2023 Weekly Views

Highlights

Q4 earnings

Over 75% of US companies reported already compared to 48% in Europe. EPS growth is lower this quarter compared to Q3, at -2% y-o-y in the US, and +2% y-o-y in Europe. S&P500 blended Q4 ’22 EPS has been declining steadily since June 2022, is still not showing a clear inflection higher. In the US, 67% of S&P500 companies that have reported beat EPS estimates, which is below their historical median. EPS growth for these companies is at -2% y-o-y, surprising positively by 2%. 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%. In Europe, of the Stoxx600 companies that reported, 61% beat EPS estimates. Q4 EPS growth is coming in at +2% y-o-y, and -7% y-o-y ex-Energy. At a sector level, Defensives are faring better, with Staples, Healthcare, Communication Services and Utilities reporting positive EPS growth. On the other hand, earnings for all Cyclical sectors barring Energy are coming in negative on a y-o-y basis. Revenue growth is at +14% y-o-y, surprising positively by 3%. In Japan, 39% of Topix companies beat EPS estimates, with overall EPS growth at -9% y-o-y. Top-line growth is running at +15% y-y this quarter, and 50% of companies have beaten revenue estimates.

Market update

A resilient economy

The S&P 500 closed the week at 4,079.09, -0.28% lower. The Dow Jones closed at 33,826.69, -0.13%, with the Nasdaq higher by +0.59%. The volatility index VIX closed the week at 20.02 down from 20.53. The Euro Stoxx 600 rallied +1.40%.

The 10-year UST closed at 3.81% up from 3.73% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -101bps. US Corporate Bond spreads: Investment Grade widened 3bps at 186bps and High Yield widened 7bps at 444bps. German 10-year Bunds yield closed at +2.44% up from +2.36% 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 +0.22% last week and closed at 103.86. The Euro closed at 1.0695 (+0.16% weekly); the Yen depreciated -2.12%, closing at 134.15 and the Swiss Franc depreciated -0.15%, closing at 0.9252. Gold closed at $1,842.36 depreciating -1.24%. Oil was up, Brent closed at $83.00 (-3.92%) and WTI at $76.34 (-4.24%).

Macroeconomy

US inflation

January's CPI inflation came up as expected at 0.5% month-on-month (m-o-m) for the headline CPI print and 0.4% m-o-m for the core print. The year-on-year CPI print was 6.4% (core CPI at 5.6%). CPI ticked up from 4.3% in Dec. to 4.6% in Jan. on a 3-month basis, and it was up from 5.1% in Dec. to 5.3% in Jan. on a 6-month basis. Notably, shelter (rents + 'owner occupied rents') rose 0.7% m-o-m, or 7.9% y-o-y. Food prices were strong (+0.5% m-o-m, +10.1% y-o-y) while energy prices rebounded (+2.0% m-o-m, +8.7% y-o-y). Services inflation is proving stickier due partly to the strength in wage growth while goods disinflation continues. The Jan. producer price index (PPI) surprised to the upside while painting a similar picture as the CPI, including resilient pipeline price pressures in services (PPI services up 0.4% m-o-m, same as in Dec.). Meanwhile PPI goods pushed up Jan.’s reading (+1.2% m-o-m, due to gasoline prices +6.2% m-o-m), although the index was consistent with a sharp improvement in supply chains and logistics (freight trucking prices -1.3% y-o-y).

Fed speakers

Numerous Fed members spoke during the week. Dallas Fed President Logan said that “we must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions”. Separately, Richmond Fed President Barkin acknowledged that “if inflation persists at levels well above our target, maybe we’ll have to do more.” Comments from Philadelphia Fed President Harker included “It’s going to be above 5% in the Fed funds rate. How much above 5? It’s going to depend a lot on what we’re seeing,” as he noted progress in bringing down inflation albeit the pace of declines was slow. New York Fed President Williams who said that year-end rates in the range of 5-5.5% seemed the “right kind of framing”. Later in the week, Cleveland Fed President Mester said that she even “saw a compelling economic case for a 50 basis-point increase” at the most recent meeting, when they opted to downshift hikes back to 25bps. Furthermore, she said that 25bps were not inevitable and that “we can move faster, and we can do bigger at any particular meeting.” That was then followed up by St Louis Fed President Bullard, who said he wouldn’t rule out supporting a 50bp hike in March as well, and said that his judgement was “it will be a long battle against inflation.”

US economic data

Jan. retail sales posted its fastest monthly growth in nearly two years at +3.0% (vs. +2.0% expected). It was a very broad-based gain highlighting car sales as well as spending at restaurants. Dec. sales had been down 1.1% m-o-m. the New York Fed’s latest Empire State manufacturing survey surprised to the upside at -5.8 in Feb. (vs. -18.0 expected). Both the “prices paid” and “prices received” components rose on the month, a sign that inflationary pressures remain strong. The Feb. NAHB’s housing market index rebounded to 42 (vs. 37 expected), which marked the biggest monthly increase since July 2020. That’s coincided with a decline in mortgage rates since their peak in late-Oct./early Nov. Financial conditions remain very accommodative as per Bloomberg’s index that was at the loosest level in a year. They remain easier now than when the Fed began its hiking cycle in March, despite 450bps worth of hikes in that time.​​​​​​​

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.)