2023 Weekly Views

Highlights

Earnings season

The Q4 US earnings season kicked off with some of the largest banks as usual. JPMorgan reported a net profit of $10.6bn, 14% above consensus (and the first time the group made >10bn whilst building its loan reserve) but downgraded the 2023 revenue guidance. Jamie Dimon commented on the macro landscape: “The U.S. economy currently remains strong with consumers still spending excess cash and businesses healthy. However, we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening. We remain vigilant and are prepared for whatever happens”. JPMorgan earnings press release now says the firm’s central case assumption is for a “mild recession”. On the Fed, JPMorgan is assuming two more rate hikes in 2023 followed by two cuts at year-end (for a year-end Funds Rate of 4.5%). Bank of America beat expectations thanks to strength in investment bank trading (considered low quality) while deposits and Net Interest Income disappointed. Management reported share buybacks for $1bn worth of shares. Bank of New York also beat on solid Net Interest Income and announced a $5bn buyback program. Wells Fargo did not meet expectations and forward guidance disappointed. Citigroup reported in line however, guidance was also underwhelming.

Market update

Inflation moderates

The S&P 500 closed the week at 3,999.09, +2.67% higher. The Dow Jones closed at 34,302.61, +2.00%, with the Nasdaq higher by +4.82%. The volatility index VIX closed the week at 18.35 down from 21.13. The Euro Stoxx 600 rallied +1.83%.

The 10-year UST closed at 3.50% down from 3.56% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -112bps. US Corporate Bond spreads: Investment Grade tightened 9bps at 200bps and High Yield tightened 23bps at 469bps. German 10-year Bunds yield closed at +2.17% down from +2.21% a week before. In Europe, Corporate Investment Grade spreads tightened 5bps at 177bps and High Yield spreads tightened 20bps at 500bps.

The US Dollar Index (DXY) depreciated -1.61% last week and closed at 102.20. The Euro closed at 1.0830 (+1.75% weekly); the Yen appreciated +3.19%, closing at 127.87 and the Swiss Franc appreciated +0.11%, closing at 0.9269. Gold closed at $1,920.23 appreciating +2.92%. Oil was up, Brent closed at $85.28 (+8.54%) and WTI at $79.86 (+8.26%).

Macroeconomy

US CPI

The US CPI for Dec. was right in line, with headline at -0.1% m-o-m and +6.5% y-o-y (down from +0.1% and +7.1%, respectively, in Nov) and core +0.3% m-o-m and +5.7% y-o-y (vs. +0.2% and +6% in Nov, respectively). The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. Indexes which increased in December include the shelter, household furnishings and operations, motor vehicle insurance, recreation, and apparel indexes. The indexes for used cars and trucks, and airline fares were among those that decreased over the month. From a Federal Reserve’s standpoint, one of the key data is the trend in services sector’s inflation, the “core PCE services ex housing” measure. Looking at the past three months on the CPI’s side (core CPI services ex rents averaged 0.24% m-o-m versus a 2-year average of 0.40%), services inflation is abating gradually.

China & Japan CPI

In China, headline CPI inflation in Dec. picked up to 1.8% y-o-y from 1.6% in Nov., mainly due to base effects. In sequential terms, the price index stayed flat at 0.0% m-o-m in December (up from -0.2% in the previous month) on higher food prices.  Core CPI edged up at 0.7% y-o-y, from 0.6% in November. The data point to persisting weakness in domestic demand at the end of 2022. For Japan, Tokyo Consumer Price Index (CPI) hit 4% for Dec., the first time since 1982 and it fuels speculation that the Bank of Japan (BoJ) could adjust policy again ahead of meeting next week. Core CPI ex-food & energy series also accelerated to +2.7%, a pick-up from the revised +2.5% in Nov. Energy contribution increased, driven mainly by gas prices. Household spending declined (-1.2% for Dec.), indicating that inflation may have started to hit consumption.

Fed speakers

Fed officials highlighted that the next move could be a 25bps rate hike (from +50bps in Dec.), but they also emphasized their willingness to move rates above 5% this year. By contrast, the current terminal rate is priced around 4.93% by June 2023 in money markets. Atlanta Fed President Bostic said that the Fed was committed to tackling high inflation and this warrants raising interest rates into a 5% to 5.25% range to squeeze excess demand out of the economy. Asked about how long he saw rates above 5%, Bostic said “three words: a long time. I am not a pivot guy. I think we should pause and hold there and let the policy work”. Bostic added he was in favor of slowing rate hikes to 25bps in February. San Francisco Fed President Mary Daly expects the central bank to raise interest rates to somewhere above 5%. The ultimate level is unclear and will depend on incoming data on inflation. She stressed it’s too early to “declare victory” over persistent inflation and that “doing it in more gradual steps does give you the ability to respond to incoming information”. Fed Boston President Collins said she would lean towards a 25-bps rate hike at next FOMC meeting. Lastly, Fed's Bullard offered some optimism that he sees "inflation moving down towards 2% as we move forward" but then countered that by warning that inflation "remains extremely high" and the Fed "needs to keep rates high enough to cool prices", adding that he favors getting to above 5% "as soon as possible." Echoing the Fed Minutes was Bullard's comments that there is "too much optimism in the market that inflation will fall."

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.)