[GO STRAIGHT TO THE TABLES] I’ll give it to you straight up – I am increasingly concerned because I’m not so sure that the combination of economic news and better-than-expected earnings are enough to support the ongoing buoyancy of risk markets, specifically equities. I expect the Fed, ECB and BoE all to raise rates again at upcoming early-May meetings (+25bps likely for each) – even though economies are clearly slowing – because inflation remains stubbornly high in each country, even if it is trending in the right direction. As far as earnings, they have been decent, but I am more concerned about some of the commentary from companies as to the outlook. As my readers know, I generally play from the long equity side, so I suppose I am “talking down” my own book. Nonetheless, I feel that this incredible resiliency at some point might break.
WHAT CAUGHT MY EYE THIS WEEK
Investors were mostly focused this week on earnings of the S&P 500 companies, with 188 companies releasing results. Perhaps more specifically, market sentiment was wrapped around the earnings of four of the five “big tech” companies that released results this week – Microsoft, Alphabet (Google), META Platforms (Facebook) and Amazon. You can see below how these shares performed post-earnings (second column from right), which says about everything you need to know about the results.
Of course, the one stock I don’t currently own of these names – META Platforms – has been the biggest gainer YtD, nearly doubling, and also clobbered earnings expectations. In fact, all of the companies reported a solid quarter, certainly better than expectations. Amazon shares, up over 12% in the after-market just after their numbers were released on Thursday evening, gave it all back plus some following commentary by management on the analysts’ call suggesting that the company was seeing weakness in its cloud business in April. A slew of other bellwether companies reported earnings this week, which were generally solid. For a summary of the week in earnings, see I/B/E/S data from Refinitiv for the week ended April 28 here.
Economic data this week more or less confirmed that we are in for a period of slower US economic growth and fortunately ongoing disinflation. However, the declines in the inflation rate remain significantly slower than the Fed (and consumers) would like. US 1Q23 real GDP came in at 1.1% YoY, vs expectations of 1.9% YoY (vs 4Q22 YoY increase of 2.6%). The BEA press release re 1Q23 GDP is here.
PCE data released Friday showed MoM (Mar vs Feb) PCE decreased to 0.1%, and core PCE was flat at 0.3% (BEA report here). YoY figures were 4.2% (baseline) and 4.6% core, both more or less in line with expectations. If I understood the data correctly, it is consumer spending that it continuing to support the economy as fixed income investment is fading, a sign of a weakening economy characterised by persistently stubborn inflation. Also, housing is continuing to fade in the US, not surprising given that the average 30-year mortgage rate is hovering around 6-1/2%. The National Association of Realtors reported on Thursday that pending home sales fell 5.2% (MoM) in March and were down 23.2% YoY (data from NAR here). Surprisingly with the avalanche of indicators pointing towards slower US growth ahead, consumer sentiment actually rose slightly in April according to the University of Michigan sentiment indicator (here).
I remind readers that this data all “looks back.” In fact, probably the most concerning thing I heard this week was Amazon’s warning on its post-earnings release management call that corporates (like themselves) remain very focused on reducing expenses across the board. With respect to Amazon specifically, management highlighted that they were seeing slowing demand from customers in April in their cloud business because customers are scrambling to rationalise costs. This concern was of course not reflected in their 1Q23 earnings release, which showed strong performance in 1Q23, but is perhaps a more relevant view of what is going on now. As you might have heard, the stock reacted accordingly in the after-market on Thursday evening, up 12% after the earnings release and then giving this back plus some during the management call.
Eurozone GDP released on Friday showed anaemic growth in European GDP, which was up a mere 0.1% in 1Q23 QoQ for the Eurozone and 0.3% in the broader EU (release here). YoY showed an increase of 1.3% for both the Eurozone and the EU. Growth was slightly slower than had been expected, whilst – like in the US – inflation remains elevated.
Lastly, the Bank of Japan did just as expected – nothing – at its policy meeting this week, sticking to its overnight bank borrowing rate of -0.1% and yield curve control for the 10y JGB at 0.25% to 0.50% (or below 0.50% as the monetary policy release said, BoJ press release here). This decision was made in spite of inflation ticking higher in March to 3.1% /annum headline and 3.8% / annum core, the highest core reading since Dec 1981. The divergence in policy between the Bank of Japan and central banks in other G7 countries cheered equity investors of course, but caused the Yen to weaken, pushing it down to levels not seen since early March.
WHAT’S COMING THAT MATTERS
It’s a busy week as we kick off the new month. Monday is a holiday in the UK (Bank holiday and Europe (Labor Day), whilst Tokyo and Shanghai will be closed three days next week. The Fed (May 3) and ECB (May 4) will release monetary statements / policy decisions this coming week, with the Bank of England following on May 11. All three central banks are expected to raise their overnight bank rates by 0.25%. In addition, 162 S&P 500 companies will release earnings this coming week, with a focus of course on Apple (Thurs), as well as several semiconductor and energy companies. It is a diverse slate of reporting companies that will again be a significant driver of sentiment.
MARKETS
Japanese equities were up 1.0% this week, leading the international equity indices that EMC tracks. The Nikkei 225 has been the best performing index YtD (+10.6%), and was also the second best performing index in April (+2.9%), trailing only the FTSE 100 (+3.1%).
In the US, the NASDAQ Comp notched another strong week, up 1.3%, the best performing US index for the week. The strong finish to the month after a weak start meant that the tech-heavy index was flat for April, although it remains by a significant margin the best performing US index YtD (+16.8%), with the return nearly double that of the S&P 500 (+8.6% YtD).
Yields on US Treasuries were lower across the curve this week, slightly more pronounced at the shorter end of the curve. The 2y-10y differential ended the week at negative 60bps (curve inverted), the same as the prior week. US Treasuries racked up another month of gains and are up YtD, reversing the losses in 2022.
Corporate credit spreads were little changed this week in both investment grade and high yield.
The price of WTI crude and the US Dollar were both weaker this week, whilst the price of gold was slightly higher. The real loser of the week was the Japanese Yen, not surprising given inaction by the BoJ. Bitcoin registered a solid gain this week, +7.6%.
THE TABLES
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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