Markets finished lower Monday after more news of economic weakness out of China, and an increasing sense of unease over the partial government shutdown. With mid-month January paychecks now not showing up in government employee bank accounts, the impact of the shutdown appears to be accelerating. And, with both sides digging in, there appears to be little hope of a near-term solution to the impasse. Investors are keeping one eye on the shutdown and the other on earnings, as earnings season is now in full swing. Many large banks report earnings this week, mixed with a number of transportation stocks. While most analysts agree earnings are coming down from the blockbuster growth of 2018, the question for investors is whether the bottom in stocks has already been put in when the market sold off last quarter, or if there is more pain to come in 2019.
PPI and the Empire State Manufacturing Survey are scheduled for release Tuesday. PPI is expected to come in flat, owing mainly to the continuing drop in oil prices in December. The Empire State numbers are expected to bounce back from a reading of 10.9, and to come in at 12 for December. Analysts will be watching this number closely to determine whether recently weak manufacturing numbers were an aberration, or the beginning of a more substantial decline in manufacturing.
JP Morgan Chase (JPM) and Wells Fargo (WFC) report before the open Tuesday. Many analysts believe the large banks are undervalued, while others are citing pressure from fintech startups and payment processors, like Visa (V), as a growing challenge to large bank profits. Citi’s (C) report on Monday, while not stellar, reinforced the pillars the large banks have come to rely on in recent quarters, large buybacks of stock and attention to cutting costs. Citi finished flat on the day. Some analysts are holding their breath hoping none of the large players encountered an unexpected trading loss given the massive volatility at the end of 2018. Also reporting Tuesday is Delta Airlines (DAL). Airlines have taken it on the chin since early December when earnings warnings began to emerge from the sector.
Banking earnings continue Wednesday, when Bank of America (BAC) and Goldman Sachs (GS) report. Goldman has been under the gun with an investigation of its involvement in an embezzlement scheme at 1MDB, a Malaysian state investment company. Revelations by Goldman employees, that they intentionally avoided the firm’s internal compliance rules, are being investigated by the Federal Reserve, and has spooked investors. CSX Corporation (CSX) reports after the close Wednesday. The rail company has been successful cutting costs and improving efficiency this year, but some analysts fear that may not provide much support going forward. CSX should be able to put forth some color commentary on the economy given its vital role in transporting goods. One question analysts have is whether the lead up to the China trade tariffs resulted in a bulge in traffic headed into the fourth quarter, and if that portends lower volume the next few quarters.
Economic numbers released Wednesday will include mortgage applications and the housing market index. Housing index numbers are expected to rise slightly to 57 after a devastating 8 point drop in November. Also on tap are retail sales, import and export prices, Redbook retail numbers, and business inventories. Both import and export prices are expected to decline, again due to the weakness in oil prices. Falling export prices were somewhat offset by a bounce in the price of farm products.