ECB Chimes In: Hints Of Rate Cut Could Support Ahead Of Amazon, Alphabet

This morning delivered a diversion from the steady drumbeat of earnings with an update from the European Central Bank (ECB). The ECB finished its meeting today without announcing a new rate cut, but hinted strongly that one could happen in September.

The ECB hasn’t cut rates since 2016, and the economy there continues to sputter. Yesterday included weak manufacturing data from Germany. Low rates in Europe can pump up the dollar vs. the euro. So anything the ECB ends up doing could have an impact on the U.S. market.

A strong dollar is already causing some problems for big U.S. companies selling products overseas, and the situation got more serious early Thursday as the dollar index climbed toward 98. Just a month ago it was under 96. It hasn’t been over 98 since May.

The other impact of low rates in Europe is pressure on U.S. rates. The U.S. 10-year Treasury yield fell early Thursday to just over 2.01%, and looks like it could threaten to fall below 2% again. One reason some analysts think the Fed is likely to cut rates next week is to put them more in line with rates overseas, though U.S. borrowing costs would still be way above those in Europe.

Earnings Continue to Impress—Mostly 

Back home, it’s been a pretty good earnings season overall, and the drumbeat continues this afternoon with two of the biggest names of all,, Inc. AMZN and Alphabet Inc. GOOG. So far, 75% of companies have reported better-than-expected earnings per share, according to FactSet. We’re about one-third of the way through earnings season.

Before hearing from AMZN and GOOGL later today, the morning papers landed at the front door with good news from 3M Co MMM, Bristol-Myers Squibb Co BMY, and American Airlines Group Inc AAL, which all beat Wall Street’s earnings per share estimates. Last night saw nice results from Facebook, Inc. FB, but the brakes slammed over at Tesla Inc TSLA, which very much under-delivered and remains a tough one to figure out.

Though TSLA missed analysts’ earnings per share projections, it did stick to its guidance for 2019 vehicle sales. The company has reported losses two quarters in a row after two quarters of profit last year, and the stock fell more than 11% in pre-market trading.

While FB stock initially climbed 3% after reporting, it quickly backtracked to slight losses despite topping third-party consensus on both top and bottom lines. That kind of tepid response might reflect what we talked about earlier this week regarding how companies under regulatory scrutiny might not see strong gains even if quarterly results impress. The stock did climb again in pre-market trading.

On a positive note, beer consumption is up. That’s the read from Anheuser-Busch InBev BUD, which reported earnings and sales above analysts’ estimates. Beer volumes rose 2.2% in the quarter.

PayPal Holdings Inc PYPL beat on earnings but missed on revenue. Still, the company reported 9 million active new accounts and raised guidance. A lot of analysts upgraded the stock.

Going back to MMM a minute, the company had really good earnings, and their CEO talked about great progress in the face of continued slow growth conditions. He didn’t emphasize sales as much as improved cash flow and managing costs. This could be seen as a cautionary note.

In data news, June durable goods came in better than expected. The first government estimate for Q2 gross domestic product (GDP) comes tomorrow.

Conundrums and Confusion 

If there’s a predictable thing about the markets, it’s that they often act unpredictably. Wednesday’s action was a good example.

For instance, crude prices crumbled despite a huge weekly draw out of U.S. stockpiles. The Technology sector performed pretty well even though just the day before the government announced a Department of Justice investigation that might affect some of the sector’s biggest firms.

At the same time, earnings continued to offer people their choice of what company’s lens they want to view things through. This is a conundrum for all market participants now. Which signal do you look at to say how the market is doing?

For instance, do you look at Caterpillar, whose quarter ran into a China roadblock, and say China is a big problem going forward and that’s the main story for the market?

Or do you see it through the lens of Texas Instruments Incorporated TXN, which had a fantastic quarter all around and helped the Semiconductor sector throw a Wall Street party Wednesday? Some analysts see the chip market as a barometer of global growth, so if chip companies do well, doesn’t that mean things are generally OK? It all depends on how you look at things.

Still, we aren’t completely through the chip industry reporting season, with Intel Corporation INTC earnings still ahead and that company often offering a different take on the sector. That’s why it’s too soon to say the chip sector has bottomed. The Philadelphia Semiconductor Index rose more than 3% Wednesday.

Another lens to look through comes from Visa Inc V, whose earnings beat expectations for every aspect of the business. This brings us back to the consumer, who ultimately seems to be driving the current stock market rally.

