Week ended October 28, 2022
SUMMARY
Let’s start with the predictable. Both the ECB and Bank of Japan did exactly as expected this week, with the former jacking up its three key interest rates by 75bps and the latter doing nothing. The ECB did the right thing as it attempts to rid the Eurozone of inflation out of fear that it could become embedded into the psych of consumers and businesses alike. Both the Fed and Band of England are on deck this week, and both are expected to raise their key bank interest rates by 75bps, although there is some speculation that the BoE could go bigger.
Sterling and Gilts steadied and improved this week as the Conservative party in the U.K. managed to choose a new Prime Minister on Monday – former Chancellor of the Exchequer Rishi Sunak. I have heard people say: “he’s boring”, “he’s pro-BREXIT”, “he’s inexperienced”, and even “he’s too short”, but the reality is that this country needs a safe pair of hands at the moment to navigate what are sure to be very choppy waters ahead. Investors voiced their approval, and now the real work begins. Tightening of the fiscal belt almost certainly lies ahead, as does a (deeper) recession.
With the political drama over now in the U.K., investors can at last turn their attention to the main event – U.S. mid-term elections – which will be close and contentious, but hopefully will not spark a repeat of January 6th. Here’s how polling company #FiveThirtyEight sees the House and Senate races playing out:
Should the House or Senate – or both – move to Republican control, I wouldn’t expect much as far as new government initiatives during the next two years. (As an aside, keep an eye too on the Brazilian presidential election, which is very close and will be decided Sunday.)
Running my eyes over economic data from this week, the things that stood out included:
Better-than-expected 3Q22 GDP in China (released later than scheduled, read 3.9% YoY vs 3.5% expected),
Poorer-than-expected PMI data for October (preliminary) for manufacturing and services in both the U.K. and U.S., with all reads below 50
Weaker-than-expected housing price data in the U.S. (Schiller Index),
Mixed PCE data in the US for September, showing on-going persistent inflation (core PCE 5.1%, +0.2% vs Aug) but a resilient consumer, and
Solid 3Q22 GDP in the U.S., 3Q22 QoQ at 0.6% and annualised 3Q22 of 2.6% (vs 2.4% expected).
Most of the focus this week was on earnings rather than economic data. With over one-half of the S&P 500 companies now having reported, including all five FAMAG companies, my observations so far are:
FAMAG and similar tech names are seeing growth slow with the strong US Dollar a contributor. Slower advertising spend is also negatively affecting GOOG and META (Facebook) which are reliant on this revenue stream. AMZN sharply cut its 4Q22 revenue expectations. Lower spending on advertising and less enthusiasm for consumer spending say a lot about the direction of the U.S., and global, economy.
European banks, energy companies and global airlines are doing very well at the moment. Shell and ExxonMobile reported record quarterly profits, and TotalEnergies and Chevron reported their second highest quarterly earnings ever. (BP reports on Tuesday.)
Setting aside technology companies, most companies are meeting or slightly beating analysts’ consensus expectations, which many investors deemed too aggressive going into this round of earnings. I discuss this further in “What Mattered This Week” below.
I had a diatribe written for this update, moaning about European governments wanting to impose windfall taxes on European banks, but I decided to save this topic for a separate article. In a nutshell, a windfall tax on banks (or energy companies) is a stupid idea and unfair to stakeholders, but don’t count the populist idea out because no one likes banks or oil giants anyway. There is plenty of noise coming from the Dems Stateside, too, wanting to get their dirty hands on record profits of major oil producers. This doesn’t sit well with me.
MARKETS THIS WEEK
Overall it was a good week for equities in the developed markets with stocks in the U.S., U.K., European and Japanese stocks all reporting gains The geographic outlier was China and the emerging markets more broadly. Chinese equities slumped early in the week following President Xi tightening his grip on power during the recent multi-day CPC National Congress meeting in Beijing. In the U.S., the DJIA was the best performing index, a sign of the rotation that is occurring out of technology and similar high-Beta names into the “more boring stuff.” The NASDAQ somehow managed to overcome the poor performance of GOOG, MSFT, AMZN and META, clawing back early session losses on Friday to end the week with a gain of 2.2%. US Treasuries rallied, a welcome respite from recent weeks, as yields fell across all maturities. The yield on the 10y UST ended the week at 4.02%, down 19bps WoW. The yield curve steepened, suggesting that investors believe there is a higher probability of slower economic growth in the U.S. in the quarters ahead. Corporate credit improved, following the lead of U.S. equities, and remains surprisingly resilient in spite of visible headwinds on the horizon. Oil continued its recent run although fell in price during the latter half of the week. The US Dollar weakened slightly (finally), and bitcoin caught a bid during the week, ending up 7.4% WoW. The summary table is below.
