2023 Weekly Update

Market update

The S&P 500 closed the week at 4,327.78, +0.45% higher. The Dow Jones closed at 33,670.29, +0.79%, with the Nasdaq lower by -0.18%. The volatility index VIX closed the week at 19.32 up from 17.45. The Euro Stoxx 600 gained +0.29%.

The 10-year UST closed at 4.61% down from 4.80% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -89bps. US Corporate Bond spreads: Investment Grade tightened 2bps at 191bps and High Yield tightened 7bps at 448bps. German 10-year Bunds yield closed at +2.74% down from +2.88% a week before. In Europe, Corporate Investment Grade spreads tightened 2bps at 172bps and High Yield spreads tightened 10bps at 459bps.

The US Dollar Index (DXY) depreciated +0.57% last week and closed at 106.65. The Euro closed at 1.0510 (-0.72%); the Yen depreciated -0.17%, closing at 149.57 and the Swiss Franc appreciated +0.86%, closing at 0.9020. Gold closed at $1,932.82 appreciating +5.45%. Oil was higher, Brent closed at $90.89 (+7.46%) and WTI at $87.69 (+5.92%).

Macroeconomy

US inflation

Headline CPI came in at +0.40% m-o-m, which was above the consensus of economists at 0.3%, along with market pricing via inflation swaps, which were expecting +0.25%. The y-o-y reading fell further to 4.1% from 4.3%. It wasn’t just the headline number that came in strong however, as the core CPI measure was running at +0.32% m-o-m, with decent increases in some of the stickier categories as well. It was also a broad-based move, as the Cleveland Fed’s trimmed mean CPI measure that excludes the biggest outliers rose to +0.40%. Inflation has been ticking up in recent months, and looking at the last 3 months, the annualized rate of CPI is now at +4.9%, the highest since August 2022. The underlying details suggest disinflation won’t be a linear process - current disinflation continues to be driven primarily by goods and housing. Core goods prices fell 0.4% m-o-m as used vehicle prices continued to decline, and apparel and other household items saw decline as well. Shelter inflation continued to fall on a y-o-y basis but accelerated m-o-m. Supercore services inflation (core services ex housing), the Fed’s preferred gauge of underlying inflation pressures, remains sticky. It accelerated to 0.61% m-o-m, the largest increase in a year. Increases in recreation services, transportation ex airfare, and other labor-intensive personal services drove the uptick. Medical services prices rose for the second time in a year, and on track to become more positive in October due to changes in insurance prices. The day before, a strong September PPI (Producer prices) inflation print showed the same picture. The monthly gain in headline PPI was at +0.5% (vs. +0.3% expected), whilst PPI excluding food and energy was up +0.3% (vs. +0.2% expected). That pushed the year-on-year measure for headline PPI up to +2.2%.

Fed speakers

When it comes to the Fed, there’s still strong skepticism about a hike in November, which is only priced as a below-10% chance. When it comes to December, futures price the chance of a hike at 30% by that meeting. Last week, there were remarks from Fed Governor Waller, who said that that financial markets were “tightening up and they are going to do some of the work for us”. Then on Wednesday we had the minutes from the Fed’s September meeting. These repeated some key messages from last month’s press conference, with all FOMC members agreeing that “policy should remain restrictive for some time” and that the Fed “can proceed carefully”. But there were also some dovish hints as “risks to the achievement of the committee’s goals had become more two-sided”. The minutes added focus to the details of today’s CPI print, noting that “significant progress in reducing inflation had yet to become apparent in the prices of core services excluding housing”. Boston Fed President Collins echoed other recent Fedspeak in saying that if the recent rise in yields persists, it “likely reduces the need for further tightening”. But she wouldn’t take further tightening off the table and said that “CPI release is a reminder that restoring price stability will take time”. Chair Powell is due to speak on Thursday this week, just before the pre-meeting blackout period begins, so that will be an important event on the calendar.

China stimulus

On the fiscal side, Policymakers are weighing the issuance of at least RMB 1trn ($137bn) of additional sovereign debt for infrastructure. Also, front-loading of local government special bonds - LGSB (estimated RMB 1.5trn) in Q4 23 is likely. This would raise this year’s total budget deficit to around 8% of GDP, compared to the official 3% cap. On the markets end, China’s sovereign wealth fund, Central Huijin Investment, increased its stake in the four biggest banks for the first time since 2015, likely as an intensified effort to boost the persistently low sentiment in the Chinese equity market. According to the filings, Hujin bought about $65 million worth of shares in 1) Bank of China Ltd., 2) Agricultural Bank of China Ltd., 3) China Construction Bank Corp. and 4) Industrial and Commercial Bank of China Ltd. Huijin also announced plans to further increase holdings over the next six months. While the equity purchases by Huijin are minor in value, this symbolic investment signifies the government’s determination to maintain market stability and support confidence.

Highlights

Earnings

For Q3 reporting season, the consensus expectations are at +4% and +3% y-o-y EPS growth ex Energy, for US and Eurozone, respectively. Median stock forecast is broadly for flat growth, on a y-o-y basis. In level terms, even though 2023 annual EPS growth projection is flat, 2H US EPS is expected to be 6% above 1H. Overall, top-line growth is decelerating smartly, expected to be at +3% and -2% y-o-y ex Energy for Q3 in US and Eurozone, respectively. This is a significant slowdown from double-digit gains seen through 2021 and 2022. EPS revisions have been more stable so far this year, after a poor 2022, but most recently EPS revisions appear to be weakening again in the US and Eurozone. Last Friday, large banks kicked off the earnings season. JPMorgan showed fee income as a bright spot as well as lower provision and Net charge-offs, IB fees and FICC well ahead of consensus. Wells Fargo beat on both Net Interest Income (NII) and Margin (NIM) as well as fee income, with better deposit growth and solid credit metrics; raised FY NII guidance. Citigroup also better on NII/NIM and fees, with some focus on lower expenses. Blackrock noted headwinds from clients earning a real return in cash and waiting to re-risk. UnitedHealth beat and raised, with Medical loss ratio better than consensus.

Rates volatility

For sovereign bonds, CPI proved to be a tough backdrop, and the US 10yr yield was up +14.0bps by the close to 4.70%. That was its biggest daily increase since early May, when the 10yr yield was still below 3.5%, and the move was led by higher real yields, which rose +10.8bps on the day. For the 30yr yield the move was more dramatic, with a +16.0bps rise to 4.85%, which was the biggest daily rise since March 2020 at the height of the financial turmoil around the Covid-19 pandemic. That wasn’t helped by a 30yr auction, which was awarded at a post-2007 high of 4.837%, as weak end-investor demand led to the largest primarily dealer take up of a 30-year auction since December 2021. All this happened before the flight to quality on Friday. US 10yr Treasury yields fell -8.6bps on Friday and -19.0bps on the week, the largest weekly decline in yields since mid-July. 30yr yields also fell, down -21.4bps week-on-week (and -10.1bps on Friday), the largest weekly decline for 30yr yields since the first week of 2023. Interesting we had one of the largest rises in 30yr yields in the last decade on Thursday with a poor auction so there is an element that Treasuries are a bit of a reluctant flight to quality flow recipient.

What to watch

Monday: no major events

Tuesday: US Retail sales (Sep.); Eurozone EcoFin meeting

Wednesday: China GDP (Q3), Retail sales (Sep.), Industrial production (Sep); US Housing starts (Sep.); UK CPI (Sep.)

Thursday: US Initial Jobless Claims (Oct. 13), Existing home sales change (Sep.)

Friday: UK Retail Sales (Sep.); Japan: National CPI (Sep.)