2023 Weekly Views

Highlights

Earnings

As of Friday, both in Europe and in the US, 60-75% of companies had reported. Earnings growth is tracking at -3% y-o-y in both regions, which is a positive surprise of 6% and 9% vs. consensus, respectively. In the US, 78% of S&P500 companies that reported beat EPS estimates. EPS growth is -3% y-o-y, +6% vs. estimates. At a sector level, delivery is mixed: Energy, Industrials and Discretionary with double-digit EPS growth, while 6 of the remaining sectors are coming in flat or down y-o-y. Top-line growth is +4% y-o-y, surprising positively by 3%. In Europe, of the Stoxx600 companies that reported so far, 72% beat EPS estimates. EPS growth is also at -3% y-o-y, +9% vs. consensus. Energy, Materials, Discretionary and Real Estate are down double-digit, while 5 sectors are reporting robust growth. Revenue growth is at +3% y-o-y, surprising positively by 1%. In Japan, 54% of Topix companies beat EPS estimates, with overall EPS growth at +14% y-o-y. Top-line growth is running at +12% y-o-y, and 50% of companies beat revenue estimates. On average, stocks that beating estimates are outperforming by less than typical, while those missing are penalized more than their median.

Market update

Slower hiking pace

The S&P 500 closed the week at 4,136.25, -0.80% lower. The Dow Jones closed at 33,674.38, -1.24%, with the Nasdaq higher by +0.07%. The volatility index VIX closed the week at 17.19 up from 15.78. The Euro Stoxx 600 slipped -0.29%.

The 10-year UST closed at 3.44% up from 3.42% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -180bps. US Corporate Bond spreads: Investment Grade widened 9bps at 214bps and High Yield widened 38bps at 532bps. German 10-year Bunds yield closed at +2.29% down from +2.31% a week before. In Europe, Corporate Investment Grade spreads widened 6bps at 182bps and High Yield spreads widened 25bps at 517bps.

The US Dollar Index (DXY) depreciated -0.44% last week and closed at 101.21. The Euro closed at 1.1019 (unchanged); the Yen appreciated +1.10%, closing at 134.80 and the Swiss Franc appreciated +0.41%, closing at 0.8909. Gold closed at $2,016.79 appreciating +1.35%. Oil was lower, Brent closed at $75.30 (-5.33%) and WTI at $71.34 (-7.09%).

Macroeconomy

FOMC meeting

The Fed hiked rates by 25bps taking the reference rate to the 5-5.25% range, kept QT unchanged, and removed the forward guidance that “some additional policy firming may be appropriate”. This suggests the FOMC is considering a pause. The statement retains a tightening bias, noting that “in determining the extent to which additional policy firming may be appropriate”. On the banking sector, Powell noted that conditions have “broadly improved”. He suggested the Senior Loan Officer survey is consistent with other data and credit conditions got “even tighter” after the recent banking turmoil. Powell noted his own forecast is for modest growth not a recession (Fed staff’s projection), but he couldn’t rule it out. Regarding rate cuts, Powell mentioned that the committee expects “inflation is going to come down not so quickly”. In that scenario, “it would not be appropriate to cut rates”. Powell suggested the debt ceiling was not a factor in today’s policy decision, but several officials did raise that as a risk to the economic outlook.

Jobs report

The jobs report for April was strong, coming in at +253k above the +185k forecast and higher than the +236k from March (the 6-month average is +290k). For a change, the ADP survey was relatively consistent with the data - ADP showed +296k on Wednesday. In April, employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance. Employment was little changed over the month in other major industries, including construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, and other services. Wages increased at +0.5% m-o-m (vs. the +0.3% expectation) and +4.4% y-o-y (vs. consensus at +4.2%). The workweek length was consistent with expectations at 34.4 hours. The unemployment rate dropped to 3.4% (below the 3.6% forecast and below the 3.5% number in March). The participation rate was in line at 62.6% and flat vs. March.

ECB meeting

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.

Euro economic data

Eurostat's flash estimate showed that euro area headline inflation ticked up to 7.0% y-o-y in April from 6.9% in March, while core inflation slowed somewhat to 5.6% y-o-y from 5.7% the previous month. The easing in core inflation was the first in 10 months. With further details to be published, food inflation eased in April (to 13.6% y-o-y from 15.5%), while energy inflation picked up (from -0.9% to +2.5% y-o-y). At the level of core inflation, pressure remains very strong, in particular in the services sector where inflation accelerated to 5.2% y-o-y in April from 5.1% the previous month. In terms of credit conditions, Corporate and households loan data were soft in March. Lending to private sector (adjusted for loan sales and securitization) declined by 0.5pp to 3.8% y-o-y in March. Household loan growth was down from 3.2% to 2.9% and non-financial corporations loan growth down from 5.7% to 5.2%. Meanwhile, the ECB’s Bank Lending Survey conducted after the March events in the US and Swiss banking sectors was consistent with tighter credit standards and a “persistent weakening” of loan dynamics. Indeed, banks tightened further credit standards to firms in Q1 23.

Swiss CPI

Swiss headline inflation fell in April to a 12-month low of 2.6% y-o-y, more than expected (vs. consensus at 2.8%), and down from a peak of 3.5% last August. This was driven by a decline in food inflation (-0.9pp to 5.4% y-o-y) and energy inflation (-3.9pp to 6.9% y-o-y), while core inflation (excluding energy and fresh food) was unchanged at 2.2% y-o-y. Foreign goods and services inflation declined 1.3pp to 2.4% while domestic inflation fell 10bps to 2.6%.

China PMI

Chinese official manufacturing PMI dropped in April to 49.2, missing market consensus and marking its first contraction since the beginning of this year. The contraction in industrial activities is broad-based across all firm sizes, with soft demand likely being the main hurdle of the economic recovery. The employment sub-index also dropped further, indicating a still-soft labor market in the manufacturing sector. The official non-manufacturing PMI continued to hold up, albeit with a slight moderation from March. Business expectations for both construction and services sector remained solid. Overall, the PMI reading in April is consistent with the post-covid recovery being well underway, but at an uneven pace.

What to watch

• Monday: Germany Industrial Production (Mar.); US president Joe Biden chairs a White House meeting to discuss the government’s debt ceiling
• Tuesday: China Trade Balance (Apr.)
• Wednesday: US CPI (Apr.); US MBA Mortgage Applications (May 5)
• Thursday: UK Bank of England Bank Rate; US Initial Jobless Claims (May 6); US PPI (Apr.); China CPI, PPI (Apr.)
• Friday: UK: GDP (1Q, prel.); UK Industrial Production, Manufacturing Production (Mar.); US Univ. of Michigan Sentiment (May, prel.)