2023 Weekly Update

Market update

The S&P 500 closed the week at 4,308.50, +0.48% higher. The Dow Jones closed at 33,407.58, -0.30%, with the Nasdaq higher by +1.60%. The volatility index VIX closed the week at 17.45 down from 17.52. The Euro Stoxx 600 slipped -1.17%.

The 10-year UST closed at 4.80% up from 4.57% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -71bps. US Corporate Bond spreads: Investment Grade widened 5bps at 193bps and High Yield widened 29bps at 455bps. German 10-year Bunds yield closed at +2.88% up from +2.84% a week before. In Europe, Corporate Investment Grade spreads widened 6bps at 174bps and High Yield spreads widened 32bps at 469bps.

The US Dollar Index (DXY) depreciated -0.12% last week and closed at 106.04. The Euro closed at 1.0586 (+0.12%); the Yen appreciated +0.03%, closing at 149.32 and the Swiss Franc appreciated +0.60%, closing at 0.9098. Gold closed at $1,833.01 depreciating -0.84%. Oil was lower, Brent closed at $84.85 (-11.26%) and WTI at $82.79 (-8.81%).

Macroeconomy

Jobs report

The US economy added 336k jobs in Sept. according to the establishment survey (data provided by a sample of businesses in the US), a huge figure that was far ahead of the analysts forecasts (+170k), much higher than the ADP figure on Wednesday (+89k), and higher than the 267k monthly average over the last 12 months. Establishment survey revisions were strong too - employment in July and August combined is 119k higher than previously reported. Job gains occurred in leisure and hospitality; government; health care; professional, scientific, and technical services; and social assistance. Leisure and hospitality added 96k jobs in September, above the average monthly gain of 61k over the prior 12 months. Employment in food services and drinking places rose by 61k over the month and has returned to its pre-pandemic February 2020 level. The household survey (information provided by a sample of US households) told a different story from the establishment one, with job gains of just 86k in Sept. – which is in line with the ADP figure from Wednesday. The unemployment rate held steady m-o-m at 3.8% (vs. the 3.7% forecast) while the participation rate was flat too at 62.8%. The workweek held flat at 34.4 hours. Average hourly earnings were a bit softer than anticipated, coming in at +4.2% (down from +4.3% in Aug. and
below the +4.3% forecast).

House Speaker

The ouster of Kevin McCarthy as US House speaker, a result of escalating infighting within the Republican majority (it came from eight, mostly conservative Republicans, along with all Democrats), renewed concerns that a federal government shutdown could happen next month. The vote for the new speaker (among Republicans) is scheduled for next Wednesday but voting can last long, as was the case with McCarthy’s election in January (15 rounds, 5 days). This marks the first time in history that the House has removed its leader and underscores the growing governance challenges that threaten the sovereign rating of the US. A government shutdown on November 17th remains a material risk with arguably higher odds now given precious time is lost due to the ouster. Additional funding for Ukraine will likely be difficult. This drama would likely raise Trump’s odds as the Republican nominee for president and he’s currently polling high with a historically wide margin. The lack of governance in the House does not help the fiscal outlook, which is being exacerbated by high issuance of debt, higher long-term interest rates, and the ongoing Quantitative Tightening. Higher long-end rates are doing the Fed’s tightening for them, and San Francisco Fed president Daly noted that the recent tightening in financial conditions, if sustained, would equate to one rate hike.

Japan

It seems that the BoJ (Bank of Japan) has started to prepare for an eventual exit of its ultra-loose monetary policy amid some positive development on its economy, including emerging signs of a virtuous cycle that leads to a wage-led inflation. That said, the board also recognized near-term uncertainties surrounding economic activity and prices remain high. Regarding the timing of future policy change, there seems to be sharply different views among policy board members. Q4 23-Q1 24 will be an important period for determining whether the price stability target will be achieved. The Japanese economy faces more pressure externally, as the latest manufacturing PMI (48.5) and core machinery orders (-13.0% y-o-y) suggest. In contrast, domestic demand still holds up on resilient activities in the services sector. On inflation front, both the national and Tokyo core CPI continue to moderate, while wage growth in September came in below expectations despite a still-tight labor market.

World PMIs

World PMI manufacturing recorded a second improvement in a row in September, but it remains in contraction territory at 49.1. Services deteriorate on a sustained way, but they remain in expansion territory at 50.8. Both emerging (EMG) and advanced economies (AE) remain in expansionary territory for services. However, the margin is tiny for AE at 50.2. For manufacturing, the world is divided into two regions. EMG is stable above the 50 thresholds, while AE is deeply in contraction at 47.4. Most of the sub-indices show a discrepancy between the two regions in manufacturing, such as new orders, backlogs, and quantity of purchases. New export orders tend to confirm that the current economic difficulties are concentrated in AE, as it is in contraction even for EMG. International trade is closely correlated with PMI manufacturing new export orders. Recently, they are pointing to zero growth from contraction. The most likely scenario appears to be ongoing global weak growth, not deterioration.

Highlights

Earnings

Third-quarter earnings season starts this week, when the big banks start to report. Expectations for the group appear to be low and falling. In the past week, bank indices have underperformed the wider market. Some reasons for the underperformance might be: 1) long-term interest rates have been rising, which means that banks’ securities portfolios will have to be marked down again; 2) earnings reports are not expected to be good as margins should fall with deposit costs rising and loan growth falling; 3) and, as recession fears creep back into markets, investors avoid cyclical sectors.

Oil

The recent rapid oil price decline is attributed to two factors: temporary technical factors and a resilient US economy. Weekly US Department of Energy data on gasoline consumption dropped 7% to 8mbd (million barrels per day), and gasoline inventory increased by 6.5mbd. Extensive rain due to a tropical storm contributed to depress gasoline demand on the East Coast. While a strong US economy increases the odds for further rate hikes, favoring the scenario of an undersupplied oil market in the months to come. The recent movements in the oil market are seen as an excess market reaction.

What to watch

• Monday: IMF and World Bank annual meetings; Germany Industrial production (Aug.)
• Tuesday: US NFIB small business survey
• Wednesday: US PPI (Sep.); US FOMC minutes (Sep.)
• Thursday: UK GDP (Aug.) & Industrial production (Aug.); US CPI (Sep.) & Initial jobless claims (Oct. 6)
• Friday: China: CPI & PPI (Sep.) & Imports & Exports (Sep.); US Michigan consumer sentiment index (Sep.) & UoM 5y consumer inflation expectation (Sep.)