The Trump administration’s announcement of a partial trade deal with China will set the stage for the coming week, as investors digest the details — and a raft of economic and earnings releases that will gauge the health of the economy.
Amid an ever-shifting narrative on the U.S.-China trade war, President Donald Trump on Friday emerged from high-level discussions with China’s trade negotiators with a partial deal that amounts to a cease-fire, but not an outright truce.
The early outlines of the agreement will entail China boosting purchases of U.S. farm products and making some intellectual property and currency-related concessions. Meanwhile, the U.S. agreed to delay an increase on tariffs previously scheduled to take effect Oct. 15, but stopped short of calling off a tariff hike previously set for December.
Against this backdrop, Wednesday’s retail sales report will be a focal point that provides a pulse on the health of one of the biggest pieces of the U.S. economy – the consumer. It comes after recent data on manufacturing and services-sector activity from the Institute of Supply Management deteriorated to multi-year lows, with each survey pointing to trade-related concerns as an underlying cause of their woes.
“At a time when most economic discussions have been dominated by recession risks, the U.S. consumer is one facet that has continued to perform. Consumer confidence remains elevated but have moderated recently, while concern over the impact of tariffs has been spontaneously mentioned by consumers in recent surveys,” Wells Fargo economists wrote in a note last week.
“While households certainly have the means to spend, our concern of late lies more in their continued willingness to do so,” the bank added.
But an upside surprise in September’s retail data may quell fears that weakness in the U.S. manufacturing sector has spilled over into consumer spending, the economists added. Consumer spending drives about two-thirds of U.S. economic activity.
Headline sales are expected to have advanced 0.3% in September, marking a slight deceleration from August’s 0.4% increase, according to a Bloomberg consensus forecast. Excluding the more volatile categories of auto and gas sales, retail sales are also anticipated to have risen 0.3% for the month, or greater than the 0.1% rise logged in August.
Investors will also receive more data on the state of the housing market this week with the Commerce Department’s report on September housing starts and building permits due Wednesday.
Broadly, economists are looking for some payback after a surge in new-home construction in August, with housing starts having surged at the fastest pace in 12 years during the month.
But even with some expected moderation in the September print, the housing market is anticipated to continue its rebound from a tepid 2018, as mortgage rates declined and helped favor buyers and builders. Wall Street expects to see a seasonally adjusted annual rate (SAAR) of 1.320 million housing starts in September, down 3.2% from August’s SAAR of 1.364 million.
“Long-term mortgage rates remained low in early October and were likely supportive for consumer housing demand,” Nomura Instinet economist Lewis Alexander wrote in a note last week.
Q3 earnings season ramps up
Major banks’ and financial institutions’ quarterly reports this week will serve as the de facto start to third-quarter earnings season. Some of those include J.P.Morgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) – the four largest U.S. banks by assets – along with other “bulge bracket” investment banks including Goldman Sachs (GS) and Morgan Stanley (MS).
Bank profitability has come under pressure this year in a lower interest rate environment, with two Fed rate cuts already executed this year, and at least one more expected by market participants by the end of the year. A flattening, and at times inverted, Treasury yield curve has also crimped banks’ ability to profit on long-term loans.
A lower-rate environment hits banks net interest margins, or the amount banks collect in interest on loans less interest paid on deposits.
The S&P 500 Financial Sector ETF (XLF) has underperformed the broader large-cap stock index, posting a 16% year-to-date gain versus the S&P 500’s (^GSPC) 18.5% advance.
[Read more: Bank earnings preview – ‘Chipping away’ at expenses amid a tough environment]
Another closely watched corporate earnings results this week will be that of Netflix (NFLX), which reports after market close on Wednesday.
Last quarter, Netflix reported its first quarterly loss in domestic paid subscribers since 2011, shedding 126,000 paying users in the three months to June. And this came even before newer entrants including Disney+ and Apple TV+ officially launched their own rivaling services, adding to an increasingly crowded field of streaming media content providers.
Netflix CEO Reed Hastings said during last quarter’s conference call the user attrition was due in part to a weaker slate of content released during the company’s second quarter, and not necessarily due to a “material change in the competitive landscape.” The company said at the time it still expected to add more paid users for the full fiscal year in 2019 versus last year.
