2023 Weekly Update

Market update

The S&P 500 closed the week at 4,358.34, +4.60% higher. The Dow Jones closed at 34,061.32, +5.07%, with the Nasdaq higher by +6.61%. The volatility index VIX closed the week at 14.91 down from 21.27. The Euro Stoxx 600 surged +4.92%.

The 10-year UST closed at 4.57% down from 4.83% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -85bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 196bps and High Yield tightened 27bps at 444bps. German 10-year Bunds yield closed at +2.65% down from +2.83% a week before. In Europe, Corporate Investment Grade spreads tightened 7bps at 169bps and High Yield spreads tightened 22bps to 467bps.

The US Dollar Index (DXY) depreciated -1.44% last week and closed at 105.02. The Euro closed at 1.0731 (+1.57%); the Yen appreciated +0.18%, closing at 149.39 and the Swiss Franc appreciated +0.39%, closing at 0.8988. Gold closed at $1,992.65 depreciating -0.68%. Oil was lower, Brent closed at $84.89 (-6.18%) and WTI at $80.51 (-5.88%).

Macroeconomy

Non-farm payrolls

The US economy added 150k jobs in Oct., below the 180k forecast, down from +336k in Sept., and about 100k less than the monthly average of 258k over the last 12 months. Revisions were negative as employment in Aug. and Sept. both combined is 101k lower than reported. Oct. job gains occurred in healthcare, government, and social assistance. Unemployment rate ticked up to 3.9% (up from 3.8% in Sept. and ahead of the 3.8% forecast) while the participation rate ticked down to 62.7% (down from 62.8% in Sept. and below the 62.8% forecast). Wages came in at +4.1% y-o-y, down from +4.3% in Sept. (the expectation was +4% for Oct.). The workweek length shortened to 34.3 hours, down from 34.4 hours in Sept. (analysts anticipated this number holding flat). Average weekly earnings were $1,166.20 in Oct., up just 3.1% y-o-y.

Fed meeting

As expected, the FOMC held rates steady at 5.50% and the prepared statement largely saw a holding pattern, with one change being a new mention of tighter financial conditions. This dovish tilt was again visible in Powell’s remarks, with a more direct comment that “the stance of policy is restrictive”. In the Q&A, Powell maintained a tightening bias, repeating that strong growth could warrant “further tightening” and that the FOMC members were “not confident yet” that a “sufficiently restrictive stance” has been achieved. So keeping the possibility of a hike in Dec. However, Powell’s overall tone made this tightening bias sound soft. Powell acknowledged that “the risk of doing too much vs. the risk of doing too little are getting closer to balance”. The FOMC “is not considering” changing the pace of Quantitative Tightening.

Bank of Japan

The BoJ took another step for yield curve control (YCC) removal, by turning the upper bound of 1.0% from “hard cap” to a “reference”. This would allow 10yr JGB yields to go above 1%, and the extent to which YCC effectively remains in place depends on how much bond buying the BOJ decides to do and at what yields it is done. On rates, the BoJ decided to keep its overnight rate and long-term rate target unchanged at -0.1% and 0.0% respectively. In parallel, PM Kishida’s cabinet approved a package of stimulus measures worth about $112bn including one-off tax reduction, cash hand-out to low-income household, and an extension of subsidies to ease rising prices of gasoline.

Bank of England

The BoE left rates on hold at 5.25% as expected, but it was a split 6-3 vote, with 3 preferring to have another 25bps hike. The decision struck a slightly more hawkish tone, since the new forecasts showed CPI landing slightly above 2% in two years' time (based on the MPC's mean projection using market expectations for interest rates). Markets moved to price out the chances of another hike in this cycle, with the probability down from 36% on Wednesday to 30% by Friday.

