2022 Weekly Views

Highlights

Earnings recap

As of last Friday, around 40% of companies have reported in both the US and in Europe. Earnings growth is sequentially lower in both regions y-o-y, at -3% in the US, and +5% in Europe. In the US, 73% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is -3% y-o-y, surprising positively by 2%. Of the key sectors, Energy, Industrials and Discretionary are reporting strong growth, while Materials, Financials and Communication Services are seeing negative EPS growth. Top-line growth in the US is at +9% y-o-y, surprising positively by 2%. In Europe, of the Stoxx600 companies that have reported so far, 59% beat EPS estimates. Q3 EPS growth is coming in at +5% y-o-y, surprising negatively by 1%. In Europe too, Energy and Industrials have reported healthy earnings growth, while the earnings delivery for 5 of the remaining sectors is either flat or down y-o-y. Revenue growth is coming in at +20% y-o-y, surprising positively by 1%.

On rates

Government bond yields fell over the week on the back of market participants’ expectations that central banks’ pivot to a slower pace of rate hikes could happen by the end of this year and lead to smaller terminal rates. The US Federal Reserve’s terminal rate is now priced in below 5%, while closer to 2.5% for the ECB. Another illustration of market participants’ less aggressive expectations is the sharp flattening of the short-to-medium-term part of the US yield curve, which even led to an intraday inversion of the 10-year-to-3-month slope for the first time since 2020. Investors expect a 75bps rate hike for the FOMC meeting scheduled for this coming Wednesday November 2.

Market update

Eventful weeks ahead

The S&P 500 closed the week at 3,901.06, +3.95% higher. The Dow Jones closed at 32,861.80, +5.72%, with the Nasdaq higher by +2.24%. The volatility index VIX closed the week at 25.75 down from 29.69. The Euro Stoxx 600 gained +3.65%.

The 10-year UST closed at 4.01% down from 4.22% a week before. The yield curve inverted with the yield spread between the 3-month and 10-year UST at -7bps. US Corporate Bond spreads: Investment Grade widened 5bps at 216bps and High Yield tightened 5bps at 520bps. German 10-year Bunds yield closed at +2.10% down from +2.42% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 242bps and High Yield spreads tightened 7bps at 664bps.

The US Dollar Index (DXY) depreciated -1.12% last week and closed at 110.75. The Euro closed at 0.9965 (+1.04% weekly); the Yen appreciated +0.03%, closing at 147.60 and the Swiss Franc appreciated +0.20%, closing at 0.9958. Gold closed at $1,644.86 depreciating -0.77%. Oil was up, Brent closed at $95.77 (+2.43%) and WTI at $87.90 (+3.35%).

Macroeconomy

US GDP & housing

US Q3 GDP came in stronger than expected at +2.6% q-o-q SAAR (seasonally adjusted annualized rate) vs. +2.4% expected. Q2 GDP was -0.6%. Consumption rose 1.4% in Q3, from 2.0% in Q2 and 1.3% in Q1. Most of this growth in consumption came from services, up 2.8%, and goods consumption fell 1.2% (third consecutive drop). Consumption was supported by consumers expending their savings. The quarterly saving rate fell to 3.3% (of incomes), the lowest rate since Q4 2007. Regarding housing, the annual rise in U.S. home prices continued to slow.  Notably, the S&P CoreLogic home price index fell by a sharp 1.3% m-o-m in August, after a 0.7% drop in July, reflecting the current sharp slowdown of the housing market due to skyrocketing mortgage rates (30-year mortgage rate at 7.1% according to Bankrate.com).

European Central Bank

The ECB hiked rates by another 75bps, taking the deposit rate to 1.5%, while hinting at a more cautious, data-dependent approach. The commitment to rate hikes over the “next several meetings” was removed. The statement emphasized the “substantial progress” in tightening policy, as well as the growing downside risks to economic activity. A decision on Quantitative Tightening was postponed to December. TLTRO (Targeted longer-term refinancing operations) will be adjusted higher from November, incentivizing banks to reduce their borrowings early.

Global PMIs

The US Manufacturing PMI entered contraction territory at 49.9 reading (vs. 51.0 forecast) for the first time since June 2020. Services PMI was worse, at 46.6 in October (vs. 49.5 expected) and below September’s reading of 49.3. The employment component fell to 49.4 from 52.2 and business expectations also contracted to 57.4 (vs. 66.7 a month prior). The only positive improvement was a fall in output prices. In Europe, manufacturing PMI fell further into the contraction territory, sliding to 46.6 (vs. 47.9 expectation) for Eurozone and to 45.7 in Germany (vs. 47.0 expected). French manufacturing stood better, sliding 0.3 points to 47.4 (vs. 47.0 expected) and 47.7 a month prior. French composite now remains at the breakeven level of 50.0. In the UK, manufacturing PMI also declined further to 45.8 (vs. 48.0 forecast), with services also disappointing at 47.5 (vs. 49.0 expected).

France & Germany GDP

France GDP growth slowed down in Q3 2022 to 0.2% q-o-q, down from 0.5% in Q2. It was up by 1% y-o-y compared to 4.2% in Q3 2021. Domestic demand was higher despite household consumption remaining stable (0.0% q-o-q). France first headline inflation estimates (HICP) ticked up again in October, standing at 7.1% y-o-y, up from 6.2% in September and above expectations – +1.3% m-o-m up from -0.5% in September. Germany posted Q3 GDP modestly above plan at +0.3% q-o-q vs. consensus at -0.2% - the +1.2% y-o-y figure also beat forecast at 0.8% growth. Economic output was driven primarily by private consumer spending. October consumer prices rose 11.6% y-o-y vs. expectations at 10.9%.

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.)