ECB holds rates steady as Germany slides toward recession

On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Research Analyst Puneet Thiara discussed the health of the U.S. consumer, the latest global economic headlines and preliminary results from third-quarter earnings season.

U.S. housing market improves as consumer spending remains solid

The U.S. consumer, which powers roughly two-thirds of the economy, is still in overall solid shape, Robison said. He cited recent housing data from the Commerce Department, including a September report which showed that construction of single-family homes increased for the fourth consecutive month. “Housing is usually very volatile, but the overall trend in 2019 seems to be one of improvement,” Robison remarked, noting that last year was particularly rough for the housing market.

Robison noted that consumers do appear to be holding back a bit when it comes to discretionary spending—the purchasing of non-essential goods. He added that this is largely outweighed by the positive trends in the housing market.

Recession fears rise in Germany as third-quarter contraction feared

Broadening the lens to a global perspective, Robison said that the world remains in a bit of an economic slowdown. Some of this is likely due to the China-U.S. trade war, he observed—particularly in Germany, where the country’s central bank recently said that its economy may have shrank again in the third quarter. “The German economy already contracted slightly during the second quarter,” Robison explained, “so if it did experience negative growth in the June-to-September period, this would make for two consecutive quarters of economic contraction in Germany—the technical definition of a recession.”

The European Central Bank (ECB) is responding to the slowdown by maintaining a very accommodative monetary policy, Robison said, noting that the bank left interest rates unchanged at its Oct. 24 policy meeting. “The meeting marked outgoing President Mario Draghi’s last as head of the ECB, but incoming President Christine Lagarde is expected to maintain the same policy,” he stated. Robison added that October’s flash manufacturing Purchasing Managers’ Index (PMI) for the eurozone, per IHS Markit, came in slightly negative. The decline in manufacturing has spread throughout the globe, he said, noting that preliminary numbers from Japan indicate that the country’s manufacturing sector remains mired in contraction.

Preliminary Q3 earnings season results

Shifting to third-quarter earnings season in the U.S., Robison noted that about half of the S&P 500 companies have reported quarterly earnings so far, with the majority beating consensus expectations. However, he cautioned against reading into this too optimistically, as consensus projections were for a -4% decline in year-over-year earnings.

“When you set the bar that low, anyone can jump over it,” Robison quipped, noting that so far, earnings have declined at a lesser rate of -2%. If earnings growth stays negative for the quarter, it would make for the third consecutive quarter of negative earnings, he added.

Robison closed by noting that two big U.S. economic reports will be released the week of Oct. 28: third-quarter GDP (gross domestic product) and the nation’s October employment report. While he expects the jobs report to be positive, Robison cautioned that the five-week General Motors strike could cut into the overall numbers a bit.

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