2023 Weekly Views

Highlights

On rates

Expectations shifted towards a slightly more hawkish path from the Fed over the coming months. The chances of a 25bps hike at the meeting this week bounced back up to 90%, up from 79% on the previous day on the basis of growing concerns about First Republic. Looking at rates expectations, the rate priced in for the December meeting rose by +11.7bps to 4.51% leading to a sharp selloff in Treasuries with the 2yr yield up +11.7bps to 4.07% and the 10yr yield up +7.2bps to 3.52%. The 3-month Treasury bill yield hit another post-2007 high of 5.14% highlighting the growing concerns around the debt ceiling deadline provided that 1m and 6m yields are still both beneath their peak in early March right before SVB’s collapse.

Earnings

In the US, 43% of companies have reported so far, and 36% in Europe. Earnings growth is coming in better than consensus expected, with both regions seeing a strong positive surprise factor, around 6% and 11%, respectively. S&P500 Q1 ’23 blended EPS projections were downgraded meaningfully ahead of the reporting season while at the same time there was a sequential improvement in PMIs over the quarter. Stock price reaction is more mixed, where on average, stocks that are beating estimates are outperforming less than typical, while those that are missing are being penalized by more than their historical median. Per region, 81% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is flat y-o-y, surprising positively by 6%. At a sector level, delivery is mixed, with 5 of 11 sectors printing positive EPS growth. Topline growth is coming in a +5% y-o-y, beating expectations by 2%. In Europe, of the Stoxx600 companies that have reported so far, 74% beat EPS estimates. Q1 EPS growth is coming in at +4% y-o-y, surprising positively by 11%. In Europe too, earnings delivery has been mixed across sectors. Revenue growth is at +7% y-o-y, beating by 3%. In Japan, 56% of Topix companies beat EPS estimates, with overall EPS growth at +18% y-o-y. Top-line growth is running at +12% y-o-y this quarter, and 49% of companies have beaten revenue estimates.

Market update

Central banks parade

The S&P 500 closed the week at 4,169.48, +0.87% higher. The Dow Jones closed at 34,098.16, +0.86%, with the Nasdaq higher by +1.28%. The volatility index VIX closed the week at 15.78 down from 16.77. The Euro Stoxx 600 slipped -0.50%.

The 10-year UST closed at 3.42% down from 3.57% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -166bps. US Corporate Bond spreads: Investment Grade widened 1bp at 205bps and High Yield tightened 4bps at 494bps. German 10-year Bunds yield closed at +2.31% down from +2.48% a week before. In Europe, Corporate Investment Grade spreads widened 5bps at 176bps and High Yield spreads widened 13bps at 492bps.

The US Dollar Index (DXY) depreciated -0.16% last week and closed at 101.66. The Euro closed at 1.1019 (+0.30% weekly); the Yen depreciated -1.60%, closing at 136.30 and the Swiss Franc depreciated -0.26%, closing at 0.8946. Gold closed at $1,990.00 appreciating +0.35%. Oil was lower, Brent closed at $79.54 (-2.60%) and WTI at $76.78 (-1.40%).

Macroeconomy

US GDP

Headline GDP growth slowed sharply in Q1 to 1.1% q-o-q annualized from 2.6%, below expectations of 1.9%. However, the underperformance was almost entirely driven by inventories, which dragged growth by -2.3% after a large +1.5% positive contribution in Q4. Excluding the often volatile inventories and trade, domestic final sales accelerated to 3.2%, the largest quarterly increase since 2021. Consumer spending rose strongly by 3.7% q-o-q annualized in Q1 thanks to outsized growth early in the quarter. Both goods and services spending growth accelerated. Business investment grew by just 0.7%. Despite increases in construction and intellectually property investment, equipment investment contracted for the second consecutive quarter. Residential investment fell slightly by 4.2% after three quarters of double-digit contraction. Government spending rose strongly for the third consecutive quarter, increasing 7.8%.

Debt ceiling

The Republican-controlled House already passed a bill, by a narrow margin (217 to 215), to raise the debt ceiling through March 31, 2024 or $1.5 trillion, whichever comes first. The bill would keep discretionary government spending in fiscal year 2024 in line with 2022 levels and cap spending increases at 1% a year. It is a sharp contrast to the clean debt ceiling raise that President Biden is looking for. President Biden told reporters ahead of that vote, that he was open to sitting down with McCarthy but “not on whether or not the debt limit gets extended”. In terms of X-date, the projected date the Treasury fully exhausts its cash and extraordinary measures to pay for its obligations, there is a small risk of an early June X-date as tax receipts have been coming in slightly weaker than expected. But if early June can be avoided, cash balances at the Treasury can probably make it to late July given extra cash inflows in mid and end June. We will likely get an update on the X-date from the Treasury itself in the next few days. It’s possible the Treasury will indicate the X-date is in early June as they are inclined to guide more conservatively.

US economic data

Core PCE inflation for Q1 showed that inflation was still running at +4.9% in Q1, vs. +4.7% expected. The latest reading came up +4.4% in Q4, going against the narrative that inflation is hedging lower at this stage. The Conference Board’s consumer confidence reading for April fell back to 101.3 (vs. 104.0 expected), and the expectations component hit a 9-month low at 68.1. Fed’s emergency lending rose for the second consecutive week, possibly due to borrowing demand from First Republic bank. FIMA repo borrowing finally dropped to zero. The banking sector is broadly stabilizing but not out of the woods yet on further stress.

Bank of Japan

In Ueda’s first meeting as the governor, Bank of Japan unanimously decided to leave their main policy settings unchanged despite the still hot inflation. So the policy balance rate remains at -0.1%. When it comes to yield curve control, the aim is still that 10yr JGB yields will stay “at around zero percent”. However, there was a shift in their forward guidance, since they dropped the previous phrasing that they expect “short- and long-term policy interest rates to remain at their present or lower levels.” Furthermore, they announced a “broad-perspective review of monetary policy” that would take 1-1.5 years.

FED & ECB

The Federal Open Market Committee is expected to raise interest rates by 25bps to 5.25% at the May 2-3 meeting this week. The biggest focus from economists may be on the statement and if the language referring to "some additional policy firming" and the "extent of future increases in the target range" is changed. Europe saw growing speculation that the ECB might deliver another 50bps hike at their meeting Thursday this week. That followed comments from Isabel Schnabel of the Executive Board, who said in an interview with Politico that “data dependence means that 50bps are not off the table”. Market expects a 25bps hike to 3.25%.

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.)