One thing predictable thing about Wednesday was the Dow Jones Industrial Average’s ($DJI) underperformance compared with the S&P 500 (SPX) and Nasdaq (COMP). Disappointing earnings results from $DJI components Caterpillar Inc CAT and Boeing Co BA had a lot to do with that, but even there you had a little bit of unpredictability because most of the big financial stocks rose despite declining rates.

Speaking of unpredictable markets, U.S. crude stocks fell more than 10 million barrels in the most recent weekly update from the government, but crude pulled back sharply Wednesday.  It looks like analysts shook off the report by saying it reflected lower production and imports due to the hurricane a couple weeks ago. If you look at the U.S. crude chart over the last month, $55 a barrel has been a pretty clear support point, and the market bounced again late Wednesday after falling below $56.

Volatility Fades as Rally Continues 

One thing finding almost no support this week is the Cboe Volatility Index (VIX), which descended down toward 12 on Wednesday and seems to be getting ready for its summer slumber. The last two summers saw VIX spend a lot of time under 12. The VIX fell under 12 intraday Wednesday for the first time since mid-April. It had climbed well over 20 back in May.

It’s hard to see that happening this year considering all the China trade and Brexit worries, but the agreement this week between Congress and the White House to raise the debt ceiling and keep the government opened might have helped lower the volatility volume a little for now. Also, earnings being a little stronger than many analysts had expected might be calming things down a bit. 

The wild card for volatility, besides those geopolitical factors, might end up being the Fed. While futures prices have baked in a 25-basis point rate cut next week, there’s uncertainty about what comes next (see more below). If the Fed throws a curveball in its statement or press conference, we could see VIX roar back.

VIX SUMMER SNOOZE? The Cboe Volatility Index (VIX - candlestick) fell to its lowest levels since mid-April and went below 12 at one point, down from above 20 back in May. VIX’s decline coincided with a record-high close for the S&P 500 (purple line), and might also reflect declining worries about earnings and Washington politics. Data Source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results

Fed Expected to Ease This Month, But Then What? Chances of a 25-basis point hike less than a week from now stand at approximately 75%, according to CME Group futures. Odds of a 50 basis-point cut in July have receded. Already, however, investors are looking beyond next week’s meeting and wondering what’s next. The futures market signals a couple more rate cuts this year, but what will Fed Chairman Jerome Powell say about those chances next week? His words could have a big impact.

One thing that could work its way into the Fed’s playbook is gross domestic product (GDP).

The Atlanta Fed’s GDPNow meter predicts 1.6% growth in Q2, and many Wall Street analysts don’t see much of a comeback in Q3 and Q4. However, if GDP starts to look better than expected, that could mean the Fed starts to push back on calls for another rate cut after this month. If the Fed vocally pushes back in either its statement or at Powell’s press conference next week, that could potentially change the bullish feelings around the stock market a bit.

GDP Talk as Q2 Estimate Looms Friday: Since we’re talking about GDP, one interesting thing that’s come up this earnings season is a few CEOs saying that Boeing’s BA 737 MAX issue may be affecting some earnings, which could potentially could have an impact on GDP. Another potential pressure point on growth could be companies consolidating operations, like this week’s news about Apple Inc AAPL considering a purchase of Intel's INTC smartphone modem-chip business. If companies start producing more of their own things, it could cut some other companies out of the chain.

The Fed is likely to provide a look next week at its own projections for growth in the second half, and tomorrow brings the government’s first look at Q2 GDP growth. Analysts see growth of just 1.8%, according to, which would be the lowest since Q1 of 2017 and down from 3.1% in Q1. A Wall Street Journal analyst survey shows average GDP estimates of under 2% for the final two quarters of this year, as well.

Manufacturing Still Slumbers: A new batch of manufacturing readings early Wednesday didn’t exactly build confidence in the economy’s current performance, as manufacturing PMI slipped 0.6 points to 50.0 in July, down from 50.6 in June and down from 55.3 from a year ago. It's the worst reading since September 2009, but it’s still holding just above a contractionary sub-50 level. Output fell to 48.9, however, versus 51.2 in June, reversing the expansionary trend.

New home sales for June also came in below expectations, with downward adjustments to the April and May numbers. “Overall sales activity remains tepid despite the fundamental supports of low mortgage rates, low unemployment, and a tight supply of existing homes for sale,” noted. Maybe investors can get a better sense of demand for new homes next week when homebuilder D.R. Horton Inc DHI before the Tuesday’s open.

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