Governor Kuroda signaled that policy would be eased immediately if inflation lost “momentum.” The Shanghai Composite index also advanced 0.4 percent on the day, while Hong Kong’s Hang Seng index and Australia’s All Ordinaries index closed up 0.1 percent and 0.2 percent respectively. 

Japan’s short-term policy rate was left unchanged at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. The updated BOJ economic forecast shows officials' assessment of the economic outlook remains steady, with the economy’s moderate expansion expected to continue and inflation expected to increase "gradually" towards their target level of 2.0 percent. Officials reaffirmed their commitment to keeping policy on hold until inflation is above that target and repeated their assessment this will likely take until early 2020. 

Speaking after the meeting, BOJ Governor Haruhiko Kuroda argued that there has not been a loss of momentum towards meeting the inflation target but acknowledged that external developments represent a potential risk to this momentum. However, in contrast to previous comments which indicated that officials would only "consider" easing policy if this momentum were to be lost, Governor Kuroda promised today that officials would ease policy "without hesitation" if this were to happen. He also noted, as he did last month, that officials have a range of policy options available to them, including lowering short-term rates, lowering long-term rates, and expanding asset purchases.

Earlier Tuesday, Japanese data showed stronger labour market conditions but weaker industrial production growth in June. Japan’s unemployment rate fell from 2.4 percent in May to 2.3 percent in June, just below the consensus forecast of 2.4 percent, and close to the multi-decade low of 2.2 percent recorded in May 2018. Industrial production, however, fell 3.6 percent on the month in June after increasing 2.0 percent in May, weaker than the consensus forecast for a decline of 1.0 percent and also weaker than the forecast officials made last month. Officials expect industrial output to rebound with a 2.7 percent increase in July and advance a further 0.3 percent in August.

Looking forward

The big event Wednesday will be the Federal Reserve’s policy announcement and press conference with Fed Chair Jay Powell.  On the data front: Australian CPI, Chinese CFLP manufacturing PMI, and the Hong Kong GDP reports are due. In Europe, Eurozone GDP flash, Eurozone HICP flash, Eurozone unemployment rate data will be released.  Also due are French CPI, German retail sales, German unemployment rate, Italian CPI, Italian GDP, and UK Nationwide HPI data. In North America, Canadian monthly GDP is due; and from the US, the ADP employment report, Chicago PMI, and employment cost index reports are scheduled.

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Note: all releases are listed in local time.

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