Investing.com - Here’s a look at three things that were under the radar this past week.
1. Morgan Stanley Eyes an Earnings Recession
Investors should brace for a U.S. earnings recession, while the labor market is set for its first real test of the Trump administration, according to analysts at Morgan Stanley.
“The bottom line for us is that the earnings recession is real and it's broader than the one we experienced in 2015-16,” Morgan Stanley said in a note Monday. “It's also happening at a time when the economy has much less slack ... This is leading to more margin pressures than what companies were prepared for when we entered 2018.”
The latest labor report from Challenger, Gray and Christmas indicating a spike in February job cut announcements to the highest level since July 2015, combined with anemic nonfarm payrolls growth, indicates the labor costs are at last biting and hitting hiring intentions, the investment bank said.
Until there’s evidence that cost cutting is reversing current negative margin trends, “the risk is still to the downside for more disappointing releases which is likely to weigh on stock prices,” it added.
“We remained comfortable with our 2500-2800 range for the S&P 500 until further notice and remain more defensively skewed than normal in our sector recommendations,” Morgan Stanley (NYSE:MS) said.
2. Homebuilders Unlikely to Hammer Out Gains
Mortgage rates have swung to their lowest level in a year, but the clouds over U.S. homebuilders are unlikely to clear anytime soon as the fundamentals of the housing market remain murky.
The sale of new U.S. homes showed little sign of life, falling 7% month on month and 4% compared with January 2018, the U.S. Census Bureau said Thursday.
Market participants have been closely watching building permits -- a key indicator of U.S. housing production -- but there's little to write home about.
Single-family homes permits, which account for the largest share of the housing market, fell to 812,000, the lowest since August 2017, data showed last week.
This arrived as a surprise after the National Association of Home Builders (NAHB) housing market index, a gauge of sentiment of single-family homes, rebounded in January, amid a decline in mortgage rates thanks to falling U.S. bond yields as the Federal Reserve remains on pause.
"The bounce back in single-family starts mirrors our builder confidence surveys, as sentiment fell in the latter part of 2018 but rebounded in January after mortgage rates showed a notable decline," said Greg Ugalde, chairman of the NAHB.
The 30-year fixed-rate mortgage averaged 4.35% in the Feb. 21 week, mortgage guarantor Freddie Mac said Thursday, the lowest since early February 2018.
The tug of war between rising demand, boosted by lower rates, and the lack of homes builders are generating for sale have played out in big builder stocks with the iShares US Home Construction (NYSE:ITB) ETF down by nearly 14% over the past year.
Still, with spring in the air, some remain optimistic the crucial selling season will mark a turnaround.
“Despite recent headwinds, the housing market appears poised for a modest rebound headed into the spring selling season," Wells Fargo said in a recent note. "Amid softer sales and rising inventories, home prices continue to moderate, which should provide some relief for buyers challenged by affordability."
3. First-Quarter GDP Measure Looking Very Weak
There’s just a couple of weeks left in the first quarter, but when it comes to economic growth, government attention is still focused on last year’s fourth quarter. The next GDP update with be a revision of fourth-quarter numbers due on March 28.
Those looking for a snapshot on how the economy is doing right now, though, should turn to the Atlanta Federal Reserve.
The Atlanta Fed’s GDPNow “forecasting model provides a ‘nowcast’ of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.”
The measure “is best viewed as a running estimate of real GDP growth based on available data for the current measured quarter,” the Atlanta Fed said.
Unfortunately for those hoping for a rebound in GDP, the latest number, released Wednesday, for real annual growth is just 0.4%.
“After reports on durable manufacturing and construction spending were released by the U.S. Census Bureau this morning, the nowcast of first-quarter real gross private domestic investment growth increased from -2.9 percent to -2.4 percent, and the nowcast of first-quarter real government expenditures growth increased from 1.7 percent to 2.5 percent,” according to the Atlanta Fed.
But for equity investors, this may be encouraging. Such weak growth could mean a guarantee for the FOMC to keep rates on hold for the rest of the year.
Written and compiled by Yasin Ebrahim and Kim Khan