2023 Weekly Update

Market update

The S&P 500 closed the week at 4,415.24, +1.31% higher. The Dow Jones closed at 34,283.10, +0.65%, with the Nasdaq higher by +2.37%. The volatility index VIX closed the week at 14.17 down from 14.91. The Euro Stoxx 600 slipped -0.75%.

The 10-year UST closed at 4.65% 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 -76bps. US Corporate Bond spreads: Investment Grade tightened 2bps at 194bps and High Yield tightened 11bps at 433bps. German 10-year Bund yield closed at +2.72% up from +2.65% a week before. In Europe, Corporate Investment Grade spreads tightened 2bps at 167bps and High Yield spreads tightened 11bps to 456bps.

The US Dollar Index (DXY) appreciated +0.80% last week and closed at 105.86. The Euro closed at 1.0686 (-0.42%); the Yen depreciated -1.43%, closing at 151.52 and the Swiss Franc depreciated -0.43%, closing at 0.9027. Gold closed at $1,940.20 depreciating -2.63%. Oil was lower, Brent closed at $81.43 (-4.08%) and WTI at $77.17 (-4.15%).

Macroeconomy

Fedspeak

In remarks at an IMF conference, Fed Chair Powell said that “if it becomes appropriate to tighten policy further, we will not hesitate to do so” and echoed that “we are not confident that we have achieved such a stance” that would ensure inflation returns to 2%. There was some balance, alluding to two-sided risks and the role that improved supply has played in bringing down inflation, but adding that “it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy”. In the same lines, Minneapolis Fed President Kashkari said that “I’m not seeing a lot of evidence that the economy is weakening”. Also, Dallas Fed President Logan said that there’s been some “important cooling” in the labor market, but that "it still looks like we're trending to 3% instead of 2%” on inflation with continued tight financial conditions needed to bring inflation down. Fed Governor Bowman was the only one to explicitly speak of additional hikes, as she continued “to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way”. Overall, hawkish comments especially when other Fed speakers had struck a more dovish note. For instance, Atlanta Fed President Bostic said that “I think our policy is restrictive, and likely sufficiently restrictive”. Richmond Fed President Barkin said that “we are still not seeing the full effects of policy”, and that “I believe there’s a slowdown coming”. Chicago Fed President Goolsbee remained cautious, saying that he didn’t like “pre-committing what the rates are going to be at the next meeting when we still have weeks to go and a lot of information to gather”.

US economic data

The Senior Loan Officer Opinion Survey (SLOOS) from the Fed looks at bank lending standards and has traditionally been a strong leading indicator for the economy more broadly. It showed some improvement in banks’ willingness to lend compared to the previous quarter’s lows, with the net balance of banks reporting tighter lending standards falling from 50.8 to 33.9 for commercial & industrial loans and from 71.7 to 64.9 for CRE loans. However, more banks reported tightening standards for mortgages, up from 13.8 to 16.0. So, the general SLOOS improvement is welcome but most measures are still at levels usually associated with recessions. The preliminary results for November’s University of Michigan consumer sentiment survey, which posted below expectations at 60.4 (vs 63.7 expected). Inflation expectations for both 1yr ahead and 5 to 10yrs came in above forecasts at 4.4% (vs 4.0% expected) and 3.2% (vs 3.0% expected). Much of the raised expectations for inflation derived from concerns about higher oil prices in the context of the conflict in Israel. The first print is often revised down and energy prices have fallen back again of late so while these are not good prints, they may not stick. Indeed, markets didn’t react much, especially with US retail gasoline prices falling for a seventh consecutive week (-2.22%).

Global central banks

Regarding the ECB, Bundesbank President Nagel said that “I don’t like this discussion going on about when will be the point you lower interest rates”. That was echoed by the Central Bank of Ireland’s Governor Makhlouf, who said that it was “far too early in my view to start talking about when we’ll start reducing or cutting rates”. Furthermore, despite the moves lower in market-based inflation expectations, the ECB’s latest Consumer Expectations Survey found that in September, median inflation expectations at the 1yr horizon were up half a point to 4.0%, which is their highest level since April. At the 3yr horizon, they were unchanged at 2.5%. Bank of England’s chief economist said that what financial markets were anticipating for rates “doesn’t seem totally unreasonable”, which were pricing in cuts later in 2024. Finally, the Reserve Bank of Australia (RBA) lifted its cash rate for the first time in five months (+25bps) to a 12-year high of 4.35% citing a slower-than-expected decline in inflation while still indicating that inflation would return to its target range of 2% to 3%.

Highlights

Rates

Bonds sold off towards the end of last week, on the back of a poor 30yr auction and a hawkish Powell speech. On Thursday, both 10yr (+13.2bps) and 30yr yields (+15.1bps) saw their largest increases in four weeks. While the 3yr and 10yr auctions the previous two days were well digested, the Thursday $24bn 30yr auction priced at 4.769%, 5.3bps above the indicated pre-sale level. Only one other 30yr auction in the last decade has had a tail around these levels. The bid-cover ratio (at 2.24) and the size of end-investor take up (at 75% vs 82% last month) were at their weakest since late 2021. Also Powell’s comments had an impact on the front-end. The likelihood of another rate hike priced by Fed funds futures went up from 17% to 24% on the day, with end-24 pricing up +10.3bps to 4.56%. The 2yr yield was trading +2 to 3bps higher on the day prior to Powell’s speech but was up +8.7bps to 5.02% at the end, the first time since the end of Oct. that it has closed above 5%.

Earnings

Around 75-85% of companies have now reported Q3 results in the US and in Europe, where overall EPS growth is at +3% y-o-y in the US and -8% y-o-y in Europe. Commodities are skewing the numbers to the downside; ex-Energy EPS growth stands at +9% and +4% in the US and Europe, respectively. Better than expected earnings delivery has led to a sharp upgrade in the S&P500 blended Q3 EPS estimate. Still, guidance for next year has been below expectations, and EPS revisions are rolling over again in most regions. In the US, 86% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is at +3% y-o-y, surprising positively by 6%. Energy, Materials and Healthcare are printing negative EPS growth, while on the other side, Discretionary, Financials and Communication Services are recording double-digit earnings growth. Topline growth is coming in at +1% y-o-y, surprising positively by 1%. In Europe, of the Stoxx600 companies that have reported so far, 58% beat EPS estimates. Q3 EPS growth is coming in at -8% y-o-y, surprising positively by 1%. Ex-Energy EPS growth is at +4% y-o-y. Defensive sectors have fared better than Cyclicals in Europe. Top line delivery is exceptionally weak, with sales beats lower than average. Revenue growth is at -9% y-o-y, surprising negatively by 4%. 9 out of 11 sectors are seeing flat or negative sales growth.

What to watch

• Monday: Eurozone: Economic growth forecast; US: Monthly budget statement (Oct.)
• Tuesday: Switzerland: SNB chairman speech; Eurozone: GDP (Q3), Employment change (Q3); Germany: ZEW survey (Nov..); US CPI (Oct.)
• Wednesday: Japan: GDP (Q3); China: Industrial production (Oct.), Retail sales (Oct); UK: CPI & PPI (Oct.); US: PPI (Oct.), Retail Sales (Oct.); Eurozone: Industrial production (Sept.)
• Thursday: US: Initial Jobless Claims (Nov. 10), Philadelphia Fed manufacturing survey (Nov.), Industrial production (Oct.)
• Friday: UK: Retail sales (Oct.); US: Building permits (Oct.), Housing starts (Oct); Switzerland: Industrial production (Q3); Eurozone: HICP (Oct.)