Weekly Market Report: February 9th, 2023

A light economic calendar last week allowed markets to focus on a full roster of fourth quarter earnings reports and a heavy dose of Fed speak with twelve speaking engagements on the calendar. In a micro over macro week, equity markets pushed to new record highs with the S&P 500 (+1.4%) closing above 5,000 for the first time. Developed markets stayed relatively flat (+0.2%) while emerging markets (+2.4%) benefited from rumors of additional stimulus measures percolating in China which rallied 4.4% on the week. Bond yields have latched onto the sustained growth narrative, rising 10-15 bps in what has been a rough start to 2024. The USD added marginally (+0.18%) to the strength it has seen so far in 2024 (+2.74%) and oil clawed back most of last week’s losses, rising 6.3% for the week, now up 7.2% in 2024.

Market Anecdotes

• The S&P 500, up 14 of the past 15 weeks, closed above the 5,000 mark for the first time and set a new record high giving financial media types an easy storyline this week. An increasingly narrow rally at the top end of the index is giving some investors pause.
• David Einhorn pointed out some obvious concerns surrounding the growth of passive (now 53% of U.S. AUM) and algorithmic investing noting “Passive investors have no opinion about value. They just assume everybody else has done the work” and “Algos have an opinion about price, like what is the price going to be in 15 minutes?”
• S&P 500 earnings results continued to improve from the difficult start with blended earnings growth up to 2.9% with a beat rate of 75% and a beat margin of 3.8%.
• Rumblings at NYCB have investors worried about regional banks but the balance sheet looks notably different from SVB and FRB situations last March but the slow moving CRE trainwreck most definitely has more chapters to play out.
• Bespoke noted the two day surge in the 10yr bond yields (+28.4 bps) following the January jobs report is the second largest of the current cycle with the largest being the yield spike leading up to a surprise 75 bps Fed rate hike in June 2022.
• The FOMC speaking circuit last week pushed back on both timing and scope of market rate cut expectations while reiterating a patient but ultimately easing bias. ISM Services prices paid last week are worth noting with the disinflation trend a key lynchpin for risk assets looking forward.
• Jobs and PMI readings have taken the most recent Atlanta Fed GDPNow model estimate of 1Q growth up from 3.0% to 3.4%.
• Last week’s annual BLS CPI revisions, which Fed Governor Waller highlighted the importance of, revealed minor downward revisions to headline Oct-Dec readings but core readings were unchanged.
• Hulbert Ratings illustrated a clear case of mean reversion with high yield credit spreads as tight as they are today (3.38%) showing the coming 12 or 24 month change favors a clear gap higher.
• The January senior loan officer opinion survey showed banks continuing to tighten lending standards and terms, more in line with economic downtrends than the uptrend we’re seeing.
• News of President Xi Jinping’s intent to focus on economic and financial market challenges sprouted some optimism in China for potential government assistance and regulatory measures.

Economic Release Highlights

• January ISM Services Index beat consensus (53.4 vs 52.1) and registered above the high end of
• the forecast range (51.5 – 53.0).
• Initial (weekly) jobless claims were relatively in line at 218,000, moving the 4-week moving average to 212,000.

Weekly Market Report: January 26th, 2023

Last week, markets took in a healthy dose of both economic and earnings reports, moving equity markets higher globally. U.S. large caps were up 1% to a new record high while small caps added 1.75%. Participation was relatively broad, led by the energy and communication services sectors. International developed (+1.5%) and emerging (+1.3%) outperformed thanks in part to a bounce in Chinese equities. Interest rates were relatively unchanged despite the encouraging economic news, but commodity markets rallied sharply with energy markets leading the way as WTI oil surged 6.3% to $78.01 on the week.

