The recent increase in yields has certainly caught me wrong-footed. I am not really a duration player (in terms of going long when the view is that yields will decrease), and for this – at least at the moment – I am grateful. The reversal in yields would ordinarily have costs for both bond and stock investors. Fortunately in this round of yield increases, stocks have been spared – at least so far – as the cost of higher yields has been overcome by continued good news about the US economy (which filters through to more robust earnings expectations). Bond investors have not been as fortunate for obvious reasons. Of course, as an investor long risk, I would like to see this continue. S&P 500 earnings are off to a good start which has further buoyed stocks, but we are only at the opening stages. As I have been discussing, the risks that bother me the most are geopolitical risks around the upcoming US presidential election – which remains too close to call – and the ongoing conflicts in the Middle East and in Ukraine-Russia.
WHAT MATTERED LAST WEEK
The main events this past week were US inflation data and earnings from two of the large US banks, marking the traditional “kick-off” for this round of S&P 500 earnings. CPI came in slightly hotter than expected on Thursday (release here), providing another data point which suggests that the US economy remains on solid footing. September headline inflation increased 0.2% MoM / 2.4% YoY, and core inflation increased 0.3% MoM / 3.3% YoY, with the trend in core and headline CPI depicted below:
Both US stocks and bonds were weaker following the news on Thursday, with yields continuing to slowly edge higher as expectations moderate for the speed of Fed easing. The slightly hot CPI report follows on the heels of a strong jobs report for September, which was released the prior week. Although disappointing data occasionally surfaces, it feels infrequent – the Atlanta Fed GDPNow forecast for GDP for the third quarter remains robust, at 3.2% YoY.
As far as earnings, the cycle got off to a good start with both JP Morgan and Wells Fargo beating analysts’ consensus expectations for their third quarter results. JPM beat because of higher-than-expected interest income (unexpected in a declining interest rate environment), and Wells Fargo beat because of an improvement in investment banking income which surpassed the decline in net interest income. Intraday, JPM was up 4.4% and WFC was up 5.6% on Friday, following the release of earnings pre-open. Other companies that released earnings last week included PEP on Tuesday and DAL on Thursday. You can find a summary of last week’s S&P 500 earnings, and an outlook for the week ahead, from LSEG I/B/E/S here.
The Federal Reserve released the minutes from the last FOMC meeting on September 17-18, interesting because it illustrates the debate that the Fed governors had before deciding on a jumbo 50bps decrease in the Fed Funds rate. The CME FedWatch Tool is projecting two more 25bps reductions in the Fed Funds rate this year, as the jumbo rate reduction of September – coupled with continued solid economic data – has taken a second jumbo rate cut off the table for now.
In the RoW, the UK economy grew 0.2% in August, an improvement over flat growth in June and July, and bang on expectations. Eurozone economic data remains sufficiently mixed and September inflation came in lower than the long-run ECB target of 2% (at 1.8%), almost guaranteeing that the ECB will reduce its policy rates a further 25bps at its next monetary policy meeting this Thursday. China’s Finance Ministry outlined today its 2 billion Yuan fiscal stimulus plan to retore economic growth, aiming for 5%/annum growth. I suppose today’s announcement provides more details, but I still consider it far from sufficient to justify the recent uptick in stocks. Investors seems to feel the same since Chinese stocks have been weak since the market reopened last Tuesday.
MARKETS LAST WEEK
Global equities were mixed last week as you can see in the table below. Chinese equities were the worst performing, not surprising given the sharp gains over the three weeks or so prior (one of which was a week-long holiday). Weakness in Chinese equities pulled the emerging markets index lower, too. US stocks were solid, with Friday bringing another day of record high closes in the S&P 500 and the DJIA. US stocks were mixed on the week until Friday’s strong earnings announcements from JP Morgan and Wells Fargo provided an injection of adrenilin in risk sentiment, sending stocks to record high closing levels (again).
As far as US Treasury yields, it’s the same narrative as last week – resilient US economic data continues to trickle in that is moderating expectations regarding the pace of monetary easing, and also improving the outlook for the US economy. Yields were higher across the curve this week, more pronounced in the belly and at the long-end.
Corporate credit all-in yields were higher off the back of higher base rates, although spreads were mixed. Investment grade spreads tightened slightly, and high yield spreads (in USD) widened. Even so, the average USD high yield spread remains below 3%, very tight by historical standards.
In currencies, the U.S. Dollar was stronger this week as yield expectations in the US worsen (i.e. higher), and US economic growth remains the best in the world. Sterling and the Euro were slightly weaker against the USD, and the Yen was flat. Gold was slightly better this week, continuing to trade in the $2,650/oz area. The price of oilrose again, and Bitcoin recorded modest gains, too.
WHAT’S AHEAD
Economic data this coming week includes
US: Plenty of Fed talking heads on the circuit, retail sales, some manufacturing data and building/housing data
UK: employment data, CPI and retail sales, all for Sept
Europe: Industrial production
China: CPI, trade data and 3Q23 GDP
Japan: CPI
Earnings: 41 S&P 500 companies report earnings next week, including GS, BAC, PG, CITI, MS, NFLX, JNJ and AXP.
Monetary policy meetings:
ECB: Oct 17 and Dec 12
FOMC: Nov 6/7 and Dec 17/18
Bank of Japan: Oct 30/31 and Dec 18/19
Bank of England: Nov 7 and Dec 19
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