2023 Weekly Update

Market update

The S&P 500 closed the week at 4,117.37, -0.48% lower. The Dow Jones closed at 32,417.59, -1.12%, with the Nasdaq higher by +0.38%. The volatility index VIX closed the week at 21.27 down from 21.71. The Euro Stoxx 600 slipped -1.02%.

The 10-year UST closed at 4.83% down from 4.91% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -63bps. US Corporate Bond spreads: Investment Grade remained at 197bps and High Yield widened 14bps at 471bps. German 10-year Bunds yield closed at +2.83% down from +2.89% a week before. In Europe, Corporate Investment Grade spreads remained at 176bps and High Yield spreads widened 9bps to 489bps.

The US Dollar Index (DXY) appreciated +0.37% last week and closed at 106.56. The Euro closed at 1.0565 (-0.27%); the Yen appreciated +0.13%, closing at 149.66 and the Swiss Franc depreciated -1.14%, closing at 0.9023. Gold closed at $2,006.37 appreciating +1.26%. Oil was lower, Brent closed at $90.48 (-1.82%) and WTI at $85.54 (-3.62%).

Macroeconomy

US economy

Real GDP accelerated sharply in Q3, rising 4.9% q-o-q annualized, up from 2.1% in Q2 and better than consensus expectations of 4.5%. In fact, consensus expectations started the quarter at zero. The acceleration was driven by strong consumption and government spending, and an outsized 1.3pp boost from inventories. Business investment contracted slightly as equipment investment fell after a sharp rise last quarter. Stripping out the volatile trade and inventories, domestic final sales, a better gauge of final demand, grew at a still strong rate of 3.5%. Durable goods orders for September were also strong, at 4.7% (vs 1.9% expected), a rise from 0.1% from the previous release. Regarding prices, core PCE for Q3 came in below expectations at 2.4% q-o-q (vs. 2.5% expected), down from 3.7%. This brings the measure to its slowest pace since 2020. Monthly Sept. PCE was mixed, headline PCE was above consensus on hotter energy prices (3.7% vs. August 3.8%), but core PCE was in line with forecasts (3.4% same as August).

Euro area economy

The ECB’s Governing Council (GC) left unchanged its three key policy rates. There were no new announcements. Of particular note, the possibility of accelerating ‘normalization’ of the ECB’s balance sheet was not discussed. The ECB maintained its view that inflation “is still expected to stay too high for too long, and domestic price pressures remain strong”. Higher-for-longer rhetoric was also left unchanged, with the GC stating that “policy rates will be set at sufficiently restrictive levels for as long as necessary.” When asked about how long is “sufficiently long”, ECB president Christine Lagarde replied that “we shall be data dependent”. ECB’s October bank lending survey showed credit standards have tightened further since the last survey in July, and more than expected across all bank loan categories. In addition, firms’ and households’ demand for loans has continued to decline rapidly. Loans to large firms decreased in Q3, as much as the all-time low reached during the global financial crisis.

China economic data

Oct. US composite PMI came in at 51, in expansion territory. The services component surprised to the upside at 50.9 (vs 49.9 expected), up from 50.1. In terms of manufacturing, the index rose to 50.0 (vs 49.5 expected) and up from 49.8 a month prior. The release also highlighted pullback in inflationary pressures at service providers. In Europe, composite PMI fell by 0.7 points to 46.5 in Oct., below consensus expectations of 47.4. This was the fifth consecutive month of falling business activity and the steepest monthly decline since November 2020. Across sectors, the main downside surprise in October was the 0.9 points decline in the PMI services index to 47.8, a level not seen since early 2021. Manufacturing output was stable at 43.1, firmly in contraction territory. The labor market remained a bright spot, particularly in the services sector where companies continued to hire in October, albeit less than in previous months. But depressed activity prompted manufacturing firms to reduce employment at the sharpest rate since August 2020. The surge in oil prices and high wage growth caused services’ input prices to increase again this month. Still, weak demand means the increase in the services sector’s costs has not resulted in accelerated selling price inflation.

China stimulus

The Standing Committee of Chinese National People’s Congress (NPC) convened in late Oct. and decided to issue special Chinese government bonds of RMB 1.0trn for post-disaster reconstruction. In addition, the NPC announced to front load the RMB 2.7trn local government bonds quota of 2024 to this year. These moves together will inject RMB 3.7trn of fiscal resources in the near term, mostly to support infrastructure investment. Part of the funds will likely be deployed in early 2024, supporting a moderate recovery of the economy in the coming quarters.

Highlights

Bonds

US and euro corporate bond spreads have been widening in recent weeks in the wake of the equity indices sell-off. US and euro investment-grade (IG) spreads stand at 197 and 176bps, respectively on Oct. 26, while their high-yield (HY) counterparts moved up more sharply to 471 and 489bps, respectively. Along with higher sovereign bond yields, wider spreads have pushed yields to elevated levels, as they are above 9.5% in US HY and above 6% in US IG. The stress is more acute in the lowest-rated categories, with US HY CCC & lower-rated spreads now wider than 1000bps, while in euro HY they have surpassed the peak they reached during the covid-19 pandemic, currently standing at 1873bps. Part of the reasons for these wider spreads in the riskiest segments is the continuous rise in the US and euro HY default rates. In Sept. default rates stood at 4.9% in US HY (5% in US HY loans and 3.4% in US HY bonds), while they remained lower in Europe at 3.1%. After a strong month of issuance in Sept. for US and euro corporate bonds, the month of Oct. is proving much calmer as the recent rise in borrowing costs is putting off corporate treasurers. Year-to-date, developed markets HY bonds issuances are slightly above 2022, but they remain much more tepid that what has been observed in the years following the pandemic.

Earnings

Nearly 40% of companies have reported in both the US and in Europe. In the US, 78% of S&P500 companies beat EPS estimates. EPS growth is at +12% y-o-y, surprising positively by 8%. 8 of the 11 sectors are printing healthy earnings growth, while commodity sectors and Real Estate are flat or down on a y-o-y basis. Unlike previous quarters, the beats have failed to translate into a meaningful improvement in blended EPS. Revenue growth is coming in at +4% y-o-y, surprising positively by 1%. In Europe, of the Stoxx600 companies that have reported, 57% beat EPS estimates. Q3 EPS growth is coming in at -8% y-o-y, surprising positively by 3%. Commodity sectors are down in Europe too, along with Staples. The bulk of the earnings weakness in Europe is driven by commodities, where ex-Energy EPS growth is flat. While it is still early, European top line delivery is exceptionally weak. Sales beats have dropped significantly. Overall topline growth is at -4% y-o-y, surprising negatively by 2%, with most sectors recording negative revenue growth.

What to watch

• Monday: Eurozone: Consumer confidence (Oct.); Germany: GDP (Q3), CPI (Oct.)
• Tuesday: US: Housing price index (Aug.), Consumer confidence (Oct.), Chicago purchasing manager index (Oct.);Eurozone: GDP (Q3), CPI (Oct.); Germany: Retail sales (Sep.); Switzerland: Retail sales (Sep.); Japan: BoJ meeting;China: NBS manufacturing PMI (Oct.)
• Wednesday: US: ISM manufacturing PMI (Oct.), JOLTS job openings (Sep.), Fed meeting, ADP employment change (Oct.);China: Caixin manufacturing PMI (Oct.)
• Thursday: UK: BoE meeting; Switzerland: CPI
• Friday: US: Employment report (Oct.), ISM services (Oct.); Eurozone: Unemployment rate (Oct.); China: Caixin servicesPMI (Oct.)