Weak data out of China and decline in oil prices are weighing on stocks at the open today. The factory sector ISM survey coming out a little later today and a deluge of economic and earnings data this week will have a bearing on the markets as well.
Overnight factory sector data out of China shows continued weakness in this key part of the country’s economy. Both the official PMI measure as well as the private sector’s Caixin PMI survey came modestly short of estimates, and both show manufacturing in contraction territory. That said, while the official measure was a tad below the prior month’s level, the private sector survey shows a modest improvement from the prior level.
The weakness in January runs counter to typical seasonal behavior for Chinese factories who operate full steam that month ahead of the New Year holidays that fall in February. The service sector PMI surveys also show some loss of momentum in January, but the index levels are still in expansionary territory. All in all, what today’s data shows is that the outlook for China’s economy remains uncertain.
On the home front, we will be getting the January manufacturing ISM survey a little later, with consensus expectations of a very modest improvement from December’s 48.2 reading. The manufacturing sector has been hit hard by a combination of weakness abroad, the strong U.S. dollar and downturn in the energy sector.
The concern is that further rate hikes from the Fed while other global central banks are easing will put further pressure on the dollar and as a result on the factory sector. The Fed is mindful of this possibility, but still wants to keep its options open as long as the U.S. economic outlook remains stable.
The January jobs report coming out on Friday will give us a good sense of how the labor market is holding up in this environment. The expectation is that Friday’s jobs report will show a deceleration from December’s strong pace, with 188K jobs added vs. December’s 292K reading. The unemployment rate is expected to remain unchanged at 5%, but some of the estimates do show a 4.9%. It will be interesting to see the market’s reaction to 4-handle on the unemployment rate.
We are also in the heart of the Q4 earnings season, with more than 120 S&P 500 companies reporting results this week. Google’s (GOOGL) parent Alphabet will be reporting after the close today, but we have had earnings from Aetna (AET), Cardinal Health (CAH) and others this morning. Including all of this morning’s reports, we now have Q4 results from 207 S&P 500 members that combined account for 53.5% of the index’s total market capitalization. Total earnings for these companies are down -3.1% from the same period last year on -3.1% lower revenues, with 72% beating EPS estimates and 47.6% coming ahead of revenue estimates.
The blended picture for Q4, combining the actual results from these 207 index members with estimates from the still-to-come 193 members is for earnings to decline by -6.5% from the same period last year on -5% lower revenues, the third quarter in a row of negative earnings growth. As we have been saying repeatedly, growth has been tough to come by in the current environment of a slowing global economy, the strong U.S. dollar and the never-ending Energy sector weakness.
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