February 1, 2018, 7:15 am EDT
February finds stock markets regaining their footing after a few days of steep declines. January was a spectacular month for many markets and a correction like the one we just encountered is not unusual in the context of an ongoing bull market.
Both the US stock market and the US Dollar appear to be taking yesterday’s economic and Fed news in stride. Very strong ADP payrolls (234K vs street 185K) and Chicago PMI (65.7 vs street 64.1) indicate a strong economy and with the US Dollar down, a robust environment for continued growth in corporate earnings.
The positive US economic outlook has oil and gas bouncing back despite a big 6 million barrel build in US inventories last week. WTI is trading back above $65.00 while Brent is testing $70.00. Other commodities are under pressure this morning including natural gas down 1.1% and wheat down 1.2%. Earnings reports for Big Oil start today with ConocoPhillips reporting, followed by ExxonMobil, Chevron and Imperial Oil on Friday.
As expected, yesterday’s FOMC meeting was a non-event with Janet Yellen heading out the door. The statement was pretty plain vanilla although recognition of economic strength and rising inflation (inflation expected to rise toward the 2% long-term target this year) left the door for Governor Powell continue raising interest rates at a steady pace and move more aggressively hawkish if needed. Traditional currency markets are steady but cryptocurrencies are getting hammered today with Bitcoin breaking decisively back under 10,000.
A lot of today’s action in stock markets is likely to be driven by the reaction to earnings reports. Last night and later today bring a flood of reports from several key market moving companies, particularly out of the technology sector.
The early part of the day could be dominated by the reaction to companies who reported last night. Facebook was volatile in overnight trading falling aftermarket bouncing back this morning. The social media giant posted a stellar report last night generating EPS of $2.20 way above the $1.96 street estimate. Average users fell slightly, however, and recent steps taken by the company to focus members back on friends and family and away from advertisers and videos rattled traders. Microsoft also slipped after hours despite beating the street handily on earnings ($0.96 to $0.86), in what looks like more profit-taking against the news.
Tonight brings earnings reports from technology and online retailing heavyweights Apple, Amazon.com, Alibaba, and Google among others. Apple is expected to report a stellar quarter for iPhone sales and EPS of $3.82. Traders may focus more on the company’s outlook, however, particularly amid reports Apple is planning to cut IPhone X production in half. The street is expecting EPS of $1.85 from Amazon, $1.42 from Alibaba and $10.12 from Alphabet/Google.
Being the first of the month, manufacturing PMI reports may also attract attention. Overnight results were mixed with Asia Pacific (China, Japan, Australia) positive and beating expectations while Europe (UK and Germany) disappointed and came in short of estimates. Canada PMI (54.8 last month) is due at 9:30 am followed by the US ISM report at 10:00 am where a 58.8 reading is expected. Later in the day, we could see traders position for tomorrow’s nonfarm payrolls report. The street is expecting job growth of 180K up from 148K last month. The nonfarm numbers are running way short of ADP, however, so I think we could see a 240K headline increase and perhaps an upward revision to last month unless the threat of a government shutdown has slowed hiring in the public sector.
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