Market Anecdotes

• Central banks in or beginning easing cycles alongside healthy economic indications (GDP, labor, inflation) have overshadowed a sub-optimal start to fourth quarter earnings season.
• The FOMC meeting on tap this week is focused on quantitative risk assessment with no policy announcements expected. Markets have been walking back 2024 rate cut expectations (from 6 to 5) but resilient growth and consumption may still challenge that further.
• With 25% of S&P 500 companies reported, the beat rate is 69% and beat magnitude is -5.3% with blended earnings of -1.4% and revenue growth of 3.2%. The 12-month forward P/E multiple is 20x.
• Chinese policy makers, responding in part to nearly $6t in losses across mainland and Hong Kong equity markets since February 2021, announced stimulus headlines last week including a PBoC 0.5% RRR rate cut and a possible CNY 2t stock market rescue package.
• BCA’s Geopolitical team’s annual look at low probability, high impact market risks include a Chinese recession, oil shock in Iran, and military conflicts with Russia/East Asia.
• Despite higher interest rates pressuring corporate debt coverage levels, leveraged loan default rates have remained below historical averages due to a significant increase in ‘distressed exchanges’ which include out of court restructurings, exchanges, and sub-par paybacks.
• The spot Bitcoin ETFs launched on January 11th have thus far been a “sell the news” illustration, down over 20% while equity markets have grinded higher.
• To put a number on higher mortgage rates, a mortgage loan today is over 2% higher than any time since 2011 which equates to $385/mo on a $300,000 conforming 30-year loan.

Economic Release Highlights

• The pace of headline (core) PCE inflation fell in November registering 2.6% (2.9%) YOY and MOM readings of 0.2% (0.2%), both generally in line with consensus. Personal Consumption exceeded forecasts (0.7% vs 0.4%) and Personal Income growth of 0.3% was in line.
• The first estimate of 4Q GDP came in well above consensus (3.3% vs 2.0%) and the high end of the forecast range (1.3% – 2.5%).
• Personal Consumption Expenditures of 2.8% in 4Q cooled slightly from the 3Q rate of 3.1% but beat the spot forecast of 2.5% and above the high end of forecast range (2.4% – 2.6%).
• January U.S. PMI (C, M, S) registered 52.3, 50.3, 52.9 where both services and manufacturing readings came in well above consensus forecast and the high end of their respective ranges.
• January non-U.S. PMI (C, M, S) last week included relatively constructive readings in the Eurozone (47.9, 46.6, 48.4) and UK (52.5, 47.3, 53.8).
• Durable Goods Orders were mixed in December with a miss on New Orders (0% vs 1%), a beat on ex-Transportation (0.6% vs 0.2%), and a beat on Core Capital Goods (0.3% vs -0.2%).
• New Home Sales in December of 664k came in slightly ahead of the spot consensus forecast of 660k and increased slightly over the prior month’s 615k pace. Pending Home Sales jumped 8.3% on the month, well ahead of the 1.3% spot consensus and 0.7%-3.9% forecast range.

Weekly Market Report: January 19th, 2023

Markets took in a good deal of central bank pushback and some firmer economic data last week very much in stride. A tech and shadow tech rally pushed the S&P 500 to a new record high despite yields drifting higher in two of the past three weeks. The S&P 500 climbed 1.17% while international developed (-1.1%) and emerging (-1.7%) both declined. Bond yields were up across the curve with the belly (2s, 3s, 5s) up over 25 bps. The USD strengthened 0.86%, up 1.9% to begin the year, while commodity markets and WTI oil ($73.41) were both relatively flat on the week.

