Highway To The Danger Zone: Full Week Ahead Preview

If you were looking for weekend Twitter fireworks from Donald Trump, you were not disappointed.

The President kicked things off (football pun fully intended) on Saturday by drawing everyone’s attention to a Washington Post article that, because he didn’t read it all the way through, he believed to be a positive story about his effect on GOP fundraising. Moving right along, he delivered the customary weekend threat of nuclear war, musing (to no one in particular), that although he is “sorry“, there’s “only one thing that’s going to work” when it comes to dealing with the regime in Pyongyang. Then, in the grand finale, he used Sunday to attack Bob Corker, calling the outgoing Senator a gutless beggar before blaming the Tennessee lawmaker for the Iran deal.

So that sets the stage for the week ahead which, speaking of Iran, will probably see Trump decertify the nuclear agreement, a move that will likely prove disastrous for all of the reasons outlined here (plus a bunch more). The U.S. is required to certify the deal every 90 days and the deadline is October 15, which means Trump should announce something in the days ahead. Expect a furious response from Tehran.

 

Meanwhile, Russia hinted on Friday that North Korea is set to test fire another missile and you can bet Trump’s Saturday tweets didn’t do anything to dissuade Kim. Yesterday, at a Workers’ Party meeting, Kim said the North should stick to goal of simultaneously pursuing economic growth and nuclear force capability. “The present situation is stern and we are faced with ordeals,” he added. Yes, “ordeals.”

Trump is also expected to sign an executive order on healthcare, something that will kill any hope of a bipartisan push to revive comprehensive reform.

As if that wasn’t enough, a new round of NAFTA negotiations starts in Washington after a week that saw the White House clash with the Chamber of Commerce which warned that the administration’s proposals are “highly dangerous.”

Are you starting to understand why everyone was so worried about Trump’s agenda? It’s a veritable minefield.

Meanwhile, earnings season gets underway in the U.S. Here’s a quick preview on that from Goldman:

3Q earnings season begins next week. Several large-cap Financials will lead the way (BLK, JPM, C, BAC, WFC, PNC, and PGR). 89% of S&P 500 equity cap will report results by November 3.

Solid economic activity during 3Q and strong 1H 2017 results explain the less negative EPS revisions than in the past. Consensus bottom-up S&P 500 EPS estimates for 2017 and 2018 have been trimmed by just 4% and 1% since March of the prior year, compared with an average cut of 10% and 3%, respectively, at comparable points in time since 1985.

Consensus expects S&P 500 EPS will grow by 5% year/year in 3Q, a substantial deceleration from 1Q (+14%) and 2Q (+11%). Excluding the rebound in Energy earnings (+128%), S&P 500 EPS is expected to grow by just 3% (vs. 10% in 1Q and 8% in 2Q). The slower expected pace of growth in 3Q 2017 partly reflects base effects, as S&P 500 EPS in 3Q 2016 increased after declining during the previous three quarters (see Exhibit 1).

The slowdown in EPS growth is forecast to be broad-based, but particularly pronounced in Financials. Financials EPS is expected to fall by 3% in 3Q, compared with a 21% increase in 1Q and a 10% rise in 2Q (see Exhibit 2). Weak loan growth and trading activity, along with hurricane related losses, will weigh on Financials results despite another Fed hike and higher interest rates. Earnings are expected to decline in two other sectors: Consumer Staples and Consumer Discretionary. Info Tech (+11%) is forecast to deliver the fastest EPS growth, driven by strong top-line growth (+15%).

Margins are expected to decline in most sectors. Consensus forecasts that only Energy (+187 bp), Telecom Services (+38 bp), and Materials (+13 bp) will expand margins in 3Q. In aggregate, S&P 500 margins are forecast to decline by 5 bp to 9.7% (14 bp decline excluding Energy). However, S&P 500 margins would still remain near all-time highs.

Also on tap: the September Fed minutes and CPI.

