Week ended Feb 24, 2023
Maybe I’m missing something, but this seemed like just another week characterised by the same themes that have driven markets most of February. In aggregate, these have reversed much of the January gains in both stocks and bonds.
Inflation: It is increasingly clear that inflation will not simply decline to the coveted 2% / annum in a straight and orderly fashion as central banks and investors would like. Rather, the battle to reduce inflation will be longer and more difficult than was thought as recently as one month ago. This is particularly true in the Eurozone and the US, where inflation remains elevated and is proving to be stubborn. The PCE release on Friday morning (January, see BEA release here) added fuel to the fire Stateside, coming well above consensus expectations at 0.6% MoM for both headline and core (Jan) vs expectations of 0.42% headline and 0.36% core (Cleveland Fed). Elsewhere, the UK has the weakest economy, and hence, inflation will likely come down faster, raising expectations that the Bank of England might in fact be the first to pivot.
Economic growth: The data is the US, UK and EU is suggesting that each respective economy – even the UK – is doing better than was anticipated several months ago. Of course, this is the problematic issue with respect to stubborn inflation, as labour markets remain tight especially in the US and UK.
Earnings: Earnings continue to be largely mixed, and this – along with mixed economic data – has weighed on stocks. For example, both HD and WMT highlighted concerns (wage inflation impacting margins, on-going supply-chain issues) and lowered their forward guidance for the quarters ahead as the US economy slows. NVDA, on the other hand, delivered stronger-than-expected top line and bottom line growth, and – on the earnings call – emphasised the opportunity available in AI, raising its guidance for the quarters ahead. The stock soared, settling at a nose-bleed forward P/E of 48.5x, and a price-to-sales of 18.3x. This introductory paragraph from FactSet (here) summarising the earnings of S&P 500 companies for the 4Q22 is self-explanatory:
“The earnings performance of S&P 500 companies during the Q4 earnings season continues to be subpar. While the percentage of S&P 500 companies reporting positive earnings surprises remained flat over the past week, the magnitude of these earnings surprises decreased during this time. Both metrics are below their 5-year and 10-year averages. As a result, the earnings decline for the fourth quarter is larger today compared to the end of last week and compared to the end of the quarter. If the index reports an actual decline in earnings for Q4 2022, it will mark the first year-over-year decline in earnings reported by the index since Q3 2020.”
China: I go back and forth on China. The economic reopening / “re-emergence” of the world’s third largest economy might be like the containment of inflation – it will trend in the right direction in the coming months but will move neither in a straight line nor in as rapid a trajectory as hoped. Chinese equities have stalled as a result.
I recently wrote about my own portfolio for those interested (“The great reveal”), which naturally did not fare particularly well this week!
Government bond yields are pushing higher both in the US and the Eurozone for obvious reasons. The UST curve widened more perversely at the short end, with the 2-10y inversion reaching its most negative during the post-pandemic cycle, and in fact, since the early 1980s.
The US Dollar has rediscovered its mojo this month after falling from a peak of above USD 1.14:USDX 1.00 in late September (2022) to below USD 1.02 : USDX 1.00 in late January. Just when expectations were mounting that the Dollar would continue to weaken, it found its floor several weeks ago and has rallied slowly but surely since then, up 3.0% in Feb and now 1.6% YtD. Why? The US is still viewed as the world’s most resilient (and diversified) economy, and with inflation remaining high, Dollar yields are likely to stay higher longer.
Equities were poor across nearly all markets this week, with only the Shanghai composite bucking the trend. YtD, the S&P 500 now has the worst performance of any of the global indices I track, although all indices so far have managed to stay green for the year.
In the US, the NASDAQ was the worst performer this week (-3.3% WoW), struggling as usual against the tide of higher bond yields. The NASDAQ still remains the best performing US market to date, up 8.9% (vs S&P 500 +3.4% YtD). The S&P 500 has now declined three consecutive weeks and is down 2.1% this month, cutting into YtD gains.
WHAT’S COMING THAT MATTERS
US: durable goods orders (Jan), housing data (existing home sales, Dec), ISM manufacturing and services data (Feb)
China: 4Q22 GDP, ISM manufacturing and services data for Jan
Japan: industrial production, retail sales and employment data for Jan, CPI for Feb
Eurozone: Jan unemployment and Feb CPI
Upcoming central bank monetary policy meetings:
Federal Reserve – Mar 21st-22nd and May 2nd-3rd
Bank of England – Mar 23rd and May 11th
ECB – Mar 23rd and May 4th
Bank of Japan – Mar 9th-10th and Apr 27th-28th
Corporate bonds (credit)
Safe haven and other assets