Week ended May 19, 2023
As I have been travelling much of this week and looking at financial news only sporadically, I will be brief in my thoughts. I really don’t recall anything overly material as far as grabbing investors’ attention aside from the ongoing saga over the debt ceiling – which I expect to get sorted – and some earnings.
The debt ceiling debacle is political theatre at its best, truly a waste of time and energy, and certainly a blow to confidence in the US and the US Dollar. But as happens in markets, it will be quickly forgotten once it is sorted, and attention will turn fully to the “will the Fed pause or will the Fed increase the Fed Funds rate” at the next FOMC meeting on June 14th. As it stands, it seems that the likelihood of the Fed pausing might be becoming slightly less certain as data continues to suggest a fairly solid US jobs market, although equally, there are indications of a gradually slowing economy. There will be much more Fed conditioning going on from the merry men at the Fed, a.k.a. “the talking heads”, in the run up to the mid-June rate decision. My expectation is that the Fed pauses in June but does not cut rates during the remainder of this year.
Earnings-wise, big US retailers delivered a mixed bag this week. WMT and TGT recorded beats, suggesting that consumers who are seeing their purchasing power erode because of inflation are increasingly shifting towards lower-cost box retailers that offer the best value-for-money. In contrast, HD disappointed, perhaps a better indication of the real direction of the US economy as consumers (according to the company) deferred projects and hence spent less on DIY. The week ended with Deere & Co (DE) serving up better-than-expected top- and bottom-line growth for its second quarter (ended April 30th), but top-line revenue growth continues to slow. Overall, US retail sales were slightly lower-than-expected for April, coming in at 0.4% MoM (report here).
This confluence of news was generally well received in risk markets this week, with nearly all of the international and US equity indices tracked by EMC delivering gains. Japanese equities continue to be the best performing equity market YtD, up a solid 18.1%, nearly double the return on the S&P 500. Of course, it is the NASDAQ in the US which continues to defy gravity, up an incredible 20.9% YtD. The tech-heavy index, and its major big-tech components, have performed brilliantly YtD, although there are increasingly questions around the fundamental support for some of the large-tech stocks, especially NVDA. US Treasuries sold off into the end of the week, with the yield on the 2y UST 30bps higher WoW, and the yield on the 10y UST 24bps higher. Corporate credit spreads were tighter in high yield, gold prices fell and the VIX remained below 17, all indicators of risk-on. The US Dollar, which has clawed back most of the year’s losses in the last two weeks, ended higher WoW, having closed back above 103.0 (vis-à-vis the DXY) for the first time since mid-March.
Even though I am an investor that plays from the long-side, I find myself increasingly struggling to remain constructive given the sharp run in stocks YtD. I ask myself this: “are risk investors seeing past the coming economic slowdown and effectively ”pricing forward”, or are they ignoring the mounting evidence of a slowing US (and global) economy”? I appreciate forward thinking, but my gut tells me that it is increasingly the latter driving market sentiment – investors simply don’t see a great deal of damage coming from slower global economic growth. FOMO also is contributing without question, causing some investors to close their eyes and go all in. In my humble opinion at these levels, I believe it will firstly pay to be selective, and secondly, to be patient. Wade in, don’t dive in, if you have interesting names you wish to own. And don’t forget the juicy bond yields available at the moment.
Corporate bonds (credit)
Safe haven and other assets