Pro Perspectives 7/25/19

July 25, 2019

We heard from the ECB this morning.  Draghi was expected to step up his "ready to act" rhetoric, but was unlikely to do anything.  That was the case.

As we discussed yesterday, an official change in policy direction by the Fed next week (cutting rates, a three year rate hiking campaign), should be enough to ease the pressure on the global economy, without requiring a move by the ECB and more stimulus from the BOJ. 

Let's talk about earnings and tomorrow's GDP report. 

The theme of the year has been concern about the slowing economy.  While it hasn't reflected much in the data, the fear has been driven by the prospects of eroding global confidence

The first place that tends to show up is in financial markets.  We saw it late last year, as U.S. and global stocks plunged.  

But if we look at how the consumer has done through the first half of 2019, there are no signs of a loss of confidence.  The consumer discretionary sector is up 25% year-to-date, outperforming the broader market (which is up 20%). 

Earnings have continued to beat expectations in consumer related businesses.  We saw it early in the earnings seasons in Q1 and Q2, from the performance of the consumer businesses within the big banks.  Today, Starbucks gave us another barometer on the consumer (a beat on earnings, with 26% year-over-year earnings growth).  Expedia, the online travel booking site beat on earnings, with 9% growth in booking revenue from the same period a year ago.  

Why has the consumer held in strong this year, in the face of a confidence shock to end 2018? 

The Fed (and global central banks) answered the call.  The did what they've done for the past decade — promising to do whatever it takes to keep the economy moving forward, and to avert any economic shocks.  That's enough to keep people spending and investing.  But a trade deal will be needed (soon) to keep it going.
We get the first look at Q2 GDP tomorrow morning.  The Atlanta Fed model is looking for just 1.3% growth in the quarter.  With consumption contributing 70% of that reading, this GDP number looks setup for a positive surprise. 

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