2023 Weekly Views

Highlights

Q4 earnings

In the US 63% of companies having reported with 36% in Europe so far. Earnings are contracting on a y-o-y basis, for the first time since 2020. In the US, 70% of S&P500 companies that reported beat EPS estimates, which is below their historical median. EPS growth for these companies is down, at -2% y-o-y, surprising positively by 1%. Of the key sectors, Energy, Industrials and Discretionary are reporting strong growth, while Materials, Financials, Tech and Communication Services are down double-digit on EPS growth. Top-line growth in the US is at +5% y-o-y, surprising positively by 2%. A smaller proportion of US companies are raising EPS guidance this quarter vs Q3, well below the historical median. In Europe, of the Stoxx600 companies that have reported so far, 64% beat EPS estimates. Q4 EPS growth is coming in at -2% y-o-y, surprising positively by 2%. Outside Energy, delivery is underwhelming; Staples, Healthcare and Communication Services are seeing low single-digit growth, while the remaining sectors are coming in negative. Revenue growth is better at +13% y-o-y, surprising positively by 4%. In Japan, 39% of Topix companies beat EPS estimates, with overall EPS growth at -5% y-o-y. Top-line growth is running at +15% y-o-y this quarter, and 50% of companies have beaten revenue estimates.

Rates

After financial conditions loosening significantly in Jan., the tide changed and the implied terminal rate ratcheted up hitting a high of 5.19% in the US. After mixed auctions of 10-yr and 30-yr, we saw larger moves at the front end of the curve, as investors modestly raised their estimates of the Fed’s terminal rate. These curve levels are still very extreme and at levels where a recession has always followed within months as per analysts from Deutsche Bank.

Market update

Rates expectations adjustment

The S&P 500 closed the week at 4,090.46, -1.11% lower. The Dow Jones closed at 33,869.27, -0.17%, with the Nasdaq lower by -2.41%. The volatility index VIX closed the week at 20.53 up from 18.33. The Euro Stoxx 600 slipped -0.63%.

The 10-year UST closed at 3.73% up from 3.52% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -105bps. US Corporate Bond spreads: Investment Grade widened 3bps at 186bps and High Yield widened 7bps at 444bps. German 10-year Bunds yield closed at +2.36% up from +2.19% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 157bps and High Yield spreads tightened 27bps at 442bps.

The US Dollar Index (DXY) appreciated +0.69% last week and closed at 103.63. The Euro closed at 1.0678 (-1.08% weekly); the Yen depreciated -0.13%, closing at 131.36 and the Swiss Franc appreciated +0.25%, closing at 0.9238. Gold closed at $1,865.57 appreciating +0.03%. Oil was up, Brent closed at $86.39 (+8.07%) and WTI at $79.72 (+8.63%).

Macroeconomy

Fed speakers

Speaking at the Economic Club of Washington, Fed chief Jerome Powell said that the process of disinflation has already begun. He even said that he expected there to be a significant decline in inflation this year, although it is unlikely that inflation will fall back to the official target of 2% next year. Powell described it as "positive that we have been able to see the trends of slowing inflation without seeing the labor market weaken". We had other Fed speakers during the week. President of Atlanta Fed Raphael Bostic highlighted that Jan.'s strong jobs report raised the possibility the Fed will need to lift borrowing costs to a higher peak than previously anticipated. New York Fed President Williams saying he believed a 5-5.25% Fed Funds range was a reasonable view, but he also touched on unsustainably high wage growth prints. The most hawkish comments came from Minneapolis Fed President Kashkari who said “there’s not yet much evidence, in my judgment, that the rate hikes that we’ve done so far are having much effect on the labor market...we need to do more”.

US economic data

The Federal Reserve’s quarterly scenario loan officer survey showed that banks continue to tighten credit conditions on both consumer and company loans, a sign that higher Fed interest rates continue to make their way through the US banking system. Wholesale trade sales were flat in Dec. after -1.4% m-o-m in Nov., raising the risk that the level of inventories may be too high in the economy right now. Looking ahead, US CPI inflation will be released on 14 Feb. Consensus is +0.5% m-o-m for headline (+6.2% y-o-y) and +0.35% m-o-m for core inflation (+5.4% y-o-y). Jan.’s retail sales are expected to be strong (consensus: +1.7% m-o-m) thanks to a sharp rebound in car sales.

Europe economic data

Euro area retail sales fell by 2.7% m-o-m in Dec., in line with expectations, vs. -1.5% m-o-m decline in Oct. and a +1.2% m-o-m rebound in Nov., which left retail sales down 1.1% q-o-q in Q4. The decline was also broad based across countries and sectors (food and non-food). European natural gas futures fell to a fresh 17-month low of €52.77 per megawatt-hour. German hard data were mixed in Dec. Factory orders rose by 3.2% m-o-m in Dec., boosted significantly by large-scale orders. German HICP inflation fell to 9.2% y-o-y in Jan. (vs. 10.0% expected) from 9.6% in Dec. That’s a 5-month low and is also the third consecutive decline since its peak of 11.6% back in Oct. In Sweden, Riksbank hiked by 50bps as expected. The new governor announced that QT would be starting from April and indicated that the policy rate would “probably be raised further during the spring”. That triggered a massive reaction among Swedish assets.

China economic data

Headline CPI inflation in Jan. picked up to 2.1% y-o-y on rising food prices. Core CPI also rose by 1.0% y-o-y (0.4% m-o-m) amid stronger seasonal demand due to the Lunar New Year holidays. The tourism sub-index bounced by 11.2% y-o-y. PPI inflation remained negative at -0.8% y-o-y (-0.4% m-o-m) in Jan..

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.)