WHAT MATTERED THIS WEEK
Earnings decent: FAMAG companies disappoint, major oil soars
S&P 500 company earnings have been generally good so far during this quarter, but the FAMAG stocks – a heavy bias in many U.S. and global stock indices – have continued to disappoint. Even though some of the FAMAG companies beat analysts’ consensus expectations, most managements were cautious on their outlooks, none more so than AMZN, which sharply revised 4Q22 revenues down. META and AMZN were the worst WoW performers, as you can see in the summary table below (right-most column).
All of the FAMAG companies are global companies, so their sales growth is adversely affected by the strong US Dollar. Slowing advertising spend is negatively affecting revenues and profits at GOOG and META, which are – relatively speaking – more dependent on this revenue stream than the other FAMAG companies. META and AMZN continue to have issues with their cost base, the former due to investment in the metaverse and the latter due to legacy COVID issues to meet peak-pandemic demand. Cloud growth is slowing too, affecting GOOG, MSFT and AMZN. AAPL perhaps has weathered this storm the best so far, but even AAPL is seeing sales of its core product – the iPhone – start to slow. Personally, I like these companies (even META at a price, which I do not currently own), because they have strong defensive characteristics under and are getting cheaper.
As mentioned already, four of the five global energy majors that reported Thursday and Friday (SHEL, TTE, CVX and XOM) had record or near-record earnings for the quarter. BP reports earnings on Tuesday.
263 companies in the S&P 500 have now reported earnings. According to the #Refinitiv (scorecard for the week is here), 73% of companies that have reported have beat consensus’ earnings expectations and 66% have beat consensus’ revenue expectations. Both are better than average so far although the positive surprises are less than in 2Q22.
ECB, BoJ do as expected
The ECB raised its key bank deposit rate 75bps to 1.50% as expected. The ECB will continue to reinvest proceeds of maturing bonds on its balance sheet, meaning that quantitative tightening is not yet part of its playback to address inflation. The “Combined monetary policy decisions and statement” from the ECB is here. Similarly, the Bank of Japan stuck to its guns as expected, remaining an outlier in terms of its accommodative monetary policy stance. The “Statement on Monetary Policy” from the BoJ can be found here.
Economic data: US 3Q22 GDP beats
The first release of 3Q22 GDP showed the U.S. economy grew 0.6% in the 3Q22 (QoQ) / 2.6% annualised, slightly better than economists’ consensus expectations of 2.4%. The BEA press release is here. This is an improvement over the first two quarters of GDP in the U.S. this year, which were slightly negative. PCE data was mixed for September (BEA release here), but clearly the Fed’s preferred gauge of inflation is showing no tangible signs of inflation subsiding and opening the door for the expected increase of 75bps in the Fed Funds rate at this week’s FOMC meeting.
WHAT’S NEXT?
Below are some of the key data releases and other financial events that matter for the weeks ahead.
S&P 500 earnings – It’s another active week for S&P 500 companies as far as earnings announcements, , including JNJ, AMD, ABNB, PFE, EL, MRNA, UBER, CVS, QCOMM, SBUX, COIN and BLOCK.
Mid-term elections are approaching in the US, slated for Nov 8th. See my earlier comments in the “Summary” section.
As far as economic data, the focus will be on the release of data for October which will begin next week, including October inflation data and 3Q22 GDP for the Eurozone, and US unemployment for October on Friday. Most eyes though will be on rate decisions from the Fed and BoE.
Upcoming central bank meetings (and last one of year):
Federal Reserve – THIS WEEK: Nov 1-2, expectation +75bps (next meeting Dec 13-14)
Bank of England – THIS WEEK: Nov 3rd, expectation +75bps (next meeting Dec 15th)
ECB – Dec 15th
Bank of Japan – Dec 19-20
THE TABLES
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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