Market Anecdotes

• The S&P 500, which has been up 11 of the past 12 weeks, marked a new all-time high for the first time since January 3, 2022 last week. Interest rate relief, disinflation/growth outlooks, the AI/”Mag 7” rally, and multiple expansion explain most of the recent move.
• Metrics indicating softening demand for labor (more of a leading indicator), would include declining job openings, hiring rates, temporary employment, business survey hiring intentions, quits rate, and average hours worked – all seemingly flashing yellow as we look into 2024.
• A still robust liquidity backdrop provides a constructive backdrop for risk assets and can also mitigate risks of protracted downturns as liquidity sometimes serves as a support mechanism in market dislocations.
• Nine FOMC speaking engagements last week in advance of the month end FOMC meeting served to cool dovish market expectations, taking rate cut probabilities down to 46% for the upcoming March 20th meeting and now pricing 140 bps of easing for the year, down from nearly 175 bps.
• Fourth quarter earnings are off to a subpar start with a beat rate of 62%, a beat magnitude of -18.1%, and a blended -1.7% earnings result. Blended revenues are growing at 2.9%. Misses at this early stage in the financial sector account for the weak start.
• A Goldman research note highlighted how the record lack of financial (rate) incentive to refi outstanding mortgages is translating to anemic existing home sales albeit in what can only be categorized as a resilient U.S. housing market.
• With all the focus on global shipping choke points, Peterson Institute for International Economics published an interesting paper on long term trends in global trade cycles and globalization.
• BCA noted the fall in oil prices in the back half of 2023 can be partially attributed to an 880k b/d surge in U.S. production to record high levels thanks to a flood of DUC shale wells coming online.

Economic Release Highlights

• December Retail Sales beat on headline (0.6% vs 0.4%), Ex-Vehicles (0.4% vs 0.2%), and Ex-Vehicles & Gas (0.6% vs 0.3%).
• Consumer Sentiment Index in January improved from 69.7 to 78.8, above the spot forecast 69.2 and consensus range 66.5-72.5.
• Housing Market Index climbed in January to 44 from prior month reading of 37 and ahead of consensus forecast of 38.
• December Housing Starts (1.460M vs 1.425M) and Permits (1.495M vs 1.478M) both came in slightly ahead of forecasts. Existing Home Sales of 3.78M were down 1% MOM and -6.2% YOY.
• Industrial Production in December grew 0.1%, slightly ahead of the -0.1% consensus estimate.

Weekly Market Report: January 12th, 2023

Markets were relatively firm last week, in what was the first full trading week of the year. Key markers last week included the beginning of the 4Q earnings season, geopolitical developments (Yemen, Taiwan), and a relatively light economic calendar including December inflation data. Equity markets looked past a lackluster start to earnings and a hotter than expected December inflation reading. U.S. (+1.8%) and developed international (+1.2%) posted gains while emerging markets (-0.6%) were weighed down by China which fell 2.1%. Bond yields declined pushing the 10yr UST yield back below 4% while the USD and commodity markets were both relatively flat on the week.

Market Anecdotes

• A great series of charts from Bespoke takes a long-term look at the U.S. stock market, reminding us all that a disciplined and resilient ‘get invested stay invested’ strategy is the most sound approach to equity market investing.
• Market priced probabilities for a March rate cut stands at 75% with a soft PPI working to offset the firm CPI last week. Meanwhile, the labor market remains strong with weekly claims last week (202k) falling to their lowest mark since October.
• Fourth quarter earnings season kicked off last week with a relatively low bar on S&P 500 consensus earnings estimate of 1.3%. The larger issue is likely surrounding forward guidance and the stability of the 12% consensus earnings estimate for full calendar 2024.
• Following an early week SEC twitter hack (and premature crypto ETF announcement), the SEC approved 11 spot Bitcoin ETFs and a BitMEX Research estimated $523mm of inflows in 3 days.
•  A Bloomberg article last week highlighted an IMF report noting global governments will be selling a net. $2.1t in new bonds to finance deficit funding of government operations, a 7% increase over 2023. Sadly, the U.S. is furthest in the crowd from balancing its checkbook.
• The U.S. Senate is likely to move forward with a CR this week to avoid a looming January 19th government shutdown funding deadline.
• Attacks in Yemen (Bab-el-Mandeb Strait) have reverberated north to the Suez Canal where traffic is down considerably. Unfortunately, drought conditions have forced the Panama Canal also to operate well below capacity with supply chains and global logistics again being challenged.
• Taiwan elected VP and DPP candidate Lai Ching-te President surely to the dismay of Chinese officials who refer to Lai as a “separatist”. Tensions are expected to remain high.
• Year-end data from China suggests improving demand conditions (import/export data) but weak private sector credit demand and a clear deflationary trend point to a tepid growth backdrop.

