2023 Weekly Update

Market update

The S&P 500 closed the week at 4,224.16, -2.39% lower. The Dow Jones closed at 33,127.28, -0.86%, with the Nasdaq lower by -3.16%. The volatility index VIX closed the week at 21.71 up from 19.32. The Euro Stoxx 600 slipped -2.70%.

The 10-year UST closed at 4.91% up from 4.61% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -56bps. US Corporate Bond spreads: Investment Grade widened 4bps at 197bps and High Yield widened 2bps at 457bps. German 10-year Bunds yield closed at +2.89% up from +2.74% a week before. In Europe, Corporate Investment Grade spreads widened 2bps at 176bps and High Yield spreads widened 11bps at 480bps.

The US Dollar Index (DXY) depreciated -0.45% last week and closed at 106.16. The Euro closed at 1.0594 (+0.80%); the Yen depreciated -0.19%, closing at 149.86 and the Swiss Franc appreciated +1.10%, closing at 0.8921. Gold closed at $1,981.40 appreciating +2.51%. Oil was higher, Brent closed at $92.16 (+1.40%) and WTI at $88.75 (+1.21%).

Macroeconomy

Fedspeak

In the speech on the economic outlook, Powell said that they were “proceeding carefully”, and explicitly mentioned that financial conditions “have tightened significantly in recent months” which could be interpreted as lessoning the need for the Fed to act suggesting the tightening in financial conditions could marginally substitute for hikes. There were also some more hawkish comments, including that “additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.” Powell then added a notable comment during the Q&A, saying “I think the evidence is not that policy is too tight right now”. He viewed the rise in longer term yields as not being driven by inflation expectations or expectations of more rate hikes, but rather a rise in term premium that could result from fiscal concerns, strong growth, QT, or other technical reasons. After the meeting and ahead of the blackout period for the Nov. FOMC meeting, the chance of a Fed hike this year fell back to 25%, from 40% the previous day.

US consumer

Recent data on retail sales suggest consumers are still turbocharging the economy, with strong gains in goods and restaurant spending. Consumer strength will support Q3 GDP, which is expected to come in strongly. Consensus forecast has shifted from no growth to almost 4% in a matter of three months, and the Atlanta Fed GDP is tracking strongly at 5.4%. The triannual data from the Survey of Consumer Finance showed median household net worth rose strongly by 37% from 2019-2022, the strongest three-year growth since the data began in 1989. The gains were broad based across the income spectrum, and net housing wealth rose particularly strongly. On the other side, the rise in long-term yields has quickly transmitted to rising mortgage rates, which are dampening housing demand and home builder sentiment.

China economic data

Chinese GDP expanded by 4.9% y-o-y in Q3, or 1.3% q-o-q (sa), beating market consensus of 4.5%. Chinese real GDP grew by 5.2% y-o-y for Q1 – Q3. Most indicators for Chinese economic activities in September continued to improve, primarily driven by stronger infrastructure and industrial activities on fiscal support. Growth in nominal retail sales rose further to 5.5% y-o-y in September, but partly driven by a low base effect. Chinese consumer confidence level remained well below pre-covid trend amid persistent fall in housing prices. Chinese nominal GDP growth fell below real GDP in Q3 23, as the GDP deflator dropped to negative territory and has likely weighed on the market.

Highlights

On rates

Global 10-year sovereign bond yields rose sharply again over the week, with the 10-year US Treasury yield up 30bps to 4.91% (primarily driven by higher TIPS yields), 10-year UK Gilt up 26bps to 4.65% and the 10-year German Bund up 15bps to 2.89%. Yield curve slopes have continued to steepen in a context where short-term yields have risen less than long-term ones, as market participants’ expectations for the policy rate paths ahead have not moved much. The ten-to-two-year slope in the US moved up to -18 bps. Market participants showed worry about the ongoing surge in US Treasury supply after the debt ceiling agreement and in a context of higher-than-expected federal deficit. Hence, the issuance of T-Notes (Treasuries with maturities ranging from two to ten years) is still negative over the last 12-months. It has ticked up in September (to USD66 bn), but most of the financing still comes from T-Bills. These have found willing buyers in the form of money market funds, which have significantly reduced the size of their reverse repo at the Fed, parking their cash into T-Bills instead. The US Treasury Department will announce its quarterly refunding schedule on November 1st, and one could expect a reduction of coupons issuance in favor of Bills issuance, given the US yield curve is almost flat after the surge in long-term yields since the summer. The federal deficit is also expected to shrink in the months ahead (from a high USD1.9trn in September) thanks to the incoming tax receipts from California, a still resilient labor market and some mandatory spending cuts agreed with debt ceiling deal. Nevertheless, higher interest rates and a more costly-than-forecasted Inflation Reduction Act, likely mean that the 2023 deficit could be higher than the USD1.5trn initially forecasted by the Congressional Budget Office. Rating agencies are going to review the sovereign ratings of European countries soon. Given the lack of fiscal consolidation in France and Italy next year, both could be at risk of rating or outlook downgrade.

Earnings

Following the 2nd week of the earnings season, 86 S&P 500 companies (24% of index earnings) reported so far, and the 9% beat from last week thinned to a 5% beat vs. consensus. Notably, top line beats have recovered from last quarter, and overall results are better than average: 65%/59%/48% of reporters beat on EPS/sales/both, vs. last quarter's 67%/51%/43% and long-term average 63%/59%/44% post-Week 2. In terms of inventories, truckers cited further moderation in de-stocking and improving volume in 3Q. The worst appears to be over for the inventory cycle with signs that the manufacturing recession has ended. In terms of Capex, just 51 companies reported capex so far, but 3Q capex is down 4% y-o-y, marking its first decline in 10 quarters. Weakness came from Micron (-60%) and AT&T (-22%); excluding these, capex is tracking a very strong +11% y-o-y. Regarding buybacks, they are -3% y-o-y from 47 companies, better than last quarter's -26%. Muted debt issuance suggests buybacks could remain tepid especially in Health Care and Tech/TMT where debt-financed buybacks were more negative. Intraday price moves skewed negative where even beats lagged during the day, with mixed results on the following day. After one day, beats have been rewarded less than misses have been penalized, suggesting heavy positioning. Stocks that beat on sales & EPS led by <20bps, the lowest since 4Q20; misses lagged by 342bp, 100bps worse than the average hit. This week marks the busiest of the Q3 earnings season, with ~40% of earnings to report.

What to watch

Monday: Eurozone Consumer confidence (Oct.)

Tuesday: UK Claimant count change (Sep.), Employment change (Aug.); US S&P Global PMI (Oct.); Germany HCOB PMI (Oct.); Eurozone HCOB PMI (Oct.)

Wednesday: US New home sale change (Sep.)

Thursday: US Initial Jobless Claims (Oct. 20), Existing home sales change (Sep.), Pending home sales (Sep.), GDP (Q3), Durable goods orders (Sep.); Eurozone: ECB monetary policy statement, ECB press Conference

Friday: US PCE (Sep.), Michigan consumer sentiment index (Oct.); Japan: Tokyo CPI (Oct.)