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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • Writer's picturetim@emorningcoffee.com

Week ended July 28, 2023: Looking good!


Microsoft joined Netflix and Tesla this week in the “underperformer club” beating top- and bottom-line expectations for the company’s 4Q23 but serving up disappointing guidance (4Q23 release here) which caused the shares to get battered. But fear little, because Alphabet (Google, release here) and Meta Platforms (Facebook etc, release here) rode to the rescue, both also beating on the top- and bottom-lines but suggesting more optimism in calls with analysts as they look forward. For GOOG and META, advertising revenues in particular – like most of the rest of the US economy – showed just how resilient growth remains. A slew of other US and European corporates also released earnings this week, mixed but perhaps slightly better than beaten-down expectations, especially for some of the large cap cyclicals. As far as economic data, 2Q2023 US GDP surprised on the upside (2.4% YoY, BEA release here) and June core PCE (BEA release here) suggested that core inflation was heading in the right direction, declining to 4.1% YoY in June (vs 4.6% YoY in May). For those of you that might remember him, many investors must feel very much like the late Rodney Dangerfield in this classic photo!


To me at least, it is getting more and more predictable – bears continue to get hammered as neither earnings nor economic data is proving weak enough to derail the momentum. It all feels so predictable now, probably too much so. Both the Fed and ECB raised their short-term rates 25bps this week as expected, and both respective central bank heads said the “right things” in press conferences following their monetary policy decisions. Investors yawned, although the shock upside of 2Q GDP growth figure caused investors to step back for a few hours on Thursday to sell both bonds and equities, fearing further monetary tightening. Even the Bank of Japan, which surprised on Friday by more or less doing away with its yield curve control policy that has been in place since 2016, did not derail the momentum. The Yen rallied after the BoJ news, but as with sagging stocks on Thursday, the about-turn proved short-lived, and Friday was a new day. Indeed, both the Fed and ECB have left the door open to further rate hikes, but the positive inflation surprise on Friday morning before the open (via June PCE release) settled investors, as they erased Thursday’s losses and more on the final trading day of the week. Since the Fed and ECB had both telegraphed their moves well in advance, both central banks decisions were largely sideshows compared to the week’s main event, which was earnings.


Just over one-half of S&P 500 companies have now released their most recent quarterly results. In isolation, the results have not been stellar. According to Factset (here), year-over-year earnings have declined by 7.3% (5-year average growth rate is +12.0%). Refinitiv (here) estimates that 2Q23 year-over-year revenues and earnings for S&P 500 companies will end up with declines of 0.4% and 6.8%, respectively, far from positive. Still, markets continue to rally more on the outlook – which is increasingly positive – than the current reality. Although a lot of attention was focused on three big tech companies – MSFT, GOOG and META – there were plenty of other large companies to keep investors on edge this week. My general observation is that those cyclicals / large cap names that have surprised on the upside have been encouraging, as more and more investors embrace the “soft landing” and “no recession” (or “recession later”) scenario, favouring these sorts of companies.


MARKETS LAST WEEK
  • The global equity indices tracked by EMC all raced forward this week, with gains ranging from 0.4% for the FTSE 100 to 4.2% for the MSCI emerging markets index. For the latter, emerging markets investors were cheered by rumours coming from China that the government is considering steps to boost the Chinese economy, with the year-to-date return for the Shanghai index (+6.0%) trailing only the FTSE 100 (+3.3%).

  • US equity indices were all positive this week, led by the NASDAQ Composite which “found its legs” on Friday, rallying 1.9% on Friday following the release of PCE data (and also causing UST bonds to rally).

  • US Treasury yields were higher across the curve, but most pronounced at the intermediate and long end of the curve as stronger-than-expected US economic data highlighted the diminishing risk of a US recession. The 2yr-10yr negative yield curve inversion lessened by 7bps (to negative 91bps). Higher yields caused both the 7-10 year and the 20+ year total bond indices to lose ground this week, although both remain modestly positive YtD (7-10 year +1.2%, and 20+ year +1.8%).

  • Corporate credit rallied this week in spite of higher underlying UST yields, continuing to exhibit no concerns about deteriorating credit conditions. Spreads for both investment grade and high yield bonds ground tighter.

  • As far as other assets tracked by EMC, the US Dollar was slightly stronger on the week although it bounced around. The biggest gainer was oil, as the price of WTI crude rallied 4.6% this week and has increased nearly 16% in the last month, again at least partially driven by an improving outlook for global growth.

If you would like to see details by asset class / market type, go to the section “The Tablesbelow.


WHAT’S AHEAD THAT MATTERS?

Earnings quarter ended O/A June 30, 2023 (2Q for most companies):

  • This is another huge week for earnings, with Factset indicating that 170 S&P 500 companies will report earnings this week; the Refinitiv’s summary for last week’s earnings (ended July 28, 2023) for the S&P 500 companies is here

  • “Magnificent seven” (three left, two this coming week): AAPL, Aug 3; AMZN, Aug 3; and NVDA, Aug 23

Central bank meetings:

  • Federal Reserve (FOMC): Sept 19-20 (with updated projections)

  • ECB: Sept 14

  • Bank of England: Aug 3 (+25bps expected) and Sept 21

  • Bank of Japan: Sept 21-22

THE TABLES

The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.


Global equities


US equities


US Treasuries


Corporate bonds (credit)





Safe haven and other assets


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