2022 Weekly Views

Highlights

Earnings recap

We are at the final stages of the Q3 reporting season. In aggregate, earnings growth is coming in at +3% y-o-y in the US, and +25% y-o-y in Europe. The bulk is coming from Energy, where ex-Energy EPS growth is at -5% y-o-y in the US and +6% y-o-y in Europe. Notably, the proportion of US companies beating EPS estimates has fallen below its historical average. In the US, 70% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is +3% y-o-y, surprising positively by 4%. Of the key sectors, Energy, Industrials and Discretionary are reporting strong growth, while 5 of the 11 GICS sectors are seeing negative EPS growth. In Europe, of the Stoxx600 companies that have reported so far, 54% beat EPS estimates. Q3 EPS growth is coming in at +25% y-o-y, surprising positively by 5%. Ex-Energy growth is lower at +6% y-o-y. In addition to Commodity sectors, Industrials and Healthcare have also reported robust earnings growth, while 5 of the remaining sectors are negative. In general, stocks that are beating estimates are outperforming the market by more than the historical average, while those that are missing estimates are also being penalized more than typical.

On China

There are rising speculations that the Chinese government may change its zero-covid policy in the near term, but these speculations are not supported by evidence on the ground, such as the recent lockdown in part of Zhengzhou City where the Foxconn factory is located. Analysts are watching closely for any new development that may pave the way for a gradual relaxation in zero-Covid policy, including the new inhaled vaccine by Cansino and any changes in the government’s narratives about the virus.

Market update

More tightening

The S&P 500 closed the week at 3,770.55, -3.35% lower. The Dow Jones closed at 32,403.22, -1.40%, with the Nasdaq lower by -5.65%. The volatility index VIX closed the week at 24.55 down from 25.75. The Euro Stoxx 600 gained +1.51%.

The 10-year UST closed at 4.16% up from 4.01% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +12bps. US Corporate Bond spreads: Investment Grade tightened 13bps at 203bps and High Yield tightened 25bps at 495bps. German 10-year Bunds yield closed at +2.30% up from +2.10% a week before. In Europe, Corporate Investment Grade spreads tightened 11bps at 231bps and High Yield spreads tightened 33bps at 631bps.

The US Dollar Index (DXY) appreciated +0.11% last week and closed at 110.88. The Euro closed at 0.9957 (-0.08% weekly); the Yen appreciated +0.66%, closing at 146.62 and the Swiss Franc appreciated +0.07%, closing at 0.9951. Gold closed at $1,681.87 appreciating +2.25%. Oil was up, Brent closed at $98.57 (+2.92%) and WTI at $92.61 (+5.36%).

Macroeconomy

The Fed hikes

As anticipated, the Federal Reserve delivered the fourth consecutive 75bps rate hike, which brought the fed funds target range to 3.75-4.0%. The Fed hinted a potential inflection in the pace of tightening due to: 1. the cumulative tightening; 2. monetary-policy lags on activity and inflation; 3. economic and financial developments. The market is now pricing 59bps of hikes in December, consistent with the hint of a slowdown in hikes at the coming meetings. There is a return of the idea of long lags in monetary policy and of "economic and financial developments “(Fed is more worried about market liquidity as well as weaker global economy). Powell hinted that the terminal rate estimate has moved up (the dot plot may be moved up from the current terminal rate of 4.6% in December). The market is now pricing a terminal rate close to 5.2% by mid-2023.

Bank of England

As expected as well, the Bank of England (BoE) increased its policy rate by 75bps to 3.0%, its largest hike in three decades. The Monetary Policy Summary mentioned that even if more rate increases might be necessary to bring inflation back to the BoE’s 2% target, the peak in rate is probably “lower than priced into financial markets” (reference was between 4.75% and 5.25%). UK sovereign bond yields rose and the UK yield curve steepened. Andrew Bailey mentioned that the “UK premium on rates in the wake of the previous government’s fiscal policy announcements has now substantially unwound”.

European economic data

Headline inflation estimates in the Euro area (EA) reached 10.7% y-o-y in October (up from 10% in September) and was above expectations. Core inflation rate increased to 5.0% (up from 4.8%). The main drivers were increasing energy and food prices, with non-energy industrial goods and services contributing as well. Looking at core inflation, upward inflationary pressures on core goods may persist in the very short term due to a weak euro and high energy costs. Third quarter GDP estimates for the Euro zone were above economic consensus at 2.1% y-o-y and 0.2% q-o-q. Germany and Italy recorded stronger than expected growth, with the latter having the highest print among the EA with a growth rate of 0.5% q-o-q.

Swiss data

Swiss manufacturing PMI showed strong growth in October at 54.9. The survey reported that 1/3 of firms have taken measures to counter the risk of shortages and 1/2 have also taken measure regarding electricity, such as cutting electricity consumption and installing renewables. Nevertheless, around 10% of some manufacturing businesses reduced their production due to electricity prices. October headline inflation declined to 3.0% y-o-y down from 3.3% in September. Core inflation rate decreased as well to 1.8% y-o-y. Both numbers were below expectations. The main drivers were essentially a decline in fuels and new cars prices, whereas gas, heating oil and mobile communication prices increased. Furthermore, inflation remains largely imported, with imported goods and services contributing for more than half of total inflation. Inflation rate remains above the Swiss National Bank (SNB) 2% key-target.

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.)