Week ended May 12, 2023
Stocks didn’t do much week-over-week although the general trend was down. Japanese equities were again the best performer WoW, and remain the best-performing equity market EMC tracks YtD. US equities rallied off of early afternoon lows in the Friday session to finish the day – and the week – down only slightly. US Treasuries were slightly weaker (yields slightly higher) although prices / yields bounced around a bit before and after the US April CPI release mid-week. Even so, UST total returns remain nicely positive YtD. Corporate bond credit spreads were stable to slightly better, as risk indicators remained neutral in equities (VIX closed 17.03) and improved in the bond market (MOVE closed 120.52). Gold, also a risk indicator, was flattish WoW. The biggest surprise was in the currency markets, where the US Dollar strengthened 1.5% on the week, bucking its YtD trend of drifting lower. The price of oil also fell (again), and Bitcoin was sharply lower. Detailed tables illustrating movement in indices and other asset prices is in the section "The Tables" below.
WHAT HAPPENED THIS WEEK THAT MATTERED
There’s not really a lot to say interesting about this past week since major economic data mostly came in as expected, and the Bank of England did just what was anticipated. I suppose there was a bias towards ever-so lower inflation and sluggish US growth, and this did take a toll on markets by the end of the week. There were some earnings surprises but nothing overly influential unless you own DIS or ABNB, which naturally, I do.
US CPI was the focal point on Wednesday, with the data in line with consensus expectations, certainly much to the relief of the Federal Reserve (BLS report here). YoY headline CPI for April decreased slightly to 4.9% and core CPI (ex-food, ex-energy) was 5.5%. Headline CPI was the lowest in 12 months and is trending down slowly, as you can see in the graph below from the BLS report.
Even though headline CPI is trending down, core CPI (red line in graph) is proving to be sticky though at 0.4% to 0.5% per month, where it has been since December 2022. Core CPI for April (MoM) was 0.4%, the same as for March. Nonetheless, this data – alongside the Fed’s signalling at the last FOMC meeting and ongoing albeit less headline-grabbing issues with US regional banks – raises the probability of a Fed pause. The odds-on-favourite is that the Fed will pause its rate increases at its next meeting in June, a view apparently supported by 88% of investors according to the CME FedWatch Tool. The same #CME FedWatch Tool is suggesting that the majority of investors expect a series of 25bps cuts starting at the September FOMC meeting and continuing to the end of the year, although this does not necessarily seem to square with what I am reading from many professional investors and pundits. If you would like to read a good article on what the Fed might do the remainder of this year and the rationale, I suggest “Reading the Entrails for a Fed Pause Versus Cuts” (if you are a Bloomberg subscriber). In this article, Bloomberg Opinion columnist John Authers points towards data that suggests a pause is likely but no rate cuts are expected this year.
Adding fuel to the “economic slowing” fire, US PPI for April (here) came in slightly below expectations showing that wholesale price inflation is slowing. (Recall PPI is a better forward indicator than CPI on the “direction of travel” of inflation.) Also, April weekly initial jobless claims released Thursday jumped to 264,000, the highest level since October 2021, further evidence of a slowing US economy. On Friday, the University of Michigan Consumer Sentiment survey was released, showing that consumer confidence fell sharply in April (see here), adding even more concerns about US economic growth. As far as debt ceiling discussions, there was no progress although Congressional leaders did meet with President Biden this week. This simply has to get resolved because it is a major distraction whether the risk is real or not.
The Bank of England raised its key interest rate for the 12th consecutive meeting on Thursday (see here), no real surprise since UK inflation continues to run hot, very hot in fact compared to both the Eurozone and US. The graph below from the #FT shows the migration of CPI of several countries including the Eurozone, the UK and the US over the last 15 years.
The BoE Bank Rate – now 4.5% – is the highest since 2008, as the central bank continues to tighten monetary policy to try to contain ongoing price increases in the UK.
Interestingly, BoE chief Andrew Baily gave a more optimistic view of the UK economy in the post decision press conference, suggesting that the country would avoid an oft-discussed recession. However, a dose of reality came on Friday when 1Q23 GDP was announced, coming in at a measly 0.1%. The UK is indeed mired in a period of stagflation as inflation remains elevated and economic growth stumbles. Comparatively speaking, the UK remains the weakest economy in the G7, damaged un-necessarily in my opinion by the country leaving the European Union. GDP growth of the G7 countries since just before the pandemic (4Q19) is illustrated in the graph below this week from Bloomberg.
WHAT'S AHEAD THAT MATTERS?
The main focus this week will likely be on progress in the US debt ceiling discussions, which must reach a resolution as the x date is drawing nearer. There is not a lot of economic data this week that will be relevant, aside from 1Q23 GDP growth in the Eurozone (consensus 0.1% QoQ / 1.3% YoY) and Japan (consensus 0.1% QoQ), and some retail sales data for April for the US and China. We are also largely finished the earnings season, although several prominent and much-watched US retailers report earnings this week including Home Depot, Target and Walmart. The week ends with earnings from industrial bellwether John Deere on Friday. In between, there will be several foreign companies that have ADRs listed in the US which will also report, including Alibaba.
Corporate bonds (credit)
Safe haven and other assets
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