Disney+ is set to launch November 12, priced at $7.99 per month. Apple’s (AAPL) streaming platform will launch November 1 at a starting price of $4.99 per month. Netflix’s Standard service currently costs $12.99 per month.
Analysts generally have low expectations for third-quarter earnings season overall. Consensus on Wall Street expects aggregate S&P 500 earnings per share will fall by 3% year-over-year in the third quarter, marking the first profit decline since 2016, according to Goldman Sachs analyst David Kostin.
That said, in the first and second quarters of 2019, consensus analysts also anticipated year-over-year earnings declines, which ultimately failed to materialize.
“But the further slowdown in macro data could lead to the first EPS decline since the 2015-2016 EPS recession,” Bank of America Merrill Lynch (BAML) analysts wrote in a note.
Investors also head into third-quarter earnings season with what BAML analysts called an “information vacuum.” This year, the fewest number of companies issued guidance for the third quarter since 2000. And that opacity may be set to continue, the analysts added.
“Historically, 7% of S&P 500 companies have provided [fiscal year] guidance during the 3Q earnings season, but we think that number could be significantly lower as trade and macro uncertainty continues,” BAML said.
“Companies’ lack of visibility into next year, with just three months left in 2019, will likely create more uncertainty among investors and may result in lower 2020 estimates,” it added.
Earnings calendar
Monday: N/A
Tuesday: BlackRock (BLK), Citi (C), Goldman Sachs (GS), J.P.Morgan Chase (JPM), Wells Fargo (WFC), Omnicom (OMC), Johnson & Johnson (JNJ), UnitedHealth Group (UNH) before market open; J.B. Hunt Transport Services (JBHT), United Airlines (UAL) after market close
Wednesday: Ally Financial (ALLY), Bank of America (BAC), Bank of New York Mellon Corporation (BK), PNC Financial Services Group (PNC); U.S. Bancorp (USB), Abbott Laboratories (ABT) before market open; IBM (IBM), Netflix (NFLX), CSX Corporation (CSX) after market close
Thursday: BB&T Corporation (BBT), KeyCorp (KEY), Morgan Stanley (MS), M&T Bank Corporation (MTB), SunTrust Banks (STI), Dover Corporation (DOV), Honeywell (HON), Textron (TXT), Union Pacific (UNP), Philip Morris (PM) before market open; E-Trade Financial Corporation (ETFC) after market close
Friday: American Express Company (AXP), State Street Corporation (STT), Synchrony Financial (SYF), Kansas City Southern (KSU), The Coca-Cola Company (KO) before market open
Economic calendar
Monday: Bond market closed for Columbus Day
Tuesday: Empire State Manufacturing, October (1.0 expected; 2.0 in September)
Wednesday: MBA Mortgage Applications, week ended October 11 (5.2% prior); Retail Sales Advance month-on-month, September (0.3% expected; 0.4% in August); Retail Sales Excluding Autos month-on-month, September (0.2% expected, 0.0% in August), Retail Sales Excluding Autos and Gas month-on-month, September (0.3% expected, 0.1% in August); NAHB Housing Market Index, October (68 expected, 68 prior); Business Inventories, August (0.2% expected, 0.4% prior); U.S. Federal Reserve releases Beige Book; Net Long-term TIC Flows, August ($84.3 billion prior)
Thursday: Building Permits month-on-month, September (-6.0% expected, 8.2% in in August); Housing Starts month-on-month, September (-3.2% expected, 12.3% prior), Philadelphia Fed Business Outlook, October (7.1 expected, 12.0 in September); Initial Jobless Claims, week ended October 12 (215,000 expected; 210,000 prior); Continuing Claims, week ended October 5 (1.670 million expected; 1.684 million prior); Industrial Production month-on-month, September (-0.2% expected, 0.6% in August); Manufacturing Production, September (-0.3% expected, 0.5% in August); Capacity Utilization, September (77.7% expected, 77.9% in August)
Friday: Leading Index, September (0.1% expected, 0.0% in August)
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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