2023 Weekly Views

Highlights

Earnings

With 80-90% of companies having reported in the US and in Europe, we are approaching the Q1 earnings season final stages. Earnings growth came in better than expected, at -3% y-o-y in the US, and +3% y-o-y in Europe, a positive surprise of 7% and 10%, respectively. Top-line growth held up, at +4% y-o-y in both the US and Europe, with a positive surprise of 3% and 1%, respectively. Profit margins are showing increasing signs of a rollover, with Q1 EPS growth minus sales growth the weakest in a while. At a sector level, delivery was mixed. In the US, Energy, Industrials and Discretionary are recording double-digit EPS growth, while 7 of the remaining sectors are coming in flat or down y-o-y. In Europe, Discretionary, Staples, Financials and Tech fared better, while Energy, Materials and Communication Services are down double-digit. The proportion of companies beating estimates picked up in both the US and Europe. Stock price reaction to beats was rather subdued with stocks that are beating estimates are outperforming by less than typical. On the other side, those that are missing estimates are being penalized by more than their historical median.

Market update

Closer X-date

The S&P 500 closed the week at 4,124.08, -0.29% lower. The Dow Jones closed at 33,300.62, -1.11%, with the Nasdaq higher by +0.40%. The volatility index VIX closed the week at 17.03 down from 17.19. The Euro Stoxx 600 gained +0.04%.

The 10-year UST closed at 3.46% up from 3.44% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -173bps. US Corporate Bond spreads: Investment Grade widened 1bp at 215bps and High Yield tightened 14bps at 518bps. German 10-year Bunds yield closed at +2.28% down from +2.29% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 183bps and High Yield spreads tightened 6bps at 511bps.

The US Dollar Index (DXY) appreciated +1.54% last week and closed at 102.68. The Euro closed at 1.0849 (-1.54%); the Yen depreciated -0.67%, closing at 135.70 and the Swiss Franc depreciated -0.74%, closing at 0.8975. Gold closed at $2,010.77 depreciating -0.30%. Oil was lower, Brent closed at $74.17 (-1.50%) and WTI at $70.04 (-1.82%).

Macroeconomy

Debt ceiling

The US Treasury Department said Friday it had just $88bn of extraordinary measures to help keep the government’s bills paid as of May 10. That’s down from around $110bn a week earlier and means just over a quarter of the $333bn of authorized measures are still available to keep the country from running out of borrowing room under the statutory debt limit. Janet Yellen declared: “our best estimate is that we will be unable to continue to satisfy all of the government's obligations by early June, and potentially as early as June 1…the actual date that Treasury exhausts extraordinary measures could be a number of weeks later than these estimates“. The Congressional Budget Office (CBO) stated that there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations. If the Treasury’s cash and extraordinary measures are sufficient to finance the government until June 15, expected quarterly tax receipts and additional extraordinary measures will probably allow the government to continue financing operations through at least the end of July. At the same time, the CBO updated its projections showing expectations that the US debt will hit 119% of gross domestic product by 2033, the highest in US history.

April CPI

April CPI was in line with the consensus at +0.37% m-o-m on headline and +0.41% for core. On a y-o-y basis, the headline number came in below consensus at +4.9% (vs. +5%) while core was in line at +5%. This is the first time the headline CPI has had below-5% print since April 2021. Indexes which increased in April include shelter, used cars and trucks, motor vehicle insurance, recreation, household furnishings and operations, and personal care. The index for airline fares and the index for new vehicles were among those that decreased over the month.
Inflation expectations    The University of Michigan’s long-run inflation expectations come in with an upside surprise, rising to 3.2% from 3% (vs. 2.9% expected), their highest since 2011. One-year inflation expectations likewise beat expectations at 4.5% (vs. 4.4% expected) but had receded from 4.6% in April. Consumer sentiment also fell back 9%, falling from 63.5 to 57.7 (vs. 63 expected). Long-run expectations slipped from 60.5 to 53.4 (vs. 60.8 expected) as consumers stated they were increasingly concerned that an economic downturn would not be short-lived. In Europe, the ECB published their Consumer Expectations Survey for March. It showed inflation expectations were moving higher again after their recent decline, with the 1yr expectation up to +5.0%, and the 3yr expectation up to +2.9%. We also heard from Bundesbank President Nagel, who held the door open to the prospect that the ECB might still be hiking in September, by saying that “there’s nothing off the table” for that meeting. And President Lagarde herself reiterated that the ECB’s fight against inflation “is not over”.

BoE

The Bank of England announced another 25bps hike that took Bank Rate up to a post-2008 high of 4.5%. Seven of the nine committee members voted for the move, and the minutes said that for those members, “there had been repeated surprises about the resilience of demand, while the labor market had remained tight.” There were also significant upward revisions to the BoE’s growth projections, and unlike in February they are no longer forecasting a recession. Nevertheless, growth was still expected to be weak by historic standards, at just 0.25% in 2023, and then 0.75% in 2024 and 2025.

China data

Chinese export growth rose by 8.5% y-o-y in April, but largely due to base effects. Import growth declined notably to -7.9% y-o-y. Chinese export fell broadly by product type, except for automobiles. By destination, exports to the US remained in contraction territory. Meanwhile, Chinese exports to the ASEAN economies also fall sharply in April. This is consistent with the region’s diverging manufacturing PMIs reading, which shows initial signs of moderation in industrial activities for some ASEAN economies. April’s trade data show that the surprising surge in Chinese March’s exports growth may have largely reflected suppliers’ catching up with unfulfilled orders, instead of strong external demands for goods. Chinese headline CPI inflation in April slowed further to 0.1% y-o-y (or -0.1% m-o-m) from 0.7% in March. Core CPI stayed flat at 0.7% y-o-y (or 0.1% m-o-m) in April. The sustained disinflationary pressure in consumer goods suggested a still-soft recovery momentum in domestic consumption. In contrast, the services sector holds up relatively well in April, mainly due to the strong recovery momentum in tourism amid holiday season. PPI inflation slowed further to -3.6% y-o-y (or -0.5% m-o-m) in April. The softness in industrial prices was broad-based across industries, with a more notable decline in producer goods while prices of consumer goods also moderated. The latest inflation readings continue to point to soft domestic demand in China as the pace of economic recovery remains moderate.

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.)