Week ended Sept 15, 2023: ARM IPO, ECB rate hike, US inflation
WHAT HAPPENED THIS WEEK THAT MATTERED?
The things that were meant to matter this week actually mattered, and it turns out they were reasonably decent as far as investor sentiment, at least until Friday. Unfortunately for US equity investors, the S&P 500 did an about-face on the final trading day of the week, and – in spite of futures suggesting a positive opening – faded throughout the day, shedding nearly 55 points (-1.22%) and pushing the benchmark US index into a slight loss WoW. Equity indices elsewhere fared better, with UK, European and Japanese stocks all posting week-over-week gains. Bonds fared no better as yields rose across the curve. Also this week, oil (WTI crude) hit its highest intraday price in 10 months, and the US Dollar remained firm. I will come back to markets in a moment, but first let’s look at the events that shaped the week.
ARM IPO: The initial public offering of ARM was priced on Wednesday afternoon at $51/share, the top end of the initial $47/share to $51/share indicated range. Softbank (owner of ARM), its new (minority) strategic shareholders, and the lead underwriters did the right thing – somewhat to my astonishment – by pricing the shares within the initial indicated range, even though that appeared to have more than enough investor demand to push the price higher. Bankers away from the trade will say the usual: “Softbank left money on the table.” Given that the shares closed on their first day of trading (Thursday) at $63.59/share (+24.7%), this might look valid at first glance. On Friday, the shares were caught in the general downdraft and shed some of their gains, closing the week at $60.75/share. The reality is that the ARM IPO needed to work well because this transaction will set the stage for what is apparently a slew of other tech IPOs in the queue, including the likes of Instacart and Chime Financial, with others like Stripe, Reddit and Klarna also possibly considering going public. If you are an investor that follows valuations, the table below might interest you:
ECB rate decision: I didn’t think the ECB would raise rates but they did. However, the commentary coming from ECB President Mme Lagarde following the monetary policy decision on Thursday caused investors to conclude that this was a “dovish rate rise”, quite possibly the last coming from the ECB. The official press release (here) following the official Monetary Policy Release (here) said the following:
“Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.”
European equities leaned into this and rose in price, and the Euro weakened. In essence, the commentary largely blunted any negative effect from the rate increase. From investors’ perspectives, this was an acceptable outcome in that the ECB stuck with its agenda to fight inflation whilst extending the very high likelihood that this might have been the last increase in Eurozone policy rates, important because economic growth has turned negative in the largest economy in the bloc, Germany.
Inflation and US CPI: Headline CPI for August came in right in line with consensus expectations on Wednesday although core CPI was slightly higher than expected MoM (but in line YoY). Investors seemed to think this was close enough as the inflation figures turned out to be largely a non-event. Focus will now shift to the jobs market. The Fed will have its next FOMC meeting this coming week, with its monetary rate decision announced on Wednesday (Sept 20). The Fed will also deliver its revised Summary of Economic Projections, which will be telling as far as what the Fed is thinking about future economic conditions. Following the inflation read mid-week, the CME FedWatch Tool is projecting a 99% probability that the Fed pauses, and a greater than 50% probability that the central bank does not start reducing the Fed Funds rate until May 2024. The official BLS press release regarding August inflation is here.
MARKETS THIS WEEK
Equities were generally stronger this week, with US Treasuries slightly weaker. The exception was US equities, which gave back their gains on Friday. European and UK stocks strengthened. As far as currencies, the US Dollar continues to strengthen against the DXY index, and the Euro and Pound are weakening. This is more what I expect at this point of the cycle as it better reflects the relative challenges and “direction of travel” of each of the respective economies (i.e. the US, the UK and the Eurozone). The fly in the ointment for the US Dollar vis-à-vis the DXY index might be Japan, which will – sooner rather than later – begin to normalise its monetary policy, and this might put pressure on the greenback (since the Yen is 13.6% of the index). Oil has reached a 10-month high as its recent increases show no signs of abating, and this might sooner or later act as an automatic stabiliser in terms of slowing economic growth, although we are about to move into the winter in the northern hemisphere.
You can find the weekly performance of select indices and other asset classes in the section “The Tables” further below.
THINGS TO WATCH
Things to watch:
· UAW strike in the US: volatile situation
· Student loans are out of forbearance with payments starting again in early October
· Carryover themes: Higher oil prices, firm US Dollar, China growth
Upcoming central bank meetings are as follows:
· Federal Reserve (FOMC): Sept 19-20 (with updated projections), expectation pause
· Bank of England: Sept 21 (tough call, I say increase)
· Bank of Japan: Sept 21-22 (do you need to ask?)
· ECB: Oct 26 and Dec 14
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets