US, UK and German 10-year sovereign bond yields continued their ascent over the week (to 3.88%, 3.60% and 2.49%, respectively), although yields have moderated from the peak reached at the middle of the week. The main drivers have been market participants expecting central banks to hike policy rates higher and stay at elevated levels for longer in the face of potentially more sticky inflation. This means that over the month, both inflation breakeven rates and inflation-linked yields have been moving up, except in Germany. The terminal rate is expected at 5.35% in the US, 4.60% in the UK and 3.75% for the ECB. US, euro and UK inflation swap curves moved up, especially in the short-term part of the curve.
Nearly 90% of S&P500 companies and almost 60% of Euro Stoxx600 companies have reported Q4 results as of Friday. EPS growth is sequentially much lower this quarter vs. Q3 in both regions, with the US seeing an outright contraction in earnings on a y-o-y basis. Interestingly, S&P500 blended Q4 ’22 EPS, which has been declining steadily since June of last year, has not inflected higher this quarter. Typically, blended EPS falls into the earnings season as companies manage EPS expectations, only to inflect higher about halfway through the reporting period. In addition, the proportion of companies beating both EPS and sales estimates has come down. In the US, 68% 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 1%. Top-line growth in the US is at +5% y-o-y, surprising positively by 2%. In Europe, Of the Stoxx600 companies that have reported so far, 59% beat EPS estimates. Q4 EPS growth is coming in at +1% y-o-y, and -6% y-o-y ex-Energy. Revenue growth is at +16% y-o-y, surprising positively by 3%. In Japan, 39% of Topix companies beat EPS estimates, with overall EPS growth at -10% y-o-y. Top-line growth is running at +15% y-o-y this quarter, and 50% of companies have beaten revenue estimates.
The S&P 500 closed the week at 3,970.04, -2.94% lower. The Dow Jones closed at 32,816.92, -2.61%, with the Nasdaq lower by -3.89%. The volatility index VIX closed the week at 21.67 up from 20.02. The Euro Stoxx 600 slipped -1.42%
The 10-year UST closed at 3.94% up from 3.81% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -88bps. US Corporate Bond spreads: Investment Grade widened 7bps at 193bps and High Yield widened 23bps at 467bps. German 10-year Bunds yield closed at +2.54% up from +2.44% a week before. In Europe, Corporate Investment Grade spreads widened 6bps at 163bps and High Yield spreads widened 21bps at 463bps.
The US Dollar Index (DXY) appreciated +1.30% last week and closed at 105.21. The Euro closed at 1.0548 (-1.37% weekly); the Yen depreciated -1.74%, closing at 136.48 and the Swiss Franc depreciated -1.64%, closing at 0.9404. Gold closed at $1,811.04 depreciating -1.70%. Oil was mixed, Brent closed at $83.16 (+0.19%) and WTI at $76.32 (-0.03%).
US PCE and consumption
The Headline PCE, personal-consumption expenditures price index (Fed’s preferred gauge of inflation), came in at +0.6% m-o-m and +5.3% y-o-y (vs. +0.5% and +5% forecasts, respectively). Core PCE, which excludes food and energy prices, came in at +0.6% m-o-m and +4.7% y-o-y (vs. +0.4% and +4.3%, respectively). For Core PCE, the 3m, 6m and 12m annualized numbers are now 4.8%, 5.1% and 4.7% and thus strongly hint at inflation stickiness. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, shot up 1.8% last month. That was the largest increase since March 2021. When adjusted for inflation, consumer spending increased 1.1%, also the biggest gain since March 2021. Real consumer spending had declined in Nov. and Dec.
US Q4 GDP
Q4 real GDP growth reflected a deceleration in consumer spending as it was revised lower to 2.7%, below expectations of 2.9%. This reading represented the weakest y-o-y growth since 2009, (excluding the pandemic) as personal consumption expenditures (PCE) decelerated to a 1.4% annual rate. However, this was offset by inflation driving capex, which rose to a 3.3% annual rate, from 0.7%, with the most capex growth in commercial and healthcare.
Fed minutes and speaker
The Fed minutes showed that a vast majority of participants were in favor of a 25bps hike although there were still a couple of dissenters who wanted to see 50bps still. There was a lot of language about not going far enough to tame inflation back to the 2% objective and having inflation expectations become de-anchored. There was also a reference to the recent loosening in financial conditions as credit spreads and equities have strongly rallied this year – some participants pointed to how this would require even tighter monetary policy. The most notable speaker was St Louis Fed President Bullard who said in a CNBC interview that “I’m still at 5.375%” in terms of where he wanted to take rates. That would be 75bps above their current levels and is roughly in line with where current market pricing is expecting terminal to get to.
In the US, the Feb. PMI jumped to 50.2, highest in eight months. It was driven by services with the services PMI reaching 50.5 from 46.8 in Jan., expanding for the first time since June, while the manufacturing PMI increased to 47.8 from 46.9. In Europe, the composite PMI for Feb. beat expectations at 52.3, further expanding after its Jan. print of 50.3. French PMI came in at 51.6 and Germany at 51.1, both being driven by their services PMIs that beat expectations. In the UK, the PMI composite also came in stronger than expected at 53.0 from 48.5, driven by the services sector with the service PMI at 53.3.
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.)