2023 Weekly Views

Highlights

US earnings season

12.9% of the S&P 500's market cap reported so far. Earnings are beating estimates by +2.4%, with 63% of companies topping projections. Although S&P 500 revenues are projected to grow 4.2% in 4Q, margins are expected to fall -8.7%. Margins are expected to decline in Tech, Materials, Financials, Health Care and Staples. By contrast, margins in Energy, Industrials and Discretionary ex-Internet are projected to expand further. 4Q expectations are for revenues and EPS growth of 4.2% and -2.5%. Ex-Tech results appear healthier, with top- and bottom-lines expected to jump 5.0% and +5.1%. Reporting for Tech companies will begin this Tuesday with Microsoft. 4Q earnings for tech firms are projected to drop -9.2% y-o-y, the steepest slide since 2016, as per Bloomberg data. The speed of the deterioration in sentiment is notable as in 3Q analysts merely saw profits coming in flat. Revenue growth for these companies is fading relative to the past couple of years, when the pandemic supercharged sales for everything from digital services to personal computers and their components. Higher costs are also squeezing profits which is resulting in layoffs.

Market update

Spotlight on earnings

The S&P 500 closed the week at 3,972.61, -0.27% lower. The Dow Jones closed at 33,375.49, -2.38%, with the Nasdaq higher by +1.27%. The volatility index VIX closed the week at 19.85 up from 18.35. The Euro Stoxx 600 slipped -0.09%.

The 10-year UST closed at 3.48% down from 3.50% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -120bps. US Corporate Bond spreads: Investment Grade tightened 4bps at 196bps and High Yield widened 7bps at 476bps. German 10-year Bunds yield closed at +2.18% up from +2.17% a week before. In Europe, Corporate Investment Grade spreads tightened 7bps at 170bps and High Yield spreads tightened 14bps at 486bps.

The US Dollar Index (DXY) depreciated -0.19% last week and closed at 102.01. The Euro closed at 1.0856 (+0.24% weekly); the Yen depreciated -1.35%, closing at 129.60 and the Swiss Franc appreciated +0.68%, closing at 0.9206. Gold closed at $1,926.08 appreciating +0.30%. Oil was up, Brent closed at $87.63 (+2.76%) and WTI at $81.31 (+1.82%).

Macroeconomy

From central bankers

From the US Fed, Vice Chair Lael Brainard (a voting member) agreed with the fact that rates should remain high for longer: “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis”. Bank of St. Louis President James Bullard said policy rates should be moved to above 5% “as quickly as we can”. In Europe, ECB President Lagarde said that inflation was “way too high” and that the ECB would “stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.” She even responded to talks of cuts in the future by saying that "I would advise market participants to revise their positions".

US debt ceiling

US Treasury Secretary Janet Yellen will soon activate “extraordinary” technical measures to avoid the debt ceiling (currently at $31.4trn). These technical measures are likely to last until Q3 2023¸and then only will the debt ceiling become a “problem”. Yellen, who said that extraordinary measures will begin from 19th Jan., warned that the crunch point could be as soon as June, although this will depend on tax receipts in coming months (including the crucial April 2023 tax receipts). The government budget (risk of government shutdown if budget not extended), so far it is funded until 30 September 2023.

Bank of Japan & inflation

Japanese core inflation hit 4% in Dec., but it might be the peak and is set to decline below 2% in H2 2023. On a sequential basis, core inflation came down further from the previous two months. The BoJ decided to stick to YCC after Dec.’s surprise. The probability of more policy adjustment, with the key objective to inject some flexibility in conducting monetary easing, has risen after the new governor steps in April. The new BoJ governor, together with the Kishida administration, may conduct a reassessment of the bank’s 2% inflation target and the way to achieve it.

China GDP

GDP weakened further in Q4 (to 2.9% y-o-y, from 3.9% in Q3) but less than expected. This has led to a full-year expansion of the Chinese economy of 3.0% in 2022. Economic growth was largely driven by FAI ex property (Fixed Asset Investment) on strong policy support. In contrast, household consumption remained muted in Dec. and for 2022, particularly for catering services. That said, a more meaningful revival in domestic consumption is expected, possibly after the Chinese New Year (end of Jan.). The property sector remained in deep contraction, but the latest reading of some housing-related indicators shows some signs of stabilization as policies recently turned more supportive. However, the strength of the recovery in the property sector remains to be seen against increasing structural headwind amid declining population.

US economic data

Dec. retail sales were softer than expected, dropping -1.1% m-o-m, after -1.0% in Nov. It looks like the US consumer front-loaded winter season purchases in Oct. at the expense of Nov./Dec. Red flags are starting to accumulate for US consumption, including the depleted Covid19 savings, much tighter credit conditions on new borrowing and a negative wealth effect (houses prices and stocks). Regional business surveys (Empire and Philly Fed indices) showed ongoing headwinds in the manufacturing sector. Manufacturing production fell in Dec. (-1.3% m-o-m), after a sharp drop in Nov. (-1.1%). Housing sector data was mostly weak once again. Dec.’s building permits fell 1.6% m-o-m, after a 10.6% drop in Nov. Homebuilder sentiment improved slightly in Jan. but remained at a very weak level (35 vs. a 1-year average of 55).

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.)