Economic Release Highlights

• December headline and core CPI registered 3.4% and 3.9% respectively while MOM readings both came in at 0.3%.
• December headline and core PPI registered 1.0% and 1.8% respectively with MOM readings of -0.1% and 0%.
• December NFIB Small Business Optimism Index improved slightly to 91.6, beating the spot consensus forecast of 90.6.

Weekly Market Report: January 5th, 2023

Markets went back to work in the first week of 2024 with a bit of consolidation, snapping a nine-week winning streak, following a robust Santa Claus rally to end the year. Drivers last week centered around the release of December FOMC minutes, a notable move higher in bond yields, and a fairly heavy slate of economic
reports. U.S. equity markets started the year down approximately 1.75% (R3000) while developed (-1.5%) and emerging (-2%) equity markets followed suit. Interest rates backed up across the curve pushing the 10yr UST yield back up over the key psychological 4% threshold. The USD and commodity markets were up approximately 1% with the latter helped by a rally across all energy contracts, leaving WTI back up to $73.81.

Market Anecdotes

• We see largely the same set of questions on the landscape including the outlook for growth, monetary policy trajectory, higher interest rate implications, and health of the labor market/consumer.
• A touch of yesterday always informs tomorrow so before heading full steam into 2024, a clear-eyed look back at 2023 capital markets and key dynamics seems to make good sense.
• A research note from Bianco Research highlighted the unprecedented 40 year easing of financial conditions as a big driver (and reflection) of the substantial stock and bond market rallies that occurred in the last two months of 2023.
• Market expectations of 175 bps in cuts in 2024 beginning in March with a backdrop of 3.7% unemployment, respectable GDP growth, and a still healthy 3.2% core PCE might be a little offside but if not, it may spark growth, and unfortunately, a new bout of inflation.
• As opposed to the synchronized global central bank hiking cycle, the cutting cycle is expected to differ but the U.S., Euro area, U.K., and Canada will be similar with OIS markets currently expecting cuts beginning in Q2 and 5 to 6 cuts priced in by the end of 2024 across the board.
• Fourth quarter earnings season kicks off next week with earnings growth consensus of 1.3%, significantly below (downward revisions) the 8.1% consensus 4Q estimate on September 30th. Full year 2024 earnings expectations are around 12%, which many feel is lofty.
• Red Sea attacks by Iranian proxies in Yemen, the Houthis, have the potential to spark another surge in energy prices with just under 9% of global oil and refined products being transported through the Red Sea.
•  A positive economic consensus for 2024 has grown markedly in the past two months but it seems mostly limited to the U.S. with other developed economies being revised downward.

Economic Release Highlights

• December payrolls rose 216,000, more than the 164,000 consensus and above the forecast range (100,000- 200,000). The unemployment rate held at 3.7%. Labor force participation rate fell notably to 62.5%. Average Hourly Earnings were +0.4% MOM and +4.1% YOY.
• The JOLT Survey for November showed job openings marginally lower to 8.790M.
• U.S. ISM Manufacturing Index for December remained in contraction at 47.4, generally in line with consensus and a marginal improvement over the prior month. Final December U.S. Manufacturing PMI was revised slightly lower from 48.2 to 47.9.
• U.S. ISM Services Index for December registered 50.6, well below consensus and last month’s reading which were both 52.7.
• December non-U.S. PMI readings (C, M, S) for China (52.6, 50.8, 52.9), India, (58.5, 54.9, 59.0), U.K. (52.1, 46.2, 53.4), and Eurozone (47.6, 44.4, 48.8) all blended to a Global reading of (51.0, 49.0, 51.6) – a sixteenth consecutive Manufacturing PMI decline.
• November Factory Orders came in within consensus forecast range at +2.6% following a 3.4% decline the prior month.