2023 Weekly Views

Highlights

On rates

The debt ceiling saga in the US is capturing market participants’ attention as lower-than-expected tax receipts so far could bring forward the X-date. This has caused some important distortions in the US Treasury Bills market, with the one-month T-Bill yield falling sharply to 3.26%, in a context where market participants are still expecting the US Federal Reserve to hike its policy rate to 5%-5.25% at its May meeting. Market participants’ concerns is also appearing through wider US sovereign credit default swaps (CDS) spreads, with the euro one-year CDS spread shooting up to 107 bps, levels that were not reached during the previous debt ceiling stalemates in 2011 and 2013. In this context, credit markets remain relatively calm, as spreads continue to tighten (US and euro investment grade at 204 and 171 bps, respectively) and the premium of high-yield bonds over IG ones is narrowing.

Earnings

Looking at the earnings results, companies have enjoyed a low bar for Q1 expectations and generally posted a beat. With 87 companies from the S&P 500 index who reported, 76% beaten analyst earnings expectations and 54% also surprised on the top line numbers. Unsurprisingly, cost cutting efforts are one of the main drivers of this reporting season, as companies try to maintain their margins in anticipation of the economy cooling. The S&P 500 is already set for a technical earnings recession, with negative EPS growth projected for both 1Q23 and 2Q23. The 3Q estimate of 0.2% growth is on the brink of turning negative too, from an upbeat 4.6% estimate at the start of the year. Meanwhile, a string of mega-tech earnings from Alphabet Inc and Microsoft (Tuesday), Meta Platforms (Wednesday) and Amazon (Thursday) are due this week. Tech giants have rallied this year after announcing thousands of job cuts, and first quarter results could offer investors a reality check following impressive gains to date for the sector. Outside of tech and communications, First Republic Bank will report on Monday and will reveal the extent of critical deposit outflows that have pushed its major peers to provide a lifeline earlier in March. On the benchmark level, 42% of the S&P 500 Index is scheduled to report this week.

Market update

Busy earnings week

The S&P 500 closed the week at 4,133.52, -0.10% lower. The Dow Jones closed at 33,808.96, -0.23%, with the Nasdaq lower by -0.42%. The volatility index VIX closed the week at 16.77 down from 17.07. The Euro Stoxx 600 gained +0.45%.

The 10-year UST closed at 3.57% up from 3.51% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -154bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 204bps and High Yield widened 6bps at 498bps. German 10-year Bunds yield closed at +2.48% up from +2.44% a week before. In Europe, Corporate Investment Grade spreads tightened 8bps at 171bps and High Yield spreads tightened 8bps at 479bps.

The US Dollar Index (DXY) appreciated +0.27% last week and closed at 101.82. The Euro closed at 1.0986 (-0.05% weekly); the Yen depreciated -0.28%, closing at 134.16 and the Swiss Franc appreciated +0.16%, closing at 0.8923. Gold closed at $1,983.06 depreciating -1.05%. Oil was lower, Brent closed at $81.66 (-5.39%) and WTI at $77.87 (-5.63%).

Macroeconomy

Debt ceiling

The base case for the US debt ceiling X-date remains sometime between July and August, but weaker-than-expected tax receipts could increase the risk of the Treasury running out of cash as soon as early June. Daily individual tax receipts through April 19th have come in around 30% below last year’s levels, with around 75% of the tax season data expected to be collected by next Tuesday. If the Treasury can get past early June, it can probably make it to early July given mid-June tax payments and end-June funds in extraordinary measures. An updated X-date should be communicated in early May. The House of Republicans released a bill Wednesday that would raise the debt ceiling through March 31, 2024 or $1.5 trillion, whichever comes first, with a $130bn in reduced spending. Meanwhile a bipartisan group of moderate House members proposed a plan to suspend the debt limit until Dec 31,2023. Lastly, Fed emergency lending went up by $4bn last week, but the modest increase remains consistent with the view that the banking sector is stabilizing.

Fed speakers

St. Louis Fed President Bullard struck a bullish tone on the economy, saying that “Wall Street’s very engaged in the idea there’s going to be a recession in six months or something, but that isn’t really the way you would read an expansion like this.” Atlanta Fed President Bostic then said that his baseline was for one further hike and then a pause that left them there for “quite some time”. Cleveland Fed President Mester advised she anticipated that “monetary policy will need to move somewhat further into restrictive territory this year”. Fed President Harker mentioned that “some additional tightening may be needed in order to ensure policy is restrictive enough”. Finally, Dallas Fed President Logan also said that the committee is constantly monitoring supply-demand imbalances as inflation remains “much too high”.

Inflation in Europe

Eurozone headline Consumer Price Index (CPI) rose 6.9% y-o-y in March, same as prior month. Same applies to core CPI which rose 5.7% annually for both February and March. ECB Chief Economist Lane said that another hike in rates would be appropriate in May, but a more detailed picture of inflation would be needed. Also, ECB President Lagarde said that monetary policy “still has a bit of way to go” to get inflation back down, whilst Dutch central bank Governor Knot said it was “too early to talk about a pause”. In the UK, inflation surprised on the upside with March headline CPI rising at an annual rate of 10.0%, above forecast of 9.8%. Core CPI rose 6.2%, higher than forecast of 6.0%.

China GDP

Chinese Q1 GDP growth came in stronger than expected at 4.5% y-o-y in Q1 23 (2.2% q-o-q seasonally adjusted). The upside surprise was mainly driven by household consumption, particularly in the services sector. Domestic consumption is still at an early stage as suggested by below-average growth in urban consumer spending. Growth in FAI (Fixed Asset Investment) was mainly driven by the infrastructure sector on the back of supporting policies. In contrast, property investment declined, and new project starts and property under construction both slumped in March, suggesting that many developers’ financial situation remained difficult. On the positive side, property completion has picked up significantly due to the government’s efforts to reduce unfinished projects, and we expect further improvement in the housing demand as home buyers’ confidence recovers. Overall, China’s post-covid recovery is well underway, but at an uneven pace.

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.)