2023 Weekly Views

Highlights

Earnings season

On Friday, the US first-quarter earnings season kicks off. Big banks will be the first group to report with Citigroup, JPMorgan Chase, Wells Fargo, and BlackRock, along with UnitedHealth Group. The latest analyst consensus estimates call for +1.6% revenue growth for S&P 500 companies in Q1, with earnings down -5.2% y-o-y, according to Refinitiv.

US banks

US bank lending contracted by the most on record in the last two weeks of Mar. The pullback in total lending was broad and included fewer real estate loans, as well as commercial and industrial loans. Commercial bank lending dropped nearly $105bn in the two weeks ended Mar. 29, the most in Federal Reserve data back to 1973. The more than $45bn decrease in the latest week was primarily due to a drop in loans by small banks. Last Thursday, the American Bankers Association index of credit conditions fell to the lowest level since the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.

Market update

Good enough payrolls

The S&P 500 closed the week at 4,105.02, -0.10% lower. The Dow Jones closed at 33,485.29, +0.63%, with the Nasdaq lower by -1.10%. The volatility index VIX closed the week at 18.40 down from 18.70. The Euro Stoxx 600 gained +0.24%.

The 10-year UST closed at 3.39% down from 3.47% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -157bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 208bps and High Yield widened 24bps at 524bps. German 10-year Bunds yield closed at +2.18% down from +2. 29% a week before. In Europe, Corporate Investment Grade spreads widened 3bps at 190bps and High Yield spreads widened 59bps at 555bps.

The US Dollar Index (DXY) depreciated -0.41% last week and closed at 102.09. The Euro closed at 1.0905 (+0.61% weekly); the Yen appreciated +0.53%, closing at 132.16 and the Swiss Franc appreciated +1.08%, closing at 0.9054. Gold closed at $2,007.91 appreciating +1.96%. Oil was higher, Brent closed at $85.12 (+6.71%) and WTI at $80.70 (+6.65%).MacroeconomyJobs report

Macroeconomy

Jobs report

The US economy added 236k jobs in Mar., right in line with the forecast (which stood at 230k) but above “whispers” (which
were around 175k). The 6-month survey average is 334k. The change in total nonfarm payroll employment for Jan. was revised down by 32k, from 504k to 472k, and the change for Feb. was revised up by 15k, from 311k to 326k. With these revisions, employment in Jan. and Feb. combined is 17k lower than previously reported. Goods-producing industries shed 7k jobs (vs. 11k in Feb. and 41k in Jan.) while private service-providing sectors added 196k jobs (down from 255k in Feb. and 312k in Jan.). Leisure and hospitality added 72k jobs in Mar., lower than the average monthly gain of 95k over the prior 6 months. Most of the job growth occurred in food services and drinking places, where employment rose by 50k in Mar. Government employment increased by 47k in Mar., the same as the average monthly gain over the prior 6 months. The unemployment rate came in at 3.5%, down from 3.6% in Feb. and below the 3.5% forecast. The participation rate rose to 62.6%, up from 62.5% in Feb. and above the 62.5% forecast. Wage growth softened, sliding to 4.2% y-o-y, down from 4.6% in Feb. and below the 4.3% forecast. The 4.2% is the lowest since June 2021. The workweek length slipped to 34.4 hours, down from 34.5 in Feb. and below the 34.5 forecast. Worker income (a function of hours multiplied by wages) softened meaningfully.

Fed speaker

Cleveland Fed Chair Loretta Mester had expressed that the central bank would need to raise interest rates further in order to contain inflation. However clearly the latest market action is placing a lot of doubts on this path. St. Louis Fed James Bullard highlighted that the market was putting “too much probability” on the banking crisis worsening and dramatically slowing the economy when discussing the expected path of the Fed policy rate. Bullard reiterated that he believes that the market is pricing in a terminal rate just above 5.00% and he believes that they will have to go slightly higher to tame
inflation. Against this backdrop, Fed expectations for the next meeting on May 3rd jumped from a 57.2% probability of a 25bps hike to a 71.7% probability at the end of the week. This would take the reference rate to the range 5-5.25%.

Central banks

The Reserve Bank of Australia (RBA) opted to keep rates on hold at its latest meeting, citing signals of inflation having peaked and a slowdown in household spending, and deciding to provide additional time to assess the impact of their tightening thus far. They also made a dovish change to their forward guidance, suggesting lower conviction for more tightening. The Reserve Bank of India (RBI) surprised markets by holding its key repo rate steady at 6.5% on Thursday after
six consecutive hikes, saying it was closely monitoring the impact of recent global financial turbulence on the economy. Most analysts had expected one final 25bps hike in the RBI's current tightening cycle, which has seen it raise the repo rate by a total 250bps since May last year. New Zealand's central bank unexpectedly raised interest rates by 50bps to a more than 14-year peak of 5.25%, saying inflation was still too high and persistent and kept the door open to further tightening. The committee expects to increase the cash rate if it is to return inflation to its target of 1%-3% - inflation in the fourth quarter was at 7.2%. It added that it expects to see a continued slowing in domestic demand and a moderation in core inflation and inflation and the extent of this moderation will determine the direction of future monetary policy decisions.

PMIs

In the US, the ISM services index dropped from 55.1 to 51.2 in Mar., below the 54.4 consensus, reflecting a slowdown in demand for services. Headline ISM manufacturing weakened more than expected in Mar., falling to 46.3 (consensus at 47.5), the lowest level since May 2020. Importantly, new orders fell to 44.3 and stayed in contractionary territory for the seventh consecutive month, close to its two-year low. Indicators of supply chain stress eased across the board. Prices paid
fell back below 50 and came below consensus. Supplier deliveries, backlog of orders, and customer inventories all pointed to some easing in price pressures after a temporary pause last month - firms worked backlogs down amid weak new orders and an improvement in delivery times. In Europe, Mar. Services PMIs came in at 53.7 for the Eurozone, 52.6 in Germany, 53.9 in France, 55.2 in Italy, and 52.2 in the UK. In France, industrial production exceeded expectations in Feb. by rising +1.2% m-o-m from -1.9% in Jan. while consensus was at +0.5%. Retail sales in Italy did not enjoy such growth and fell -0.1% in Feb. compared to +1.7% the previous month. In Germany, factory orders exceeded the consensus in Feb., growing +4.8% (vs. +0.3% expected). In Japan, PMI rose to 52.9 in Mar., in line with the preliminary reading.

What to watch

• Monday: Japan Current account balance (Mar.)

• Tuesday: -

• Wednesday:  Japan PPI (Mar.); US CPI (Mar.); FOMC minutes

• Thursday: UK Industrial production (Feb.); Germany CPI (Mar.)

• Friday: France CPI (Mar.); US Retail sales (Mar.); US Industrial production (Mar.); Univ. of Michigan (Apr.)