Week ended May 5, 2023: Now what?
[Slight format change this week. Markets to be presented first followed by the gory detail of what mattered this past week]
It’s hard to know what to do as an investor these days because there are so many conflicting signs and different narratives as to what might happen next. Hmmmm……
MARKETS THIS WEEK
Global / US equity indices slightly weaker, Asian equities slightly better WoW. US equities ended the week strongly on Friday, clawing back some of early-week losses, due to a combination of economic data showing US economic resiliency and better-than-expected results from Apple on Thursday after the market closed.
UST yields were lower at the short end this week supported by the Fed’s suggestion that a pause was likely, but then rose sharply on Friday after the strong US jobs report (still ending lower WoW). The 10-year UST was unchanged on the week, and the yield on the 20-year UST was lower. The yield curve remains inverted but – as you can surmise from the yield action across the curve – flattened.
Corporate bond spreads were wider across the credit complex, and were sharply wider in high yield for the first time since the possibility of a “credit crisis” has been mentioned. This needs to be monitored carefully as deterioration in the corporate bond market could portend trouble ahead.
In another sign of risk aversion increasing (in spite of a resilient equity market), gold continues to edge higher, settling now above $2,000/oz.
The price of oil continues to decline, a potential forward signal of weakening demand as the global economy slows; this could spur OPEC+ into another round of supply cuts.
Below is a summary of markets for the week.
WHAT HAPPENED THIS WEEK THAT MATTERED
Central banks (Fed & ECB): We got more or less what was expected this week from the central banks of the US and Europe. Both the Fed and the ECB bumped their overnight bank rates by 25bps to 5.00%-5.25% (US) and 3.25% (Eurozone), respectively. The ECB also announced that it would increase its balance sheet shrinkage from €15 bln/month to €25 bln/month starting in July (QT). The Fed signalled that its rate rises could be finished, while the ECB hinted that there could be another one or two increases, although both central banks remain “data dependent”. Press releases are here: Fed and ECB. As with earnings releases, the more perverse market reaction normally occurs during or after the press conferences featuring each respective central bank head which get dissected almost as a matter of sport these days. Chairman Powell, intentionally or not, laid the groundwork for a rate pause sufficiently that investors are now expecting it, even though he went on to suggest that even if rates had peaked, they would not likely come down anytime soon. You can watch the Powell press conference here. In some respects, Ms Lagarde used similar language (“data dependent”, etc) but left the door wide open for further rate rises in the Eurozone. One other thing to keep in mind is that a so-called “pause” might not be the end of rate rises, as markets experienced this week when the Reserve Bank of Australia raised its key overnight bank rate by a further 25bps (to 3.85%) having paused its rate increases the meeting before (press release here).
US banks: No sooner had JPM chairman Mr Dimon put his signature on the acquisition of troubled lender First Republic Bank on Monday (press release and deal outline here) to end that saga then the next “bank crisis” shoe (or three) started to drop. Mind you, this also gave time for Mr Powell to remind investors during his press conference on Wednesday afternoon that the US bank market was in fine shape, words that sounded hollow almost as soon as they were uttered. Following the market close of Fed decision day, PacWest Bancorp announced that it was exploring a strategic sale, and its shares promptly got hammered. On Thursday morning pre-open, Arizona-based Western Alliance Bancorporationannounced that it too was considering strategic options, and that the merger of First Horizon and TD was being called off. To add fuel to the bank-crisis fire, the likes of some very smart US investors like Charlie Munger (Berkshire) and Bill Ackman (Pershing Square Partners) went on the record to say that they believe the US banking system is in more trouble than investors generally believe, with Mr Munger laying the coming crisis at the feet of a troubled US commercial real estate market. The reality is that equity investors might be right to flee troubled US banks at the first sign of trouble, because so far in this round of bank failures, they have been left completely empty-handed (as they should) in failures of Signature, SVB, First Republic and CS. However, it means that investors trade the news (whether real or rumour), which explains some of the divergence between rumoured deposit (out)flows and equity market performance of banks that remain in the spotlight. Shorts have also jumped on the bandwagon without a lot of work, meaning movements up (like Friday) and down (much of the rest of week) in the KRE ETF get highly exaggerated.
Earnings and Apple especially: Earnings continued to come in as 419 of the S&P 500 companies have now reported earnings, along with some notable European companies (e.g. BP and HSBC). Earnings remain mixed albeit better than beaten-down expectations, which might be underpinning the buoyancy of equities. A good summary report is provided by Refinitiv I/B/E/S and can be found here. Refinitiv I/B/E/S reported that 77.1% of reporting companies have beat earnings expectations (vs the long-term average of 66.3%) so far, and that revenue growth has averaged 3.5% this quarter. The stock investors were watching most closely this week was Apple (AAPL), which reported better-than-expected results after the bell on Thursday, underpinning a sharp rally on Friday in US equities. AAPL closed the week up 2.3%, and although not cheap by any means, the company continues to deliver quarter after quarter. This is portfolio “must own” in my opinion.
Economic data: Economic data remains mixed but overall suggests a still-resilient US economy. S&P Global US Composite PMI for the US unexpectedly rose in April, an indicator of reasonably robust economic activity in the private sector. JOLTS data (here) released mid-week showed that new job openings declined, and layoffs and discharges increased, suggesting a jobs market that might be finally reacting to higher interest rates. However, no sooner than this was suggested than did the April jobs report come out on Friday (here). The US added 253,000 jobs in April (vs 165,000 in March), and the unemployment rate fell to 3.4%. This cheered investors from an economic growth perspective, but was also a stark reminder that the fight to tame inflation is far from over. Equities rose and bonds faltered after the jobs report.
Corporate bonds (credit)
Safe haven and other assets