2022 Weekly Views

Highlights

China Covid

Infections deteriorated sharply in recent weeks, with both daily infections cases and number of “high-risk” communities hitting new highs since pandemic started in 2020. The path to reopening will likely be bumpy and messy ahead, and the probability of an involuntary and chaotic re-opening has risen. Despite the recent adjustment of covid rules, many local governments including megacities like Beijing, Shanghai, Guangzhou and Chongqing have actually tightened covid controls due to surging cases. With people’s tolerance for restrictions running low, costs of maintaining control running high and the increasingly tight fiscal conditions by local governments, social resistance to the zero-covid policy is on the rise.

Earnings recap

Q3 reporting season is over. US top line kept surprising on the upside whereas bottom line was just in line despite earnings downgrades ahead of the reporting season. Margins surprised negatively in the US but were as expected in Europe, leading to resilient earnings in Europe whereas so far earnings downgrades are mainly in the US. US 2022 earnings growth excluding oil & gas is getting closer to 0 after poor figures from US tech giants. 2023 earnings growth expectations were revised down during Q3 2022 and is now standing in low single digit in Europe and mid-single digit in the US and Japan. Stripping out oil & gas, figures are in mid-single digit for all developed equity markets as consensus is expecting a decrease in earnings in 2023 for oil & gas. US earnings growth profile in the coming quarters is quite weak: negative for Q4 2022 and close to 0 in H1 2023 before bouncing back in H2. Focusing on Q4, data sales is expected weak in Europe especially without oil & gas but quite healthy in the US and Japan. Earnings growth in Q4 22 remains supported by oil & gas, without this segment figures would be even worse in the US around -6% on a y-o-y basis.What to watchMonday: Euro area M3 and credit (Oct.); ECB Presiden

Market update

Hiking at slower pace

The S&P 500 closed the week at 4,026.12, +2.02% higher. The Dow Jones closed at 34,347.03, +2.39%, with the Nasdaq higher by +0.73%. The volatility index VIX closed the week at 20.50 down from 23.12. The Euro Stoxx 600 rallied +1.71%.

The 10-year UST closed at 3.68% down from 3.83% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -64bps. US Corporate Bond spreads: Investment Grade tightened 8bps at 185bps and High Yield tightened 16bps at 484bps. German 10-year Bunds yield closed at +1.97% down from +2.01% a week before. In Europe, Corporate Investment Grade spreads tightened 9bps at 196bps and High Yield spreads tightened 24bps at 545bps..

The US Dollar Index (DXY) depreciated -0.91% last week and closed at 105.96. The Euro closed at 1.0395 (+0.68% weekly); the Yen appreciated +0.84%, closing at 139.19 and the Swiss Franc appreciated +0.92%, closing at 0.9459. Gold closed at $1,754.93 appreciating +0.24%. Oil was down, Brent closed at $83.63 (-4.55%) and WTI at $76.28 (-4.75%).

Macroeconomy

FOMC minutes

The biggest hint was that the Fed is ready to slow the pace of rate hikes to +50bps instead of +75bps. The minutes are more consistent with the dovish 11/2 FOMC statement (more disagreement among Fed officials) vs. Powell’s hawkish 11/2 press conference (certitude about the need for a higher 2023 “dot”). Some participants think there is now a higher risk of the Fed tightening too much. Fed staff economists think the risk of a recession is about on par with the risk of their baseline scenario. Finally, with inflation remaining stubbornly high, the staff continued to view the risks to the inflation projection as skewed to the upside. Currently, money markets are pricing a +50bps hike in 12/14 (instead of +75bps) with a terminal rate of 5.0% by mid-2023, followed by modest rate cuts in the second half of the year.

Fed speakers

Cleveland Fed President Lorretta Mester (voting FOMC member) said that monetary policy was entering a different “cadence” now that rates are at the start of restrictive territory and that she “doesn’t have a problem with the Fed slowing down the pace of rate increases”. She emphasized that wresting inflation back to the long-term target of 2% remains the key focus, and that demand for labor is still out of balance with supply, though there isn’t evidence of a wage price spiral.

November PMIs

In the US, the composite measure fell further into contractionary territory to 46.3 (vs. 48.2 a month prior). Activity was weaker across both manufacturing (47.6 vs 50.4 prior) and services (46.1 vs. 47.8), while new orders also shrank the most since May 2020. Input prices eased for a sixth-straight month, now increasing at the slowest pace since December 2020. November PMIs are indicating that businesses are increasingly more pessimistic about future activity, with headwinds coming from weakening demand and tighter financial conditions. The Euro Area composite PMI unexpectedly ticked up to 47.3 (vs. 47.0 expected), with upside surprises in both Manufacturing (47.3 vs. 46.0 expected) and services (48.6 vs. 48.0 expected). In Germany, PMIs showed improvement in supplies and shorter delivery times for inputs. Private-sector output still shrank for a fifth consecutive month, with France seeing its first contraction since February 2021. PMIs in the Euro Area show signs that the region’s record inflation may be starting to cool, while expectations for future production are improving.

Economic data

The OECD released their latest economic outlook, projecting a world GDP growth of just +2.2% in 2023 and +2.7% in 2024 as well as high but moderate inflation over the next two years. If true, 2023 would be the third-worst year of the 21st century so far for global growth, trailing only 2020 with the pandemic and 2009 with the global financial crisis. In the US, New home sales unexpectedly rebounded in October at +7.5% m-o-m vs. -11.0% in Sep. Mortgage application data continue to suggest more downside for US housing activity as high mortgage rates continue to asphyxiate demand.

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.)