2022 Weekly Views

Highlights

US earnings to slow down

Analysts are forecasting just under 3% EPS growth in 3Q and 5.3% in 4Q, down from 9-10% implied just a few months ago. As the deteriorating outlook for economic growth, rising interest rates, extreme currency moves, and sticky inflation weighed on analyst sentiment. Sales forecasts took a hit as well, though it was less pronounced, thanks to reasonably sticky pricing power. S&P 500 sales are seen rising 8.6% in 3Q and 6.3% in 4Q, from 9.8% and 7%, respectively, in July. The average S&P 500 net income margin forecast dropped to 12.9% in 3Q the lowest since 1Q21, and the outlook for improvement remains challenged. Analysts now project margins will continue to worsen until at least 4Q and won't recover to a new high until 3Q24. Eight of the index's 11 sectors are expected to post net income margins below year-ago levels in 3Q and six to record margin contraction vs. the year prior in 4Q. The deepest drop is expected in the financial and communication services sectors, while energy and industrials are expected to hold up best.

Market update

Earnings season

The S&P 500 closed the week at 3,583.07, -1.55% lower. The Dow Jones closed at 29,634.83, +1.55%, with the Nasdaq lower by -3.11%. The volatility index VIX closed the week at 32.02 up from 31.36. The Euro Stoxx 600 slipped -0.09%.

The 10-year UST closed at 4.02% up from 3.88% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST at +28bps. US Corporate Bond spreads: Investment Grade widened 14bps at 219bps and High Yield widened 28bps at 560bps. German 10-year Bunds yield closed at +2.35% up from +2.19% a week before. In Europe, Corporate Investment Grade spreads widened 13bps at 248bps and High Yield spreads widened 44bps at 698bps.

The US Dollar Index (DXY) appreciated +0.46% last week and closed at 113.31. The Euro closed at 0.9722 (-0.23% weekly); the Yen depreciated -2.35%, closing at 148.67 and the Swiss Franc depreciated -1.11%, closing at 1.0054. Gold closed at $1,644.47 depreciating -2.97%. Oil was down, Brent closed at $91.63 (-6.42%) and WTI at $85.61 (-7.59%).

Macroeconomy

US CPI

Sept. US CPI inflation was once again above market expectations at 0.4% m-o-m and 8.2% y-o-y. The main drivers were (in line with August) rents, food and medical prices. Rents rose by a sharp 0.84% m-o-m (7.2% y-o-y), the fastest increase since 1982. They represented 40% of the increase in core CPI (0.6% m-o-m / 6.6% y-o-y). Medical care prices rose 1.0% m-o-m (vs. 0.8% m-o-m in August), or 6.5% y-o-y. Food prices rose 0.7% m-o-m (13.0% y-o-y).

FOMC minutes

September FOMC meeting minutes kept a generally hawkish tone, as expected by the market. The minutes signalled that the Committee plans to keep hiking the policy rate, and then maintain a restrictive stance, in an effort to bring inflation down. Many participants stressed that the cost of “too little action likely outweighed the costs of taking too much action”, with some respondents echoing comments in recent speeches that highlighted potential dangers from ending a tightening cycle prematurely. That said, plans to slow the path of rate increases at some future date remain intact and several participants noted the importance of calibrating future tightening to mitigate “the risk of significant adverse effects on the economic outlook.”

Global economic data

The Sept. US headline PPI reading came in stronger than expected at +0.4% m-o-m (vs. +0.2% expected), although the details were mixed. The Core Goods PPI slowed to 0.3% m-o-m (vs. 0.4% in a month prior) and was in line with estimates. US retail sales were flat m-o-m, which missed consensus at +0.2%. The Michigan sentiment index of 59.8 was 0.8 points better than expected. In the UK, the August GDP contracted by -0.3% m-o-m (vs. 0.0% expected). Euro area industrial production (IP) rose by 2.5% y-o-y in August (+1.5% on the month), above expectations. German IP fell by 0.5% y-o-y, while French, Italian and Spanish IP increased. In parallel, excessive inventory levels are reported as well as deteriorating PMIs, which likely indicate substantial worsening in industrial production in the coming months.

World PMI

World PMI manufacturing has dropped into contraction territory in September (49.8 vs 50.3 in August) for the first time since June 2020. Sentiment in services appears also gloomy (50.0 vs 49.3 in August). Geographically, there is a wide divergence. Sentiment in Europe is deeply into contraction territory, slightly below 50 for emerging economies, and still resilient in the US and in other advanced economies. The main reasons behind this gloomy sentiment are depressed new orders. Both orders and export orders have deepened further into contraction territory (below 50 since March for export orders). They are currently well below previous recessions (excluding the pandemic). Export orders are depressed in advanced as well as emerging economies. Regarding inventories, stock of finished goods has shifted from too low to an all-time high. Price pressures are cooling down rapidly but there are wide divergences among countries.

UK saga continues

Prime Minister Liz Truss fired her finance minister Kwasi Kwarteng and scrapped parts of their unpopular economic package on Friday. So far Truss has reversed course on two parts of her fiscal plan - the move to scrap the 45% top rate of income tax and a decision to hold corporation tax at 19% instead of letting it rise to 25%. The two changes will provide around GBP 20bn for public finances. GBP and government bonds tumbled: 30-year GILTS closed at 4.78% after a session low of 4.25%; GBP closed at 1.1180 coming from 1.1350 earlier in the day. The Bank of England confirmed the end of Gilt purchases on Oct. 14. It also confirmed that BoE’s Temporary Expanded Collateral Repo Facility will operate until Thursday Nov. 10.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)