DE | Weekly | Global Markets | Q3 Company Earnings Front-and-Center Under a Weak Backdrop – 10/18/19

Posted October 19, 2019 by rvillareal

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Q3 Company Earnings Front-and-Center Under a Weak Backdrop

The U.S. economy continues to expand reasonably well, while its growth path and sustainability is in question (this week’s Q3 track down to 2.1%, annualized vs. 2.3% last week) as Recession risk becomes a big issue.

Ultra-Easy Monetary Policy To Continue

Monetary Policy everywhere, including the U.S., Eurozone (ECB), and Japan (the BOJ), is ultra-easy because price inflation has been muted and hovers way below their respective central bank targets. The low rates are particularly easy considering how far we are into the current expansion.

Why?

As central banks employ inflation targeting, explicit in the U.S. only since 2012, sluggish growth and very low inflation in many countries and regions have kept monetary policy in a perpetual easing mode.

Given what appears to be a modern-day “Liquidity Trap,” i.e., little response in growth and inflation to Quantitative Easing <QE> accompanied by low positive, or at times zero or negative interest rates, a shifting focus toward fiscal stimulus seems to be in process. The U.S. has already legislated stimulus; France and South Korea appear to be working on possible stimulus. Fiscal Stimulus is need elsewhere as well, which would be a distinct positive for economies and stock markets—not, however, for fixed income asset prices. Bank lending channels in the U.S. and elsewhere appear severed and borrowing for spending, as opposed to paper investments, especially in Europe and Japan, is anemic.

Decision Economics, Inc. (DE) “Basic Prospect” Expansion but Considerable Downside Risk

The Decision Economics, Inc. (DE) “best bet” expectation remains continuing Expansion (60 percent odds), 2.6% Real GDP Q4-over-Q4 in 2019, 2.5% in 2020 and 1.8% in 2021. A “Disappointing Growth” Scenario (1%-to-2% Real GDP growth) has one-in-four odds. “Recession” risk is assessed at 15%. Thus, downside risks against a continuing solid Expansion are a large 40%.

Table 1 – Key Global and U.S. Economic Indicators and Events

Oct 21-25, 2019            A Light Week—Mostly Manufacturing Indicators

	Release	Time (EDT)	DE / Consensus	Comment
U.S.	Sep Exs Home Sales Oct Mkt Man. PMI Sep New Home Sales	Tu 10:00 am   Th 9:45 am Th 10:00 am	5.42M / 5.46M   -0.5 to 50.6 / -0.4 695K / 705K	Home sales likely to moderate some from a strong August. Worries of a rapid slowdown continue to brew.
Eur     Ger Fra	Oct Man. PMI ECB Meeting (Dep. Facil. Rate) Oct Man. PMI Oct Man. PMI	Th 4:00 am Th 7:45 am   Th 3:15 am Th 3:30 am	-0.2 to 45.5 / +0.3   -0.5% / -0.5% unch. at 41.7 / +0.3 -0.3 to 49.8 / -0.1	Continuing Recession in Manufacturing with risk of it going overall. No changes in Policy Rate (ECB) expected as monetary policy reaches limits of ease in the Eurozone.
Chn	1-yr Loan Prime Rate	Su 9:30 pm	-5 bps to 4.15% / 4.15%	Light week in China. More policy support may surface.
Jpn	Aug All Ind. Act.	Mo 0:30 am	-0.2% / 0.1% m/m	Activity likely softened with weak Manufacturing.