2023 Weekly Views

Highlights

Q2 earnings season   

Nearly 40% of companies have reported so far in the US, and 42% in Europe. In the US, 80% of S&P 500 companies that have reported beat EPS estimates. EPS growth for these companies is at +5% y-o-y, surprising positively by 6%. Eight of the 11 sectors are printing robust EPS growth, while commodity sectors and Healthcare are down on a y-o-y basis. Top-line growth is coming in at +6% y-o-y, surprising positively by 2%. In Europe, of the Stoxx 600 companies that have reported so far, 55% beat EPS estimates. Q2 EPS growth is coming in at -2% y-o-y, surprising positively by 3%. Commodity sectors are weak in Europe too, along with Discretionary and Real Estate. On the other side, four sectors are seeing double-digit EPS growth. Revenue growth is also down -2% y-o-y, surprising positively by 4%.

 On rates

Japan 10-year government bond yield reacted mutedly to the widening of the trading range for the 10-year yield to -/+100 bps by the BoJ and closed the week at 0.55% vs. 0.48% a week before. It did push slightly higher than the rest of the developed market government bond yields. US 10-year yield rose by 12bps over the week to 3.95%, pushed up by robust economic data (an upside surprise on Q2 GDP), while the 10-year German Bund was only slightly higher last week at 2.49% helped by the dovish rate hike by the ECB on Thursday. Euro periphery spreads also remain well behaved (at 160bps in Italy and 103bps in Spain) with no material impact from the political uncertainty that resulted from the unconclusive Spanish general elections. The periphery shows higher economic resilience than Nordic countries, as shown by the robust GDP growth of 0.4% q-o-q in Q2 in Spain. Domestic demand contributed to growth, whereas the German economy stagnated in Q2.

Market update

Hikes delivered

The S&P 500 closed the week at 4,582.23, +1.01% higher. The Dow Jones closed at 35,459.29, +0.66%, with the Nasdaq higher by +2.02%. The volatility index VIX closed the week at 13.33 down from 13.60. The Euro Stoxx 600 rose +0.26%.

The 10-year UST closed at 3.95% up from 3.83% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -149bps. US Corporate Bond spreads: Investment Grade tightened 8bps at 183bps and High Yield tightened 14bps at 406bps. German 10-year Bunds yield closed at +2.49% up from +2.47% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 164bps and High Yield spreads tightened 3bps at 444bps.

The US Dollar Index (DXY) appreciated +0.55% last week and closed at 101.62. The Euro closed at 1.1016 (-0.97%); the Yen appreciated +0.40%, closing at 141.16 and the Swiss Franc depreciated -0.46%, closing at 0.8698. Gold closed at $1,959.49 depreciating -0.12%. Oil was higher, Brent closed at $84.99 (+4.84%) and WTI at $80.58 (+4.55%).

Macroeconomy

FOMC meeting    

On Wednesday, the Fed hiked its reference rate as expected by 25bps to the range 5.25-5.50%. The FOMC statement was similar to the June one, as the current forward guidance on “the extent of additional policy firming that may be appropriate” remained unchanged. One change to the statement was the characterization of current US growth, with the committee upgrading it from “modest” to “moderate”, and Powell said that the staff forecast no longer included a recession. In the press conference, the overall tone was one of cautious optimism, with the expectation that the labor market would continue to soften. He also noted that a strong economy could lead to further inflation down the line and that lending conditions are tighter. On the topic of pausing hikes in September, Powell was noncommittal and noted that “looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate”. The next FOMC meeting is expected on September 19-20 with two payrolls and two CPI prints before then.

European Central Bank

The ECB delivered a 25bps rate hike as expected, taking the deposit rate up to 3.75%. The statement language was softer with future decisions would ensure rates will be set at sufficiently restrictive levels. President Lagarde said that “we have an open mind as to what the decisions will be in September and in subsequent meetings”. She avoided signaling a specific outcome, and said that if they did pause, then it “would not necessarily be for an extended period”.

Bank of Japan

The BoJ surprised investors by tweaking its Yield-curve Control (YCC) policy. The BoJ kept their target for 10yr JGBs at 0% but effectively widened the band to +1% from 0.5%. This means that the BoJ loosened its grip on bond yields, keeping the target for 10-year government bond yields at around 0% but saying its 0.5% ceiling on yield movements was a reference point not a rigid limit. On economic data, Tokyo’s consumer price index (CPI) rose +3.2% y-o-y in July (v/s +2.9% expected). This is the 14th consecutive month that inflation came in above the BOJ’s 2% target. At the same time, core inflation (excluding fresh food) advanced +3.0% y-o-y in July, higher than Bloomberg estimates of +2.9% but lower than prior month’s reading of 3.2%. More surprising was the core-core inflation (excluding fresh food and energy) which climbed to +4.0% y-o-y in July (vs. +3.7% expected, +3.8% in June) and provided more justification for the BoJ move.

US Q2 GDP

Real GDP accelerated in Q2, rising 2.4% q-o-q annualized, up from 2.0% in Q1 and better than expectations of 1.8%. The acceleration was driven by a solid increase in business investment and inventories reversing its outsized drag last quarter. On the other hand, personal consumption and government spending both slowed, but growth remains solid. Stripping out the volatile trade and inventories, domestic final sales decelerated to a still strong pace of +2.3%. Inflation surprised on the downside, as the GDP deflator came in at 2.2% q-o-q annualized, down from 4.1% in Q1 and below consensus expectation of 3.0%. Importantly, quarterly core PCE inflation came below expectations, raising downside risks to tomorrow’s monthly print, where consensus is looking for a print of 4.2% y-o-y.

China Politburo meeting

The quarterly Chinese Communist Party (CCP) meeting tone came in more dovish than expected. The macro policy stance turned more proactive with targeted policies and “counter-cyclical” adjustments to enhance domestic demand such as: prioritizing consumption recovery with stronger support to SMEs; more policy easing in the property sector; addressing the local government debt problem; and boosting infrastructure investment.

What to watch

• Monday: Japan Industrial production (June); Euro zone GDP (Q2) and CPI (July)

• Tuesday: Germany Unemployment (July); Euro zone Unemployment (June); US and Canada Manufacturing PMI (July)

• Wednesday: US Mortgage applications (July 28); US ADP Employment change (July)

• Thursday: UK Bank of England rate decision; US Services and Composite PMI (July)

• Friday: US Non-farm payrolls (July)