Risk markets stabilised this week on mixed economic and earnings news. US stocks slid three consecutive days to start the holiday-shortened week following a rocking start to the year but clawed back much of the losses on Friday in a strong session. European equities were also slightly weaker on the week, whilst Asian and emerging markets equities continued their strong start to the year.
Some pundits might say that this week was simply a pause as markets consolidate, whilst others – like me – would say that we have come too far too fast given the backdrop. History has shown time and time again that risk markets will react to expectations of the trajectory of the economy two or three quarters forward, and I fully respect this. It is also true that inflation seems to have reached inflection points not only in the US, but also in the UK and Eurozone. Even so, central banks cannot take their foot off the brakes because inflation remains at troubling high levels, and the last thing they will want to do is to ease and then have to undertake a second round of tightening (a la the late 1970s/early 1980s in the US). Even though policy rate increases might moderate, there is every indication that the Fed, the BoE and the ECB will hold rates at high levels until inflation is approaching the coveted 2%/annum level. All this said, the fact is that central bank actions seem to be taking a backseat to corporate earnings, which are dominating the news flow.
As we experienced again this week, we are largely getting mixed earnings results from S&P 500 companies. Goldman surprised on the downside and paid for it (down 8.6% WoW), whilst Morgan Stanley surprised on the upside due to its superior wealth management business (up 5.0% WoW). United (UAL) blew consensus analysts’ expectations out of the water, showing how strong travel is (and the positive margin effects of more stable oil prices); the stock is up 31.2% YtD. Netflix (NFLX) (up 2.9% WoW) far exceeded consensus subscriber growth expectations – a good start for the tech companies – even though I’m not sure that the company’s overall results deserved such accolades (see Twitter thread here). Following the rationale of “bad news can be good news”, both MSFT and GOOG followed AMZN and META with announcements of job cuts, as tech companies try to adjust their pandemic-inspired bloated cost bases. Both stocks rallied on the news. You can find the latest Lipper Refinitiv “This Week in Earnings” report for the S&P 500 here.
MARKETS THIS WEEK
US and European equity markets gyrated this week, but all backed off following a solid first two weeks of the year. Asian equities continued to run. US index performance suggests that investors are moving out of the “boring” DJI stocks and back into higher-beta more volatile stocks, especially technology companies, and into value. US Treasury yields were lower at the short end, and stable at the intermediate part of the curve, also soothing equity markets. Bitcoin continues to defy gravity this year after an abysmal 2022, up an amazing 36% in the first three weeks of 2023. Every time cryptocurrency markets appear to be at death’s door, the major cryptos find support and recover. Let’s see how long this can continue.
Below is a summary table of markets for this week, with the gory detail further below in the section "The Tables".
DRIVERS OF MARKETS THIS WEEK (WITH LINKS)
China 4Q22 / FY22 economic growth: China has its slowest growth in 2022 in decades, with GDP (YoY) increasing 3.0%. The National Bureau of Statistics of China report, released on Monday, is here. A good portion of the optimism so far in 2023 in global risk assets, and especially emerging markets, can be attributed to optimism that the official move away from COVID Zero will eventually spur much stronger economic growth in the world’s second largest economy in 2023.
December PPI: The BLS released the December PPI report on Wednesday morning, and it showed that PPI declined 0.5% in December MoM (report in the US (here), well below consensus’ expectations. YoY PPI is 6.2%, and core PPI is 4.6%. Data is continuing to trickle suggesting that the Fed will hike the Fed Funds rate 25bps at the upcoming FOMC meeting (decision Feb 1) rather than 50bps, since inflation is slowing. This narrative has driven the positive sentiment especially in higher volatility assets, including technology stocks (NASDAQ proxy) and Bitcoin.
Earnings: Mixed for S&P 500 companies, but on average largely in line with consensus expectations. There have been mixed results from banks, signalling uncertainties ahead. NFLX delivered better-than-expected subscriber growth, boosting their shares, whilst the giant FAMAG names continue to announce job cuts of 5%-6% or their workforces, aligning their cost structures better to the post-COVID economy.
UK CPI: The ONS released the December inflation report for the UK on Wednesday (here), which showed that UK CPI declined in December to 0.4% MoM / 10.5% YoY. This is down from November reads (0.5% MoM / 10.7% YoY), and largely in line with analysts’ consensus expectations.
Nonetheless, officials from the Bank of England continue to express concerns that persistent inflation could become embedded and remain committed to its mission of bringing down inflation. In light of these concerns, a 50bps increase in the Bank Rate is largely baked in for the next Monetary Policy Meeting on Feb 2nd.
US retail sales, December: The Census Bureau reported on Wednesday that US retail sales declined 1.1% MoM in December, following a decline MoM of 1.2% in November (report here). It is clear that US retail sales are under severe pressure from rising inflation, another signal that US economic growth will be slowing in the quarters ahead. Along the mantra of “bad news is good news”, the initial reaction was that the Fed might step back sooner than expected, largely ignoring the fact that slower retail sales two months running means a slowing US economy.
World Economic Forum in Davos: There have been plenty of sound bites coming from the various dignitaries and others at the WEF in Davos, although the major themes that have caught my ear have included:
uncertainty about the near-term economic outlook, and
comments from central bankers – including ECB head Christine Lagarde (panel, here) – about monetary policy remaining hawkish until inflation is under control. As an aside, Fed Vice Chair Leal Brainard said something similar regarding the Fed’s approach at a University of Chicago event this week.
WHAT'S COMING THAT MATTERS
Economic data: Data at beginning of the week will revolve around preliminary industrial and manufacturing activity for January for the US, UK and Eurozone, and CPI data for Japan. US PCE data for December (the Fed’s preferred measure of inflation) and 4Q22 GDP will also be released next week.
A variety of companies in the S&P 500 will report earnings this week, including a few bellwether names like MSFT, TSLA, BA, GE, V and MA. The easiest-to-view website I have found for tracking the earnings calendar is here (Interactive Investors), and the picture of the coming week for the larger S&P 500 companies.
US debt ceiling: Not much to say, except the saga continues.
Upcoming central bank monetary policy meetings:
Federal Reserve – Jan 31st/Feb 1st and Mar 21st-22nd
Bank of England – Feb 2nd and Mar 23rd
ECB – Feb 2nd and Mar 23rd
Bank of Japan –Mar 9th-10th and Apr 27th-28th
Global equities ere
Corporate bonds (credit)
Safe haven and other assets