Earnings season begins today, with Alcoa reporting after the market close. Analysts are bracing for the biggest overall declines in earnings since the great recession. Corporate earnings have been falling since the second quarter of last year, and Morgan Stanley warned clients Sunday that the earnings recession is not over.
Energy companies led the plunge last year, but financials are taking the biggest hit this year. The big banks will report earnings Wednesday (JP Morgan), Thursday (Wells Fargo and Bank of America), and Friday (Citigroup.)
In the past, recessions in corporate earnings have been accompanied by economic recessions. The one exception in the last six earnings cycles was 1998, during the Asian financial crisis, when earnings fell but the economy kept growing. Most economists predict this year will be another exception, but the earnings shortfall is a sign of the weak underpinnings of those economic projections. Morgan Stanley puts the risk of recession at 30% this year.
That will be a talking point later today when President Obama meets with Fed Chair Yellen to discuss the state of the economy. This is only their second private meeting since she became Fed chair. I’d recommend they do it more often.
More news below
• Ted Cruz’s Attritional Gains
Donald Trump’s effort to reset his campaign following defeat in Wisconsin showed no signs of paying off this weekend, as rival Ted Cruz capitalized on a series of technical failures by his campaign. From Thursday to Saturday, Trump suffered setbacks in Colorado, Iowa, Michigan, South Carolina, and Indiana, raising new doubts about his campaign’s preparedness for the slog of delegate hunting as the GOP race approaches a possible contested convention. He lost the battle on two fronts: Cruz picked up 28 pledged delegates in Colorado; in the other states, rival campaigns placed dozens of their own loyalists in delegate spots pledged to Trump on the first ballot. This will matter if Trump fails to win a majority of delegates on the first ballot in Cleveland, as his delegates defect once party rules allow them to choose the candidate they want to nominate. Fortune
Verizon has competition. The parent company of the British newspaper, the Daily Mail, confirmed it is in talks with private equity firms about a possible bid for Yahoo, according to The Financial Times. Daily Mail & General Trust’s potential bid could take one of two forms, according to the report. A direct, outright cash offer isn’t under consideration, it seems, but it does at least raise the likelihood of real competition, and consequently a higher price, for the assets that CEO Marissa Mayer is selling. Financial Times, subscription required
• Food Chains Pressed by Investors over Antibiotics
A group of 54 large investors managing over $1.4 trillion in assets has launched a campaign to get antibiotics out of the supply chains of 10 large U.S. and British restaurant groups, including McDonalds, Domino’s Pizza and KFC owner Yum! Brands. The move follows warnings from the World Health Organisation that the world is moving towards a post-antibiotic era in which many infections would no longer be treatable because of the overuse of antibiotics. Some 80% of antibiotics produced in the U.S. are given to livestock, the coalition said in a statement. Fortune
• The World Bank is Surprisingly Upbeat On Asia.
Some good news for U.S. exporters: the emerging markets of east Asia will withstand the slowdown in China better than many think, according to the latest World Bank forecasts out Monday. The IMF’s twin sister reckons that the region will still grow 6.3% this year and 6.2% next year, with Indonesia, the Philippines and Vietnam taking up the baton from China. Elsewhere, China said its producers were still beset by deflation in March, although factory gate prices fell by less than feared–a mere 4.3%. NYT
Around the Water Cooler
• Bill Gross, Rate Dove?
Bond manager Bill Gross predicts that the U.S. Federal Reserve may only manage one interest rate hike this year, according to an interview in Barron’s. Gross, who now divides his time between managing the Janus Global Unconstrained Bond Fund and suing his former employer Pimco, told Barron’s that the Fed needs to raise them more over the coming years “or the domestic and global economy won’t function.” That said, he doesn’t expect 10-year Treasury yields, currently around 1.73 percent, to change dramatically this year. Barron's, subscription required
• David Cameron Hits Back
The British Prime Minister has decided that offense is the best form of defense. Having published six years of his own tax returns over the weekend, he’s now promising new legislation this year that will make companies criminally liable if they fail to stop their employees facilitating tax evasion, a move likely to send a shudder the private banking and wealth management arms of the country’s biggest banks. Cameron’s own disclosures haven’t ended criticism of his behavior, but have significantly raised the bar for accusations of wrongdoing against him, which appear ill-founded on the evidence available. BBC
• Dirty Doings at Airbus?
France and Germany have joined the U.K. in suspending new export credit for Airbus Group against a background of concern about its use of middlemen to grease the sale of aircraft and satellites. The U.K.’s Serious Fraud Office is currently reviewing whether it needs to take more action. The news may generate a wry smile or two in Seattle: Boeing has been fighting an uphill battle to persuade Congress to renew the U.S. Export-Import Bank’s support for aircraft deals. WSJ, subscription required
• That Familiar Creaking Sound Won’t Stop
We refer, of course, to the sound of the global commodities sector under strain. Today, it’s the turn of India-focused Vedanta Resources to announce that its banks have agreed to loosen covenants on its debts to stop it breaching them in its financial reports for the year ending March 31. Elsewhere, China said that rail freight volumes, once a key indicator for its economy, were down 9.2% on the year in the first quarter. Not earth-shaking, but neither offers any convincingly positive spin. Financial Times, subscription required
• CIA Director Rejects Torture
CIA Director John Brennan told NBC that he wouldn’t use waterboarding or other controversial interrogation techniques, even if ordered to do so by a future President. Brennan’s comments are an implicit dig at Republican front-runner Donald Trump, who said in February he’d “bring back a hell of a lot worse than waterboarding” if elected. NBC