Even with the dire (but sligtly improved) outlook in the U.K., the
“The Federal Reserve announced that it was raising its target rate by 25 basis points, hiking for the eighth meeting in succession. Markets briefly wobbled on the news; and then Chair Jerome Powell embarked on his press conference, traders released their inner Sigmund Freuds and Jacques Derridas, and risk assets headed for the moon.” – John Authers, #BloombergOpinion, “Points of Return”, Feb 2, 2023
What a week – so much to cover, so little time. I think #JohnAuthers of Bloomberg Opinion is a brilliant writer and tactician of markets, so I borrowed the quote above directly from his Thursday morning "Points of Return", since it perfectly captured the response to the FOMC meeting and Chairman Powell’s press conference. For the record, I listened to the press conference, and I didn’t hear the “pivot narrative” at all, which obviously most investors did based on the market’s reaction.
I couldn’t begin to cover all the gyrations this week if I had to. Since I am trying to shorten and simplify these weekly reviews and focus more on thematic pieces and the future direction of markets, I intend to reduce the regurgitation of what happened this week with all of the many links and references, which you can find in the mainstream financial press. Nonetheless, suffer my summary below.
Central banks behaved just as expected as far as monetary policy, with the Fed hiking the Fed Funds rate 25bps (to 4.50% – 4.75%) on Wednesday, and the ECB and Bank of England hiking their policy rates 50bps (UK Bank Rate to 4% and Eurozone Marginal Lending Facility to 3.0%) on Thursday.
During Mr Powell’s press conference following the FOMC, risk assets started to rally. A similar response happened in UK and European equity markets the next day during the press conferences following UK and ECB rate decisions. Investors are reacting as if the battle against inflation is done; central bankers are suggesting the opposite.
As far as earnings this past week, most companies seemed to be on the wrong side of consensus expectations. And even more companies seemed to provide disappointing outlooks and cautious outlooks. Having said that, META (+22.9% WoW) reported mixed results on Wednesday after the bell, but beat on subscriber growth and advert revenues, which cheered markets. The results from AAPL, AMZN and GOOG – all of which reported Thursday after the bell – were poorer than anticipated, but the response was more positive for AAPL (+5.9% WoW) than for AMZN (+1.1% WoW) and GOOG (+4.8% WoW). (See I/B/E/S data from Refinitiv for the week ended Feb 3, 2023 here.)
The week ended on Friday with the January jobs report announced before the bell. 517,000 new jobs were added in the US in January, nearly triple expectations and twice the number of jobs added in December; unemployment fell to 3.4%, the lowest in 53 years (BLS report here). Supplementing the strong jobs data was better-than-anticipated ISM services data, which – unlike ISM manufacturing data – suggests a thriving US services sector.
Rolling all this together, the week can perhaps best be summarised as:
Generally poorer-than-expected earnings and cautious outlooks from corporate management teams for the quarters ahead,
Ongoing data suggesting a strong US economy, at least in terms of services and jobs, and better-than-expected economic growth in the UK and Europe,
Central banks aggressively immersed in the battle against inflation, with no indication of a definitive pivot, and
Stocks investors more or less ignoring the data and corporate earnings outlook (although the bond market seems more cautious).
Look - you gotta be in it to win it. Even though markets finally settled down on Friday with bonds and stocks behaving as I would expect (down), it was still a decent week overall if you were long risk. I would caution you though to keep a close eye on the valuations of stocks in your portfolio and do not get sucked in by FOMO . Let’s be honest - some stocks are getting back to ridiculously stupid levels. After all, when I see Cathie Woods back on the financial talk show circuit, I worry!
Global equities were generally better this past week, with the S&P 500 leading the pack even after Friday’s sell-off.
Emerging markets had a difficult week, mainly because the economic data clearly served as a reminder that the Fed’s work is far from done, pushing the US Dollar higher.
The NASDAQ continues to be the star performer Stateside YtD, quite a change from 2022. .
Even with the dire (but slightly improved) economic outlook in the U.K., the FTSE 100 closed at a record high on Friday.
Credit spreads also improved on the week, as credit remains in favour.
The short-end of the UST curve took in on the chin on Friday, as the “Fed pivot” narrative was squashed by the combination of strong jobs data and service ISM.
Gold continued its recent slide, back below $1,900/oz (strengthening US Dollar a factor).
Oil prices buckled under the weight of supply, with stronger-than-expected economic data unable to offset the effects of lower-than-expected demand during the winter months.
Below is a summary of markets for the week.
WHAT’S COMING THAT MATTERS
Economic data: It’s a relatively light week for data although the Fed and Bank of England “talking heads” will be making various speeches this week, no doubt reminding investors that the fight against inflation rages on. Limited data releases that matter include Eurozone retail sales on Monday, and China CPI, UK Dec/4Q22 GDP and US Michigan consumer sentiment survey all on Friday.
S&P 500 earnings: 93 additional S&P 500 companies will report earnings this week, including: BP, Kraft Heinz, Prudential, CVS, Disney, AstraZeneca, Pepsi, Philp Morris, Enbridge, Kellogg, Airbnb and UBER.
Upcoming central bank monetary policy meetings:
Federal Reserve – Mar 21st-22nd
Bank of England – Mar 23rd
ECB – Mar 23rd
Bank of Japan – Mar 9th-10th and Apr 27th-28th
Corporate bonds (credit)
Safe haven and other assets