The Week Ahead

The Harris trade and what to expect this week

2024 will go down in history as the year of political dramas. The latest twist was Joe Biden pulling out as the Democratic nominee in the US, which has upended the US Presidential race. The polls at the start of the week has seen a surge of national support for Kamala Harris. She is projected to win 40% of the vote, according to PredictIt, even though she is yet to be formally declared the Democratic nominee. This is an increase of 13 points. Donald Trump still has a wide lead and is projected to win nearly 60% of the vote, according to PreditIt, however, he has seen support fall by 3 points, in the aftermath of Biden pulling out. The ‘Harris trade’ has seen US stock index futures rise at the start of the week, after falling sharply at the end of last week, Bitcoin is down more than $150 since the open late on Sunday, the dollar is broadly lower, and the 10-year US Treasury yield is lower by 2 basis points.

It is too early to tell if the ‘Harris trade’ will cause a bounce back in US equities after last week’s bruising declines. The Democrats have reigned over strong US economic growth and record highs for US stocks, particularly the tech giants. However, Joe Biden’s policies have also pushed up the US deficit, something that may eventually weigh on the US economic outlook. In 24 hours, the market has had to pivot from a clear victory for Trump and the Republicans to a more nuanced election race, especially since Kamala Harris seems to be picking up the independent vote for the Democrats. There is just less than 4 months to go in the US Presidential race, the biggest risk right now is that a challenger emerges from the Democratic side to rival Harris, causing internal strife among the Democrats. At this stage we think that this is a low probability event, however, after a year of political twists and turns, we can’t rule anything out.

Harris could dampen demand for oil stocks

If Harris is confirmed as the Democratic nominee, then her voting record as a VP and as a senator of California, could be scrutinized. It will be worth watching US oil stocks on Monday, as Harris was considered tough on oil and anti-shale and fracking. Thus, her surge in popularity in just 24 hours could impact the US energy sector at the start of this week.

Surprise China rate cut to give temporary boost

Elsewhere, US stocks may have also been given a boost by the surprise cut to short term interest rates in China. The PBOC surprised the market, and this boosted the Hang Seng, which is higher by 0.88% so far on Monday. This is modest support for the Chinese economy, even though Q2 GDP was slower than expected at 0.7% QoQ, down from a 1.6% quarterly growth rate in Q1. This is the first rate cut for a year, and a rare move by the government to support the economy, after repeatedly refusing to add stimulus to the economy to boost growth. Although the Hang Seng is higher, China’s main stock index is down more than 1% at the start of the week, which is a sign that the cut to short term interest rates is not expected to have a long-term impact on growth.

US GDP for Q2 unlikely to stand in the way of a rate cut

Key economic data releases to watch this week include a raft of data from the US, which could determine whether financial markets are right to price in a 95% chance of a rate cut from the Federal Reserve in September. Q2 GDP is released on Thursday, the market is expecting the Q2 annualized rate of growth to expand by 1.9%, up from a 1.4% rate in Q1. There is a chance that the GDP figure for the last quarter could be higher than expected. The Atlanta Fed GDPNow estimate of Q2 growth was 2.7% last week. Its model has trended higher in recent weeks, which is a sign that the US economy has strengthened at the end of Q2. A rate of growth in line with expectations should not hinder a rate cut from the Fed in September, although a stronger rate of growth could complicate the picture.

US: making progress on inflation

There could also be more good news on the inflation outlook. The market is expecting the Q2 price index to fall sharply to 2.7% from 3.7%. The timelier core PCE index for June is also released this week. It is expected to rise 0.1% on the month, and the annual rate is expected to moderate slightly to 2.5% from 2.6%. This is within touching distance of the Fed’s 2% inflation target, and as long as inflation does not surprise on the upside, we think this report is another green light for a rate cut in two months’ time.

This US economic data comes at an important time for the Federal Reserve. The Fed is in a blackout period ahead of their July meeting that takes place next week, however, this week’s data could fuel the tone of the Fed’s and Jerome Powell’s communications after the meeting and confirm whether a rate cut is going to happen in September.

The start of the Magnificent 7 earnings season

The ‘catch up’ rally in mid-cap stocks are dependent on  a rate cut. This stock market trend paused last week, and we will watch it closely this week to see if it resumes. There are a raft of key earnings releases this week, including the start of the tech earnings season. In the US, Tesla and Alphabet release their earnings reports for Q2 on Tuesday after the US market closes. Google’s results will be especially scrutinized to see if their AI investments are paying off. Alphabet’s shares sold off heavily last week and were down more than 3.5%, however the stock is higher by 28% YTD, thus there is room for a sell-off if its AI investments don’t boost the bottom line.

Tesla’s share price also fell heavily last week, and was down more than 4% on Friday, after reports that a win for President Trump in November would see reduced support for electric vehicles in the US. Tesla’s share price could bounce back on Monday, now that Kamala Harris has entered the race to be President. Its earnings report on Tuesday will be scrutinized to see how bad the well-signposted revenue decline will be, how price cuts are impacting the business, and how far its next generation platform has come since last quarter. The market is expecting a modest decline in revenue YoY. The EPS estimate for Tesla is $0.61.

Other releases to watch include General Electric, Southwest Airlines, Deckers, Raymond James, Align Technology, PG&E Corp, Bristol Myers, Aon, and T Rowe Price. There is a wide range of earnings reports from multiple US stock market sectors, which should give us an idea about the health of earnings outside of tech. The market is expecting earnings excluding tech for the S&P 500 to grow at their fastest pace for 6 quarters. This week we should know if this is correct.

Europe PMI reports and Japan inflation in focus

Elsewhere, in the UK, the key data releases to watch include the first look at July PMI reports, CBI business trends and mortgage approvals. In the Eurozone the focus will be on July PMI reports, especially manufacturing in Germany, to see if the manufacturing sector can pick up, although it is expected to remain deep in contraction territory. The German IFO survey is also worth watching. Economic data in Japan is also in focus. The Jibun Bank PMI reports will be watched closely along with the July reading of Tokyo CPI. Headline inflation is expected to remain steady at 2.3%, however, core inflation is expected to rise slightly to 2.2% from 2.1% this month. The market is pricing in a 50% probability of a rate hike at this month’s Bank of Japan meeting, and for their meetings for the rest of the year. Thus, it is a coin toss whether the BOJ do hike rates. This could cause volatility, especially for the yen. USD/JPY has fallen sharply this month as the yen has made a comeback. It has been down more than 3% since peaking on 10^th July, due to broad-based weakness in the dollar. Japanese data this week could determine if the recovery of the yen continues.