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What Escalating U.S.-China Tensions Mean for Markets

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What’s in Today’s Report:

  • What Escalating U.S.-China Tensions Mean for Markets
  • What’s the Fed’s Endgame With Rates?
  • How Low Could Oil Prices Go?

Stock futures are lower and the 10-year yield fell to a 4-month low overnight amid heightened tensions between the U.S. and China over Speaker Pelosi’s trip to Taiwan.

Speaker Pelosi is scheduled to land in Taiwan later this morning despite repeated and stern warnings from China about a potential military response to the visit and the elevated tensions are resulting in equity market weakness and rising demand for safe havens assets such as Treasuries.

Looking beyond geopolitics, there are a few other potential catalysts to watch today including two economic reports: Motor Vehicle Sales (E: 13.5M) and JOLTS (11.0M), as well as two Fed officials scheduled to speak: Evans (9:00 a.m. ET) and Bullard (6:45 p.m. ET).

Earnings season also continues today with results from CAT ($3.00), JBLU (-$0.11), MAR ($1.59), TSEM ($0.52), AMD ($1.03), PYPL ($0.85), and SBUX ($0.77).

Bottom line, markets are trading with a risk-off tone due to the U.S.-China tensions surrounding Taiwan however a meaningful escalation including military action between the U.S. and China remains very unlikely, and as such the pressure on equities is not expected to deepen or last very long and market focus is likely to turn back to Fed policy later in the week as the July jobs report is due out on Friday.

Tom Essaye Quoted by Forbes on July 27th, 2022

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Fed Raises Interest Rates By 75 Basis Points Again As Investors Brace For Recession

By making borrowing more expensive and thereby tempering demand, rate increases are critical in combating inflation, but “growing fears” that the hikes will spur a recession by undercutting economic growth are the “driving forces” behind recent market weakness, says analyst Tom Essaye of the Sevens Report. Click here to read the full article.

Time to Reduce Commodity Allocations?

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What’s in Today’s Report:

  • Is it Time to Reduce Commodity Allocations?
  • Why Q2 GDP Wasn’t as Bad As It Seemed

Futures are moderately higher following a solid night of earnings.

AAPL (up 2%) and AMZN (up 12%) both beat estimates and that’s helping to extend this week’s rally.

Eurozone inflation came in slightly hotter than expected, as EU HICP rose 8.9% yoy vs. (E ) 8.8% yoy, but stronger than expected earnings are helping the market look past the slightly hot number.

Today the focus will be on inflation as we get three notable inflation readings:  Core PCE Price Index (E: 0.5% m/m, 4.7% y/y), Employment Cost Index (E: 1.1%), and the University of Michigan Five Year Inflation Expectations (E: 2.8%).  Markets have aggressively priced in a near term peak in inflation, and the data needs to start to confirm that, starting today.  If these inflation stats run hot, don’t be surprised to see stocks decline.

On the earnings front, the season is starting to wind down but there are still a few more days of notable results.  Some reports we’re watching today include: XOM ($3.80), CVX ($5.02), PG ($1.23) and CL ($0.71).

Tom Essaye Quoted in The Washington Post on July 23rd, 2022

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Big Tech is bracing for a possible recession, spooking other industries

The market looks at that, and basically, the logic is, ‘oh crap, if they’re doing this then what about the ones aren’t as strong?’ And what are they seeing coming that everyone else isn’t…said Tom Essaye, president of Sevens Report Research. Click here to read the full article.

Tom Essaye Quoted in Barron’s on July 22nd, 2022

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The Stock Market Is at a Crossroads. What to Watch Next.

You’ve seen a relief rally, the Fed maybe being slightly less hawkish than you think is the hope…said Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

What Happens After Inflation Peaks?

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What’s in Today’s Report:

  • What Happens After Inflation Peaks?
  • Weekly Market Preview:  Fed Decision Wednesday
  • Weekly Economic Cheat Sheet:  Q2 GDP and Inflation Stats are the Highlights

Futures are modestly higher as markets bounce from Friday’s declines, following a quiet weekend and as investors look forward to numerous important catalysts this week.

Chinese authorities are considering some restrictions on movement in Shanghai as COVID cases rise, but are still resisting broad lockdowns (for now).

Economically, German Ifo Business Expectations declined further (80.3 vs. (E) 83.3).

Today there’s only one notable economic report, the Chicago Fed National Activity Index (E: 0.05), and markets will want to see stability here following last week’s disappointing data.  If this number is surprisingly weak (like the PMIs last Thursday/Friday) then that will likely weigh on stocks as recession fears grow.

Earnings season continues and this will be a very busy and important week for results.  Some earnings we’ll be watching today include:  WHR ($5.22), NXPI ($3.39), and LOGI ($3.39).