China PMI

Chinese official manufacturing PMI slipped back into contraction at 49.5 in Oct., while the official non-manufacturing PMI also dropped to 50.6. The downside surprise may partly be due to some seasonal factor, while input price hikes moderated from previous months. The Central Financial Work Conference conducted its twice-a-decade meeting, which set the direction of policy for the next five years. Overall, the meeting urged greater efforts to comprehensively step-up financial supervision, as an effort to promote high-quality economic growth.

Europe & Switzerland data

Euro area GDP fell by -0.1% q-o-q in Q3, while the Q2 figure was revised up to +0.2% q-o-q (from +0.1%). Euro area headline inflation eased to 2.9% y-o-y in Oct. from 4.3% in Sept., while core inflation moderated to 4.2% y-o-y from 4.5%. Services inflation eased to 4.6% y-o-y from 4.7% in Sept. Core goods inflation fell by 0.6pp to 3.5% y-o-y in Oct., reflecting fading pressure from supply-chain issues and energy prices. Food and energy inflation moderated in Oct. Swiss Manufacturing PMI fell 4.3 points in Oct. to 40.6, almost reversing the Sept. increase but still above the trough of 38.5 in July. Swiss headline inflation was broadly stable at 1.7% in Oct. Core inflation rose to 1.5% from 1.3% in Sept. Domestic price pressures are expected to increase due to rents, electricity prices, VAT and national public transport prices.

Highlights

Rates

US Treasury yields fell over the week, and as longer-dated ones fell more, the US Treasury yield curve inverted further again. The ten-to-two-year slope flattened from -20bps to -33bps, with the 10-year yield falling 18bps to 4.66%, while the 30-year fell even more by 29bps to 4.80%. Along with the quarterly refunding announcement from the US Treasury Department, the fact that Jerome Powell did not commit to an additional rate hike in Dec. led market participants to reprice lower the expected Fed funds rate path, both likely contributing to the fall in longer-dated Treasury yields. The policy rate expected in 10-years’ time has moved down from 4.6% at the peak on 19 Oct. to 4.3% on 2 Nov. Regarding the Treasury announcement, the auction sizes for Treasury notes and bonds have not been increased as much as expected in the longer-dated maturities. They forecasted that only “one additional quarter of increases to coupon auction sizes will likely be needed”. That will likely push up the share of T-bills in percentage of total US Treasuries outstanding higher that the recommended range between 15%-20% for longer. The T-bills share already stood at 20% in August.

Earnings

In aggregate, earnings growth is coming in at +2% y-o-y in the US, and -13% in Europe. However, the bulk of the weakness is due to commodity sectors; excluding Energy and Materials, EPS growth is at +9% and +8% in the US and Europe, respectively. In the US, 72% of S&P500 companies have reported: 81% of S&P500 companies beat EPS estimates. EPS growth is at +2% y-o-y, surprising positively by 6%. Ex-Energy EPS growth is +8% y-o-y. Apart from Energy, Materials and Healthcare, all sectors are printing robust growth, leading to a sharp revision higher in S&P500 Q3 blended EPS. In Europe, over 60% of Stoxx600 companies expected to report have released Q3 earnings: 56% beat EPS estimates. Q3 EPS growth is coming in at -13% y-o-y, surprising positively by 1%. Earnings growth for commodity sectors, Staples, Utilities and Real Estate is poor. On top line, delivery has continued to be very weak, with sales beats much lower than average. Revenue growth is at -7% y-o-y, surprising negatively by 3%. 9 out of 11 sectors show negative sales growth.

What to watch

• Monday: Eurozone: composite PMI (Oct.); Sentix investor confidence (Oct.); Germany: Factory orders (Oct.); US: Senior Loan Officer survey (Q3)
• Tuesday: China: Trade balance (Oct.); Eurozone: PPI (Sept.); Germany: Industrial production (Sept.)
• Wednesday: Germany: HICP (Oct.); Eurozone: Retail sales (Sept.)
• Thursday: US: Initial Jobless Claims (Nov. 3); China: CPI & PPI (Oct.)
• Friday: UK: GDP (Q3); US: Michigan consumer sentiment index (Nov.)