Going nowhere fast: week ended April 21, 2023
Week ended April 21, 2023
[GO STRAIGHT TO THE TABLES] THINGS THAT CAUGHT MY EYE THIS WEEK
U.K. economic data and consumer confidence
The U.K. continues to serve up mixed economic data, with March CPI remaining in double-digits for the seventh consecutive month running (10.1% YoY, here) and retail sales falling in March by 0.9% (here), following gains in February. Nonetheless, consumer confidence spiked to the highest level in over one year in March according to GfK’s Consumer Confidence Index. As the weakest economically of the G7 countries and with the highest inflation, it is slightly surprising to see Brits feel optimistic about the future. Perhaps Labour doesn’t have the next election in the bag just yet.
Although economic data suggests that the US and Eurozone are in better shape (than the U.K.), there are also plenty of mixed messages in those economies. In fact, all three economic zones are continuing experience tight labour markets even as manufacturing activity slows. PMI data indicates that services remain strong but manufacturing less so, although on Friday flash PMI manufacturing data for the US for April (here) was above expectations and suggested that US manufacturing is now growing again. Naturally, bonds yields rose along with the US Dollar off this news. There’s no doubt that inflation is inevitably proving sticky across the board, although it is especially high and persistent in the U.K. US bank crisis and the effect on credit
Many US banks have now reported earnings, and the picture has been largely as expected. Banks overall have experienced deposit outflows, and within the banking system, the systemically large US banks have been the beneficiaries of deposit inflows that have left mid-size and smaller US banks. Also, my cursory interpretation of results seem to suggest that operating margins of banks are being squeezed by higher funding costs, which should not be a surprise. The combination of deposit outflows and higher funding costs will likely lead to tighter credit standards, a concern that has been highlighted time and time again by the financial press. The Fed would certainly welcome some degree of tighter credit markets in that it would assist in its quest to rein in inflation. Having said this, the combination of robust private credit markets and receptive capital markets should be more than able to absorb shortfalls in bank lending. As a proxy for borrowing costs, credit spreads in the public bond market have clawed back much of the widening experienced after the failure of SVB, although spreads do remain wider than before the mini-bank crisis.
Strength of global equities
The financial press and many professional investors are expressing scepticism over the current strength of US and European equities. However, the scepticism certainly isn’t reflected in share prices because they remain resilient. I suspect lower bond yields have made equities appear slightly more attractive relatively speaking, which has driven some movement from bonds back into equities. Uncertainty over the looming debt ceiling in the US is probably also not improving confidence in bonds as an alternative to stocks. Although I maintain a negative bias as far as US equities, I can also envisage a scenario in which the rally continues and even gains steam due to short covering. Earnings have not been spectacular perhaps but they have been good enough. Tesla was the focus this past week, as they missed their numbers and experienced sharp compression in operating margins. The stock fell nearly 11% WoW (although Cathy Wood / ARKK was loading up!). The I/B/E/S 1Q23 earnings data from Refinitiv can be found here for the week ended April 21, 2023.
WHAT’S COMING THAT MATTERS
We have the all-important tech giants reporting earnings this coming week: Microsoft, Alphabet, Meta, and Amazon. (Apple reports the following week.) There are also a slew of other companies reporting earnings that matter. In total, 188 S&P 500 companies will deliver 1Q23 earnings in the biggest week of the season. The Bank of Japan will also give its first monetary policy decision under the leadership of new Governor Kazuo Ueda. The Fed, Bank of England and the ECB all deliver monetary policy decisions the first week of May, with bets seeming to suggest that all will increase rates another 25bps. There is a lot of economic data, mostly in the second half of the week. A few things to keep an eye on this coming week include PCE data (the much-preferred Fed measure of inflation), preliminary 1Q23 GDP for the US, and US housing data.
MARKETS THIS WEEK
Developed markets indices largely skidded sideways on the week, whilst Chinese equities – and the emerging markets indices more broadly – were lower. All of these indices remain positive YtD, with the Euro STOXX 600 and the Nikkei 225 leading the gains.
In the US, equities were slightly weaker across the board this week, with the tech-heavy NASDAQ performing the poorest as interest rates edged higher. Earnings remain reasonably supportive, with nearly 18% of S&P 500 companies having reported earnings so far this cycle.
US Treasury yields were wider across the curve, most significantly at the short end as the Fed “talking heads” continue to say that a 25bps in the Fed Funds rate in early May is almost a dead certainty. US economic data has also showed a resilient economy.
Credit spreads in corporate investment grade and the weakest end of high yield (CCC) were tighter on the week, whilst spreads drifted higher in the higher end (BB/B) of the high yield universe.
Crude prices declined sharply this week as the efforts by OPEC+ to boost prices have fallen short. The price of WTI crude has given back most of the gains since the OPEC+ supply cuts were announced in early April.
The US Dollar was steady and gold was slightly weaker. Bitcoin was sharply lower on the week but is holding on to its nearly 70% gain YtD.
Corporate bonds (credit)
Safe haven and other assets