Why the Transmission Protection Instrument Matters to Markets

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What’s in Today’s Report:

  • Why the Transmission Protection Instrument Matters to Markets
  • ECB Decision Takeaways (Not Hawkish Enough)
  • Another Sign Inflation Has Peaked?

Stocks are resilient this morning as futures are only slightly lower despite disappointing overnight earnings and ugly economic reports from Europe.

Earnings overnight were bad with several ugly reports including SNAP (-30%), COF (-3.5%), and STX (-13%).

Economically, July flash PMIs from the EU were also ugly as the composite PMI fell into contraction territory at 49.6 vs. (E) 51.0.

Hope that inflation has peaked is the reason stocks are resilient lately, so today’s focus will be on the July Flash Manufacturing PMI (E: 51.8) and the July Flash Services PMI (E: 52.3).  If these reports show meaningful drops in the price indices (like we’ve seen in the Empire and Philly Fed surveys) then that will further the idea that inflation is peaking and support stocks (as long as the headline readings aren’t huge misses).

On the earnings front, results to watch today include TWTR (-$0.06), VZ $1.34), and AXP ($2.37).

Is Value Outperformance Ending?

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What’s in Today’s Report:

  • Is Value Outperformance Ending?
  • The S&P 500 Has Reached Another Key Technical Tipping Point

Stock futures are higher this morning despite soft earnings from IBM after the close yesterday as European inflation data was not as bad as feared in June.

Eurozone HICP (their CPI equivalent) met estimates with a rise of 8.6% Y/Y in June up from 8.1% in May, however, the core figure slipped to 3.7% Y/Y from 3.8% in May. The release has prompted new bets for a 50 bp hike from the ECB this week, but that is bolstering hopes that peak inflation will come sooner than later.

Looking into today’s session, there is one economic report to watch: Housing Starts (E: 1.588) and after yesterday’s terrible Housing Market Index print, investors will want to see a number more in line with expectations that does not point to such a rapid deterioration in the real estate market.

There are no Fed speakers or Treasury auctions today which will leave traders largely focused on earnings with: JNJ ($2.57), HAL ($0.45), LMT ($6.29), ALLY ($1.90), and TFC ($1.17) reporting before the bell, and NFLX ($2.90) and JBHT ($2.31) releasing results after the close.

Bottom line, the broader equity market remains at a key tipping point right now as recession fears continue to simmer, but earnings have so far been mostly upbeat suggesting there is still a path to a soft landing. And if earnings news is upbeat today, we could see the S&P 500 breakout through key downtrend resistance near 3,890 and make a run at new multi-week highs.

Three Keys to a Bottom (Updated)

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What’s in Today’s Report:

  • Three Keys to a Bottom (Updated)
  • Weekly Market Preview:  Focus Turns to Earnings
  • Weekly Economic Cheat Sheet:  Flash PMI on Friday is the Big Report to Watch

Futures are moderately higher mostly on momentum from Friday’s rally and following a generally quiet weekend.

Investors continue to hope for a near-term peak in inflation and Friday’s drop in University of Michigan inflation expectations (2.8% vs. (E) 3.0%) and multi-month lows in the Empire Manufacturing price indices fueled that hope and resulted in the rally on Friday and in futures this morning.

Today’s focus will shift to earnings, and they will dominate market action early this week as there are no Fed speakers and no market-moving economic reports till later this week.  If earnings are better than feared, they can help extend this rally in the near term while disappointing results will cause more volatility.  Some reports we’re watching today include BAC ($ 0.77), GS ($6.99), SCHW ($0.91), IBM ($ 2.29).

Why Is the Market Suddenly Resilient?

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What’s in Today’s Report:

  • Why Is the Market Suddenly Resilient?

Futures are slightly higher on momentum from yesterday’s recovery and despite mixed Chinese economic data.

Chinese Industrial Production and Fixed Asset Investment both slightly missed estimates while Retail Sales beat expectations, but importantly the data didn’t show the Chinese economy had lost significant momentum.

Today there are numerous economic reports and some of them potentially will move markets.  The most important report today is 5-Yr Inflation Expectations (3.1% previous) and if they drop to 3.0% or lower that will be a good sign on inflation.  Retail Sales (E: 0.9%) and Empire State Manufacturing Index (E: -1.3) are the next most important reports today and again markets will want to see moderation – a slowing of activity but not a collapse.  Finally, we also get Industrial Production (E: 0.1%) and Consumer Sentiment (E: 50.0).

We also have one Fed speaker today, Bostic (8:45 a.m. ET), and we’d expect him to follow yesterday’s script and push back on the inevitability of a 100 basis point hike (although acknowledge that anything’s possible depending on the data).