NEW YORK (MarketWatch) — U.S. stock investors are likely to focus on jobs, the consumer and central bankers next week, with more tepid readings on the economy raising expectations for extra Federal Reserve stimulus.
A heavy week of data releases, culminating in Friday’s July jobs report, as well as meetings by the Fed, European Central Bank and Bank of England will likely overshadow earnings reports.
Investors are likely to turn from a focus on earnings to the Federal Reserve's next rate meeting, July auto and retail sales and the July labor report. (Photo: Bloomberg)
More than half of S&P 500 SPX+1.91% companies, including Apple Inc.AAPL+1.79% , Bank of America Corp.BAC+1.95% and Caterpillar Inc.CAT+3.43% already have reported the latest quarter’s results.
Although 71% of large-cap U.S. stocks have reported earnings above the mean estimate, the blended growth rate for the index is currently at 3.3% — the lowest growth in 11 consecutive quarters, according to a FactSet analysis.
“On the whole it hasn’t been a bad season, given all the macro challenges, but some of the companies gave really weak forward guidance and they were punished [in the markets] for that,” said John Praveen, chief investment strategist at Prudential International.
Some of those strains on corporate growth may be showing up in sluggish jobs growth.
In June, the United States created 80,000 jobs, the third straight month of job growth of under 100,000. Economists polled by MarketWatch are expecting a break with that trend, with payrolls expanding by 110,000 in July.
With federal spending cuts and higher taxes due to kick in next year, plus the ongoing debt crisis in Europe, analysts worry that businesses have little incentive to hire.
Investors will be out for hints of further quantitative easing from both the FOMC minutes and the ECB news conference. A busy earnings week includes figures from HSBC, RBS and Fiat.
“There’s a great deal of uncertainty over what happens as we get into the second half of the year — there’s the ‘Europe fatigue’, anxiety about U.S. elections and the fiscal cliff,” Praveen added.
Europe vied with corporate news to sway sentiment in the latest week. Comments from policy makers including ECB President Mario Draghi on preserving the euro zone temporarily calmed fears about runaway Spanish borrowing costs, helping stocks into a late-week rally.
The Dow Jones Industrial AverageDJIA+1.46% rose nearly 2% for the week, its third weekly gain, and recrossed 13,000 for the first time since early May. The S&P 500 Index SPX+1.91% gained 1.7% for the week, also the third weekly gain. The Nasdaq Composite Index COMP+2.24% rose 1.1%. See Friday’s Market Snapshot.
Monday is light on both earnings and economic data, giving investors an extra day to digest Friday’s gross domestic product report, which underscored lingering sluggishness in consumption. The U.S. economy grew 1.5% in the second quarter. Read more on GDP.
“What was also interesting in the GDP numbers was that we clearly saw slower consumer spending but higher inventory numbers,” said Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors. “The shelves are being stocked, but they’re not getting emptied.”
The consumer will be in focus Tuesday as indicators on consumer spending, personal income, consumer confidence and S&P/Case-Shiller home prices are released. See economic calendar.
Housing data has become somewhat of a bright spot, according to Prudential’s Praveen, but don’t expect a big pop in the consumer numbers. “We might see some modest gains, but it’s not going to be enough to make a dent,” he said.
The Federal Open Market Committee will release a policy statement Wednesday. Analysts are mixed over whether members will agree to another round of asset purchases, known as quantitative easing, to give the stalling economy a jolt. Read more on what's expected from Fed.
“I think the probability of QE3 has increased significantly because of the GDP report,” Praveen elaborated. “I suspect [the committee] will move in August; otherwise it comes too close to the elections. If they do act, they will have to do it in a big way. Doing something token is not going to be meaningful.”
Praveen noted that if the central bank does expand its easing program, it will likely choose other kinds of assets, such as mortgage-backed securities, over Treasurys, to the tune of “around $500 billion.”
But Albright of Wilmington Trust is more circumspect. “There will be debate, but you won’t see QE announced at this meeting. We might hear language coming out that they’re inching closer to that.
“There are a lot of questions over how effective a third round of easing will be,” he said. “We’ve seen declining benefits from some of the programs they’ve put in place.”
Ramp-up to jobs data
On Wednesday, investors get the first stab at jobs data, with the ADP employment report, plus a July manufacturing survey from the Institute for Supply Management.
They can also expect the release of motor-vehicle sales for July from the Big Three auto makers: Chrysler, General Motors Co. GM+2.93% and Ford Motor Co. F+0.45% All three companies posted healthy year-on-year new vehicle sales in June. Research firm J.D. Power and Associates estimates annual light-vehicle retail sales are tracking 11.5 million, on a seasonally adjusted basis.
On Thursday, weekly jobless claims and factory orders start the day, plus retailers’ reports. A barrage of July same-store sales data from retailers including Costco Wholesale Corp. COST+1.25% , Target Corp. TGT+0.75% , Gap Inc. GPS+0.88% and Macy’s Inc. M+2.70% will hit investors, with analysts bracing for the worst. The sales are expected to give investors an early sense of how back-to-school sales are shaping up.
“There’s clearly hesitation in terms of how much people are willing to spend, and I don’t see that changing much over the next months,” Albright commented.
Weak consumer demand will likewise present itself as companies like Pfizer Inc.PFE+1.45% , MasterCard Inc. MA+3.06% , Kraft Foods Inc. KFT+0.09% and Procter & Gamble Co. PG+0.82% are slated to release results next week
Of the 265 companies in the S&P 500 that have reported earnings so far, only 43% beat sales estimates. This marks the lowest percentage for sales beats since the first quarter of 2009, according to FactSet.