Obviously, the minutes will be parsed for clues as to what the committee was thinking in terms of staying the course for December despite lackluster inflation. On CPI, BofAML is looking for 0.2% m/m on the core print and 0.6% on the headline (presumably thanks to the spike in prices at the pump). Full docket for U.S. data:

Everybody’s in the same ballpark on the core number in terms of the Street.  We’ll see.

For their part, Barclays thinks you should focus more on the race for the Fed chair. Here’s a bit of color from the bank on that:

The succession race for the position of Fed Chair appears to have reached the final stage. President Trump stated that a decision on the next Fed Chair could come in the next two or three weeks, and a short list of finalists has been reported in the press (eg. Bloomberg). The markets have responded according to perception of the level of hawkishness or dovishness of the listed candidates. Kevin Warsh, former Fed governor, is widely perceived as the most hawkish of the candidates, given his vocal criticism of extremely accommodative policy and his views on the need to overhaul financial regulation. John B. Taylor, author of the Taylor rule, has advocated for a more systematic approach, which would reduce discretion in the conduct of monetary policy. Different versions of the Taylor rule would prescribe higher-than-current rates. Gary Cohn appears closer to the current status quo, while Fed board member Jerome Powell stands on the dovish side of the spectrum.

The Fed Chair succession process has captured the market’s attention and is likely to continue to drive the USD this week. However, the Chair is not the only board position that needs to be filled, and the FOMC is a committee that works through consensus. The new Vice Chair could be a balancing force, and markets seem oblivious to the fact that Vice Chair Fischer will depart soon. We see the gyrations of the market on the likely hawkishness of the new Chair as exaggerated, as we will not have a complete picture without knowing the complete composition of the board, and the Vice Chair’s stance in particular.

And in case you need a handy reference guide, here’s their dove-hawk “spectrum”:

the "spectrum": pic.twitter.com/8TUiDc0dP9

— Heisenberg Report (@heisenbergrpt) October 8, 2017

All of that is just in the U.S.

There’s also significant uncertainty around exactly how the snap election in Japan is going to play out (it’s not until later this month, but there’s a lot going on in the lead up). “Even though the support for PM Abe’s LDP is substantially higher than for other parties, the current political situation is very fluid and can have various market impacts depending on the election result,” Barclays notes, before reminding you that “the continuation of Abenomics, implications for the successor to BoJ Governor Kuroda, and the likelihood of more extreme policies are at play.” Koike’s not running for PM and told Reuters that “all options were on the table regarding whom her party would back when parliament convenes to vote on a prime minister after the election.”

As far as Kuroda is concerned, here are some useful bullet points from Bloomberg:

• Koike Says No Need For Major Change in BOJ Policy
• Unfortunate that BOJ policy hasn’t resolved deflation, but no need for major change in direction
• Policy should continue to some extent under next BOJ governor; sudden change would affect stock market
• Related story: Japan’s Koike Signals Need for Change at BOJ, But Very Gradually
• It’s premature to talk about an exit from monetary easing, Japanese Prime Minister Shinzo Abe said in a debate hosted by the Japan National Press Club on Sunday, adding that he is leaving the issue to the Bank of Japan.
• Abe says he and Haruhiko Kuroda are in accord on 2% inflation target, but what tools are used to achieve that and move toward exit from easing are left to the BOJ governor
• Goal of primary balance surplus by FY20 can’t be achieved; govt maintains that objective, though it doesn’t yet have enough information to establish a new timeframe

So that’s Japan.

Markets will also be focused on Catalonia, where tensions waxed and waned last week depending on the day. On Sunday, literally hundreds of thousands of people gathered in Barcelona to protest against independence. Suffice to say the situation is fluid.

Oh, and they’ll be more Brexit talks as well.

So good luck with all of that, and just know that you’re in good hands, because the most powerful man in the world is even-keeled and predictable…

https://twitter.com/darth/status/917056070329131014

Full calendar from BofAML

And here’s Archer (if you’re not a fan, you need to get familiar)…