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Markets Weekly

26 April 2019

Week ahead

With the second quarter of the year well underway, next week’s crowded economic calendar will certainly keep investors busy.

A batch of data from the eurozone, including the manufacturing purchasing managers’ index and core consumer price index readings, will give more clarity on the region’s outlook following recent signs of improvement amid strong domestic demand and resilient services activity.

US manufacturing and payroll data will indicate whether the resilience of the American economy is likely to persist in Q2 on the back of a solid jobs market and improving trade balance.

We expect central banks on both sides of the Atlantic to leave monetary policy unchanged for the time being, as inflation remains subdued both in the US and the UK.

We discuss further the UK inflation outlook in our focus article of the week.

Chart of the week

Earnings optimism

Earnings season in the US is in full swing with a third of the S&P 500 Index constituents having published Q1 2019 results. While it may be premature to draw any conclusion, the early indication is that companies are delivering significantly better-than-feared earnings. A couple of weeks ago we highlighted that consensus expectations appeared conservative with earnings forecasted to decline by 3% compared with the same period last year.

Our view was that with revenues growing by close to +5%, margins were unlikely to contract much, if at all. So far, the blended rate (i.e. actual earnings numbers combined with expectations for those companies that still have to report) of contraction is around -1%. This compares with -2% at the beginning of April. In other words, companies that have reported have surprised positively by around +6% on average, significantly above the usual +3.5% positive surprise.

More importantly, many high profile companies have raised their full-year guidance providing support to 2019 earnings expectations. We should have more clarity by the end of the month, but our conviction in our above-consensus 2019 earnings growth forecast of +5% has been strengthened further. However, with the S&P 500 Index flirting with record high levels, we feel that a period of consolidation is now likely as investors’ focus gradually reverts back to macroeconomic issues.

 

Chart of the week

rates on hold

UK rates are on hold… but for how long?

Markets are now pricing in a 30% probability of a rate hike by the end of 2019, as opposed to 0% in early April.

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