Every Friday, Brian Jacobsen provides perspective on key events and topics of the current week and his thoughts about what the week ahead may hold. Here’s his report for the week of July 18–24, 2020.

The week that was

  • Equities were on a good tear higher through midweek, but on Thursday the rally reversed. An increase in jobless claims—which could point to a choppy road ahead for the economy—may have been the proximate cause of the reversal.
  • Tensions are rising between the U.S. and China. The U.S. Department of State ordered China’s consulate in Houston to close, and China followed by ordering the U.S. consulate in Chengdu to close. The U.S. cited the protections of intellectual property and personal information as reasons for closing the Houston consulate.
  • Earnings season is beginning to accelerate. Next week, some big tech names will be reporting. Coming into earnings season, average earnings per share (EPS) for companies comprising the S&P 500 Index were projected to fall 44% year over year. Based on the 25% of S&P 500 companies that have already reported their earnings results, average index EPS are on track to be down “only” 42% year over year. That number comes from blending the 25% that have reported with the 75% that haven’t.



  • European Union (EU) leaders agreed to a set of terms for the EU’s relief fund. A few countries were holding up talks because they didn’t want the program to just be a bunch of giveaways. This group—Austria, Denmark, the Netherlands, and Sweden—has been referred to in the press as “The Frugal Four” due to these countries’ historical opposition to sharing debt burdens across countries. The current agreement is a significant step toward a type of fiscal union as the debt to be issued will be jointly guaranteed by all of the EU countries. As structured, 390 billion euros will be in the form of grants—which don’t have to be paid back—and 360 billion euros will be in the form of low-interest loans.
  • Chinese regulators raised the amount insurers can invest in equities to 45%, helping stoke China’s equity rally.
  • U.S. Treasury Secretary Mnuchin was interviewed on CNBC, and he revealed some details about what Republicans are seeking in the next phase of coronavirus relief. He said Republicans won’t insist on a payroll tax cut, but they will ask for unemployment benefits that replace approximately 70% of lost wages rather than the current $600/week enhanced benefit that’s set to expire at the end of July. Mnuchin also said Republicans won’t bail out states, but they will offer flexibility in the way federal funds can be used. Finally, their proposal will include tax credits to encourage businesses to hire and direct payments to households. Congress is scheduled to take another recess after the first week of August, so the clock is ticking to get a deal done.



  • The U.S. Department of State’s order that China close its consulate in Houston followed claims regarding Chinese hacking. The U.S. Department of Justice accused two Chinese hackers—allegedly working for the Chinese government—of stealing information related to COVID-19 research. Chinese officials said the U.S. should rescind the decision or “China will undertake legitimate and necessary responses.”
  • President Trump said he is canceling the Republican convention activities in Florida. The convention will be mainly virtual.


The week to come

  • Earnings season continues. Going into earnings season, for the S&P 500 Index on a year-over-year basis, earnings were expected to fall more than 44% and sales were expected to fall 11%, according to FactSet.
  • On Wednesday, the Federal Open Market Committee (FOMC) releases its policy statement and Chair Powell holds a press conference. The Federal Reserve (Fed) has thrown cold water on the idea of “yield curve control”—where instead of just setting a target for the federal funds rate (an overnight rate), the Fed tries to control longer-term Treasury yields. Yield curve control can be a way for the Fed to underscore its commitment to keeping rates lower for longer—but so can other techniques, like setting economic thresholds that must be crossed before the Fed hikes rates. For example, the Evans Rule from December 2012 stated that the Fed wouldn’t hike rates until the unemployment rate fell below 6.5% or inflation rose above 2.5%. If the Fed thinks it needs to make any enhancements to its current stance of monetary policy, it may be to adopt a similar strategy.
  • On Monday, U.S. durable goods orders for June will be released. This can be taken as an indicator of businesses making investments in plants and equipment. The Conference Board Consumer Confidence Index for July is released on Tuesday. The University of Michigan’s Index of Consumer Sentiment showed a slight reduction in sentiment— perhaps related to the rebound in coronavirus cases—so we will see if this shift in sentiment is confirmed by the Conference Board Consumer Confidence Index. On Friday, U.S. personal income and spending data for June are released. The consensus is calling for a decline in income, but that’s only because of the initial pop in income after stimulus checks were received. Spending is expected to increase at a healthy clip but slightly slower than in May.
  • On Thursday, China’s official Purchasing Managers’ Index is released. In June, the index stayed above 50, indicating continued expansion of manufacturing activity. In July, the consensus seems to be calling for continued expansion, but perhaps at a slower pace.

Thanks for reading, stay informed!

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