Vive La France: Election Out Of The Way, Focus Returns To Earnings And Data

Markets charged up to record or near-record highs Friday ahead of the French election. Now the vote is over, earnings are 80% finished, and the jobs report is out of the way, swinging the focus to quarterly results from retailers and inflation data.

For the moment, stocks appeared to have a slightly lower bias, perhaps a sign of some profit taking after the election results came in to the market’s apparent liking. As was the case with Brexit and the U.S. election last year, the ultimate market impact of the French election might take a little time to play out, but a win by the centrist candidate appears to lessen concerns about the euro, which dropped slightly vs. the dollar early Monday.

European and Asian stocks were mixed overnight, but the one big story was Japan’s Nikkei, which rose 2.3% to 18-month highs. April trade data from China looked a bit light, however.

Economic data perks up tomorrow with the government’s March Job Openings and Labor Turnover Survey (JOLTS), as well as March wholesale inventories. Last Friday’s employment report seemed to ease concerns about recent soft economic numbers, but some big numbers are on tap for later this week including the producer price index (PPI), the consumer price index (CPI), and retail sales.

Retailers take the earnings spotlight this week and next (see below). So far, the biggest year-over-year earnings per share gains in Q1 come from financials (19.3%), materials (19%), technology (17.9%), and health care (6.6%). Telecom is the only sector to see earnings fall from a year earlier.

Those earnings gains don’t include energy, which is up 647% from steep losses a year ago. There’s concern, however, that weak oil prices this quarter could put energy earnings back under pressure as the months move along. Crude traded slightly lower Monday despite talk that OPEC might extend its production cuts.

About 40 more S&P 500 companies report earnings this week, and so far, 67% have beaten Wall Street analysts’ estimates for revenue growth, compared with a five-year average of 53%. Revenues are up 7.6% for the quarter, compared with estimates for 6.9% going into earnings season. These are healthy numbers and signal that despite any soft economic data, the earnings engine seems to be running smoothly and efficiently. The strong jobs report Friday was another positive economic sign.

Two Fed speakers took the microphone this morning as St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester discussed the economy and interest rates. It’s a month until the next Fed meeting, and the jobs report helped solidify expectations for a hike by June. Odds now stand at 83%, according to Fed funds futures.

The Road Ahead

It’s still a ways off, but one economic number to watch early next month is May auto sales. As we’ve discussed, this metric has been a little weak lately after two really strong years. It's proven difficult for the market to keep up the 2015 and 2016 pace, and some economists say demographics might be working against such lofty sales continuing. However, next month’s sales, if weak, would mark five straight months of decline, and that might signal demand has dried up, which is kind of odd considering the average car on the road is over 11 years old. It’s something to keep an eye on.

Wondering about Wages

In the wake of Friday’s strong April employment report, talking heads on TV turned their attention to wage growth, which was up 0.3%. While that was in line with pre-report estimates from Wall Street analysts, it raised eyebrows in part because even with unemployment at 10-year lows, wages are up just 2.5% over the last year. Economic common wisdom suggests that when joblessness falls to such low levels, wages often rise more quickly because companies have fewer workers to choose from and are forced to “pay up.” In the late 1990s, for instance, when unemployment fell below 4%, wages boomed. That’s not happening now. Even so, it’s not a good idea to get complacent about possible inflation, because most signs do point to a tighter labor market.

Earnings Roll On, with Retailers Up Next

Earnings are far from over. Tomorrow after the close come quarterly reports from Walt Disney Co DIS and Priceline Group Inc PCLN. DIS had a very successful start to the summer movie season with “Guardians of the Galaxy.” Later in the week brings big retailers including Macy’s Inc M, Kohl’s Corporation KSS, Nordstrom, Inc. JWN, and J C Penney Company Inc JCP. Following these come Target Corporation TGT and Wal-Mart Stores Inc WMT next week. It’s always interesting to watch the so-called “brick and mortar” stores to see how they’re coping with stress on retailers from Internet businesses. They’re basically trying to figure out their business model. Retail employment picked up by about 6,000 jobs last month, according to the jobs report, but it’s unclear if that’s a blip after several months of steep declines or the start of a trend. Perhaps executives might provide clues on their calls.