Busy Week Begins With McDonald's Beating Estimates; Fed Meeting, Jobs Data Loom

It’s hard to imagine a busier week than the one getting started today. A little of everything gets baked into the cake, including a slew of key earnings reports, a Fed meeting, and, to put a cherry on top, the April employment report on Friday.

Some of the more high profile earnings this week include Apple Inc. AAPL, Tesla Inc. TSLA, Alibaba Group Holding Inc. BABA, Merck & Co., Inc. MRK, and Pfizer Inc. PFE. The parade got underway this morning with McDonald’s Corporation MCD and continues tomorrow morning with the two big pharma stocks. The earnings fest rolls on with AAPL after the close Tuesday, and by the end of this week, we’ll be about two-thirds of the way through reporting season.

It's M&A Monday

Another layer in the mix is blockbuster deal news announced over the weekend as Sprint Corp. S and T-Mobile US Inc. TMUS decided to merge in an agreement that values S at around $26 billion. The new company — which TMUS CEO and President John Legere called “a larger stronger competitor” in a tweet Sunday — could have more than 125 million customers. Though the deal made huge headlines, remember that it still needs to get approved by U.S. regulators. Shares of S fell sharply in pre-market trading Monday.

To build on all that, news came from the overseas grocery business as Walmart Inc. WMT agreed to combine its UK division Asda Group Limited with Sainsbury Plc (JSAIY), creating Britain's biggest supermarket operator. According to a statement released by the two firms, WMT will control 42 percent of the combined business, and up to 29.9 percent of the voting rights. This deal appears to align with overall trends in grocery shopping in which convenience and online sales increasingly put pressure on the traditional business.

Burger Beat

Investors also munched early Monday on better than expected earnings per share and revenue from MCD. Earnings per share of $1.79 came in ahead of analysts’ consensus view of $1.67, and revenue of $5.14 billion topped estimates of $4.93 billion, though it was down from a year earlier. Same-store sales rose 5.5 percent globally to mark the 11th straight quarter of growth, bettering Wall Street analysts’ estimates, and shares rose around 4 percent in pre-market trading.

Fed Watch Commences

Tuesday marks the start of the Fed meeting, which at this point doesn’t appear all that likely to set off any fireworks. There’s about a 94 percent chance the Fed will keep rates unchanged after raising them in March, according to Fed funds futures. There’s no press conference following the Fed’s scheduled Wednesday announcement, though the Fed will issue a statement explaining its decision. Some investors might be relieved there’s no media Q&A with Fed Chair Jerome Powell after the meeting, simply because it seems like every time he’s spoken publicly since taking on the top job the market has reacted in a negative way.

Friday Summary

Looking back to Friday, the S&P 500 (SPX) and Nasdaq (COMP) finished slightly higher while the Dow Jones Industrial Average ($DJI) was down a smidge as the market digested mixed signals. For the week, all three major U.S. indices declined a tad. On the plus side, Amazon. com, Inc. AMZN and Microsoft Corporation MSFT ended higher after both reported strong earnings late last week.

But the energy sector took a hit of more than 1 percent Friday. Shares of Exxon Mobil (XOM) dropped the most of the sector’s components as the oil supermajor reported earnings that came short of Wall Street expectations.

That miss wasn’t in line with the trend of companies beating earnings estimates this season. Yet, stocks have had a hard time rallying because expectations going into earnings season were quite high. 

Also Friday, separate data reports showed that employment costs rose more than expected and GDP slowed less than expected. It looks like the economy continued to grow modestly, but a tight labor market may have investors worried about rising inflation.

The yield on 10-year Treasury notes retreated further from the psychologically important 3 percent level Friday but crept up to around 2.96 percent early Monday. Hitting 3 percent appeared to be a headwind for stocks last week as some investors fretted about future inflation and corporate borrowing costs.

Another trend to consider watching this week is strength in the dollar, which continues to rebound after a long slump. The Dollar Index was up a little more early Monday and approaching 92, a level that might act as resistance. A rising dollar can sometimes put pressure on crude oil, something that could potentially ease some of the bearish impact rising oil prices recently have had on stock prices. Oil prices were a little lower to start the week, but remain near three-year highs.

FIGURE 1: TRANSPORTS, SMALL CAPS LOSE GROUND. Some analysts point to the small-cap Russell 2000 (RUT, candlestick chart) and the Dow Jones Transports ($DJT, purple line), as good barometers to watch for future market direction. Both have sagged since the start of earnings season after gaining ground in early April. Data source: Dow Jones & Co., FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

FAANG’s Bite is Back

Before investors were deluged by a wave of better than expected Q1 earnings, there was quite a bit of worry about tech stocks. Those fears now appear to have receded. Last week, Amazon (AMZN) crushed earnings expectations while Facebook, Inc. FB also handily beat forecasts. FB even added daily users during the same quarter when the data sharing scandal broke. You know who else added users during the first quarter? Netflix, Inc. NFLX — by more than expected. And the number of paid clicks rose for Alphabet Inc. GOOGL GOOG Google. Apple (AAPL) is scheduled to round out the FAANG earnings reports this week.

Ford Leaves Door Open

Along with reporting better-than-expected earnings last week, iconic carmaker Ford Motor Company F lifted eyebrows with a dramatic reduction in its line of sedans for the North American market. It seems to make sense, as more and more people would rather drive utility vehicles and trucks, especially as newer models have much better gas mileage. But the market for traditional cars isn’t completely dead. So F’s pullback could be an opportunity for rivals who plan to keep a bigger sedan footprint in North America, at least for a while. As this dynamic plays out, it will be interesting to watch data on car and truck sales. We get our next peek this week, with April auto and truck sales data expected on Tuesday.

Fed Meeting

Federal Reserve policy makers are scheduled to meet this week, with an interest rate decision on Wednesday. The Fed has sounded slightly more hawkish in recent days as central bankers appear more optimistic on the economy. On Friday, advance Q1 GDP came in at 2.3 percent, a figure showing moderate growth in a way that doesn’t seem like it would alter the Fed’s outlook much. However, wages are rising amid a tight labor market, one of the factors pointing to potential higher future inflation. A reading on the employment cost index, which includes labor costs, on Friday showed an increase of 0.8 percent. This comes as commodities prices are also on the rise, and the 10-year Treasury yield is on either side of the psychologically important 3 percent level as investors factor in potential future inflation. Bond prices, which move opposite of yields, have fallen four straight weeks. According to Fed funds futures, it’s widely expected that the central bank will leave its key rate unchanged this week and raise it in June.

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