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Day Ahead: Top 3 Things to Watch

Stock MarketsJul 12, 2018 04:30PM ET
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© Reuters. - Here’s a preview of the top 3 things that could rock markets tomorrow.

1. Bank Earnings Will Dominate Early Headlines

It’s almost the middle of the month, but Friday will be when earnings season really gets underway with major banks reporting before the bell.

Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are all scheduled to issue numbers.

Analysts expect Citi to earn $1.57 a share on revenue of about $18.5 billion. JP Morgan is forecast to post $2.22 a share in earnings on revenue of about $27.5 billion. And Wells Fargo is expected to report a profit of $1.12 a share on revenue of about $21.7 billion.

Along with the headline numbers, investors will be looking closely at net interest margin – the measure of interest paid to lenders vs. the interest earned on interest-bearing assets – which is a key measure of the health of the big banks.

Analysts are already expecting that net interest margin will have been impacted by a flattening yield curve, which happens when the difference between short- and long-term interest rates narrows.

(See the difference in the slope of the yield curve charted at the Treasury Department website.)

In the case of the second quarter, the flattening has occurred as short-term yields on Treasuries have climbed. A strong labor market and inflation data have increased speculation for a more hawkish Fed. On Thursday, the consumer price index for June came in at a six-year high.

Overall, the financial sector earnings are expected to rise 18.5% for the three months ended June, according to Zacks. That’s below the 19.1% rise in earnings forecast for all stocks in the S&P 500.

2. Consumer Inflation Expectations Could Be Significant

The star of Friday’s economic indicators will be the University of Michigan’s initial measure of July consumer sentiment at 10:00 AM ET (14:00 GMT). Economists expect that the index ticked down to 98.1 from 98.2 in June.

But the headline number is unlikely to be much of a market mover, given the acknowledgment of the market that consumers confidence is very strong. The Michigan index hasn’t dropped below 90 this year.

But Fed-watchers may be paying attention to the inflation expectations component of the survey, which arrived at 3% in June.

The Fed takes inflation expectations, as well as inflation data, into account when setting rate policy. Given consumer inflation hitting a six-year high in June, a spike in inflations expectations could raise some worries of more hawkish moves by the FOMC.

3. Will Oil Drop Below $70?

While financial stocks will likely call the market tune, investors will also be keeping an eye on energy shares.

After hitting levels not seen since late 2014, oil prices have retreated in the last few sessions. On Thursday, crude oil prices fell 5 cents to settle at $70.33 a barrel.

If oil prices push and stay below the $70 level, that could put pressure on energy stocks.

Oil prices are moving lower as supply outages in Canada and Libya are being resolved and Saudi Arabia is pushing to produce more barrels per day to make up for any shortfall from sanctions on Iranian oil.

But the International Energy Agency on Thursday said in its monthly report that “rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit."

On Friday Baker Hughes will report its U.S. rig count at 1:00 PM ET (17:00 GMT). Last week it reported a rise to 863 rigs, the first gain in three weeks.

Day Ahead: Top 3 Things to Watch

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