2023 Weekly Views

Highlights

Earnings season

Following Week 2 of the Q2 earnings season, 89 S&P 500 companies contributing 25% of S&P 500 earnings are in. Reported companies beat consensus by 4%, driven by better margins as sales beat by 1%. EBIT margins fell -26bps y-o-y in aggregate (vs. -72bps in 1Q) and 55% of reporters posted better margins y-o-y (vs. 49% in 1Q), pointing to a stabilizing margin environment. The proportion of beats has been largely in-line with the historical average: 67% beat on EPS, 51% on sales and 43% on both vs. 63%/59%/44% historical average. Consensus 2Q EPS is -2% since July 1. Despite mixed demand commentary, guidance is surprisingly solid: there have been 57% more above than below-consensus earnings guides, the strongest level since October 2021. While still early (sample size = 49), capex remains strong, +15% y-o-y (vs. +14% in Q1), suggesting credit tightening has not yet derailed the capex cycle. Buybacks could suffer from tighter credit. They are tracking -30%, from 45 companies so far in 2Q vs. -27% in 1Q. Regarding the consumer, there have been mixed signals. Truckers saw volume improving vs. the April trough, seeing signs of destocking moderating. On the other hand, many companies see a continued slowdown, with demand headwinds weighing on Semis (despite AI tailwinds), with Taiwan Semiconductor (TSMC) cutting its guidance on a weaker recovery and high inventories. High inventories also could be a drag for machinery and industrial companies and China deceleration is another risk. Overall, realized post-earnings moves were 1.3ppt larger on average than implied by the options market. But the direction was skewed to the downside, with reporters so far underperforming the S&P 500 by 105bps on average the next day. Even companies that beat on both sales and EPS underperformed by 23bps (vs. historical average +146bps), while misses underperformed less than usual (-40bps vs. -239bps historical average). This suggests increased positioning risk and good news having been priced in. This week will be the busiest with 39% of S&P500 companies reporting including Tech mega caps such as Microsoft, Alphabet and Meta.

Market update

Hikes ahead

The S&P 500 closed the week at 4,536.34, +0.69% higher. The Dow Jones closed at 35,227.69, +2.08%, with the Nasdaq lower by -0.57%. The volatility index VIX closed the week at 13.60 up from 13.34. The Euro Stoxx 600 slipped -0.04%.

The 10-year UST closed at 3.83% unchanged from a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -159bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 191bps and High Yield tightened 8bps at 420bps. German 10-year Bunds yield closed at +2.47% down from +2.51% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 165bps and High Yield spreads tightened 4bps at 447bps.

The US Dollar Index (DXY) appreciated +1.16% last week and closed at 101.07. The Euro closed at 1.1124 (-0.93%); the Yen depreciated -2.11%, closing at 141.73 and the Swiss Franc depreciated -0.44%, closing at 0.8658. Gold closed at $1,961.97 appreciating +0.34%. Oil was higher, Brent closed at $81.07 (+1.50%) and WTI at $77.07 (+2.19%).MacroeconomyCentral banks

Macroeconomy

Central banks    

This week, central bank meetings from Europe, Japan, and the United State are due. In the US, markets expect a 25bps hike from the Fed on Wednesday (96% probability priced in) to 5.25-5.50% range. The latest inflation data showed inflation softening with monthly headline CPI at just 0.18% in June (below expectations for 0.3%). The y-o-y measure was 3.0%, which is the lowest it’s been since March 2021. On core CPI, the monthly print came in at 0.16%, the weakest since February 2021. Similarly, that took the y-o-y core CPI print down to 4.8%. In Europe, the ECB will meet on Thursday. Markets expect a 25bps hike to 3.75%. an additional rate hike in September is priced at 59% probability. In Japan, inflation data bolstered the chances the BoJ will revise up this year's inflation forecast in fresh projections due next week. While BoJ Governor Kazuo Ueda earlier this week said Japan was still distant from sustainably achieving the bank's 2% inflation target, prompting speculation that a tweak to yield curve control was on the cards markets now expect the BoJ to hold policy steady including its yield control scheme. BoJ target rate is still -0.10%.

UK CPI

UK CPI fell to 7.9% in June (vs. 8.2% expected). It was beneath every economist’s estimate on Bloomberg, and core CPI was also beneath expectations at 6.9% (vs. 7.1% expected). Even though the UK still has the highest inflation in the G7, the print came in as the biggest downside surprise in almost two years. In turn, the downside surprise meant that investors dialed back their expectations for rate hikes from the Bank of England. For example, at the next meeting on August 3rd, markets are still fully pricing in another 25bps hike to 5.25%, but they lowered the chances of a larger 50bps hike. Investors also pared back their terminal rate forecasts, with markets now much less confident that they’ll take rates to the 6% mark.

Japan economic data

Japan’s consumer inflation climbed by 3.3% y-o-y in June (vs. 3.2% expected), and slightly higher than May’s 3.2% increase. Core consumer prices rose 3.3% y-o-y in June, in line with market expectations and against the prior month’s gain of 3.2%. Super-core, closely watched by the BoJ, was in-line at +4.2% y-o-y, down a tenth from last month, the first decrease since January. The pace of the decline will determine the BoJ's policy over that period. This morning, data showed that the manufacturing sector in Japan continued to slightly contract in July as the Jibun bank’s preliminary manufacturing PMI declined to 49.4 from June’s reading of 49.8. Meanwhile, the flash estimate of the services PMI dipped slightly to 53.9 in July from 54.0 in June with the Composite PMI, indicative of the overall health of the economy, remaining unchanged at 52.1.

China economic data

Chinese GDP expanded by 6.3% y-o-y in Q2, or 0.8% q-o-q seasonally adjusted, according to the Chinese National Bureau of Statistics. The high growth rate is largely due to a low base effect (the large-scale covid lockdowns in April-May last year). It missed market consensus of 7.1%. Most indicators for Chinese economic activities in June continued to weaken, particularly in the property sector and household consumption. Growth in nominal retail sales slumped to 3.1% y-o-y in June, down from 18.4% and 12.7% in the previous two months and missing the market consensus of 3.3 %. While the sharp decline partly reflects a subsided low base effect, in sequential and seasonally adjusted terms, retail sales growth dropped to 0.2% m-o-m in June, from an average of 0.5% and 0.3% in Q1 and Q2 respectively, indicating the lack of strength in consumption recovery. Unemployment rate stayed unchanged at 5.2% in June, below government target of around 5.5%. Youth unemployment rate continued to trend upwards for the 7th consecutive month and hit its historical high of 21.3%, up from 20.8% in the previous month. It may have reached a peak as the graduation season ends. Industrial production growth came in better than expected at 4.4% y-o-y (0.7 % m-o-m) in June, vs. 3.5% (0.6% m-o-m) in May.

What to watch

• Monday: Japan, UK, France, Germany, Euro zone, US PMIs Manufacturing, Services, Composite (July)

• Tuesday: Germany IFO Survey (July); US Consumer confidence (July)

• Wednesday: US New home sales (June); US FOMC rate decision

• Thursday: Euro zone ECB rate decision; US GDP annualized q-o-q (Q2)

• Friday: Japan BoJ rate decision; France GDP (Q2); France, Germany CPI (July)