Week ended April 14, 2023
Inflation data and bank earnings drive markets
All eyes this week were on US inflation data for March, punctuated by the release of the FOMC minutes from the March 21/22 meeting, bank earnings on Friday, and goings on at the spring meeting of the IMF / World Bank. Investors remain constructive in general, with most expecting a lighter touch from the Federal Reserve in the coming months based on this week’s data releases, even as the economic outlook worsens and credit conditions tighten (at least from the perspective of banks). On Friday, the release of US March retail sales, comments from an FOMC member and cautionary outlooks from the large US banks, put a damper on the last trading day of the week, sending US stocks and bonds lower on the day although equities managed gains for the week.
Key data this week included:
Inflation data was slightly positive, in that data suggested inflation is continuing to decline. Headline CPI for March (here) showed increases which are moderating, and the data was in line with expectations. Headline PPI for March (here) actually showed an unexpected decline in producer prices for March. Stripping out food and energy prices to get to core CPI and PPI for March, the figures were:
o March core CPI: +0.4% MoM / +5.6% YoY
o March core PPI: +0.1% MoM / +3.6% YoY
These are moves in the right direction, with the CPI release on Wednesday being greeted with
apathy but the PPI figures released on Thursday sparking a rally in risk assets that gained
momentum as the day wore on.
Bank earnings from three of the six largest U.S. banks – JP Morgan, Citibank and Wells Fargo
– all beat analysts’ consensus expectations. I was expecting a gloomy outlook in the post-announcement management calls but in fact, each management team gave a rather upbeat assessment of the quarter and the outlook although cautioned on the potential for a US recession. The shares of these banks rallied following the news and were up for the week.
The FOMC minutes were released on Wednesday afternoon (here), three weeks following the last policy decision on March 22nd. The overall themes leading to the 25bps increase in the Federal Funds rate were the ongoing focus on bringing down inflation even in the wake of the mini-bank crisis triggered by the failures of Silicon Valley Bank and Signature Bank early in the month. The minutes also suggest that a further rate rise is likely at the FOMC meeting in early May, with future rises being data-dependent.
To punctuate the likely trajectory of the global economy for the remainder of this year and into 2024, the IMF released its updated World Economic Outlook which you can find here. If you
can’t be bothered to dig into the report, the first paragraph of the summary – extracted below – provides the major details:
The baseline [global economic] forecast is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent. Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. Inflation’s return to target is unlikely before 2025 in most cases.
The “Projections Table” (above, right) extracted from the report (more detail from report here) which provides the IMF’s views on economic growth for 2023-2025 for developed and larger developing countries/ regions.
US retail sales fell in March more than expected (see here / below), and this – along with mixed
comments from Chicago Fed President Austan Goolsbee on Friday morning (see CNBC interview here, 4 mins) – undid some of the nice gains from the day before. I thought Mr Goolsbee’s comments were fair and balanced; he suggested that a mild recession is probable.
Stocks were mostly positive on the week, with European markets registering solid gains but Japan delivering the best results for the week. Japanese equities (+3.5% WoW) rallied following comments by Warren Buffett on Tuesday that he would maintain Berkshire’s 5% holdings in the top Japanese trading houses.
US equities unravelled on Friday following solid gains on Thursday, with the S&P 500 giving back some of its gains for the week. Even so, all of the US indices ended positive WoW, with the value-play Russell 2000 delivering the best performance.
US Treasuries sold off with most of the pain coming on Friday as US equities were weakening, too. Yields were 10bps to12bps wider across the curve, with the 2yr-10yr inversion closing the week at –56bps. Both total return maturity buckets of USTs lost ground on the week.
Corporate credit spreads raced tighter this week. Investment grade spreads are about 10bps tighter in the last four weeks, and high yield spreads have come in around 65bps since then. The corporate bond market is showing no signs of credit stress, having clawed back its losses since the mini-bank crisis in early March.
Gold was marginally better on the week, WTI crude was higher by 2.5% and the US Dollar weakened slightly, bringing its YtD loss to nearly 2%. Bitcoin continued to defy gravity, registering a further gain this week of 9.1%, closing above $30,000; the benchmark crypto is up an impressive 83.5% YtD.
Corporate bonds (credit)
Safe haven and other assets