2023 – Week 42
Alessandro Hor
Investment Manager | Fund Management | Compliance & AML | Capital Transactions | Asset Management | Risk Management
Markets’ overview:
The Q3 2023 earnings season is currently underway, and the latest data from FACTSET reveals that the number of positive earnings surprises and their size closely align with the 10-year average.
As of now, 17% of S&P 500 companies have shared their actual results. Of these, 73% have reported earnings per share (EPS) figures that outperformed the estimates. This percentage is slightly lower than the 5-year average of 77% but remains just below the 10-year average of 74%. Collectively, these companies are exceeding earnings expectations by 6.6%, which is slightly less than the 5-year average of 8.5% but falls in line with the 10-year average of 6.6%.
Moving to the equity markets, we've seen a recent downturn in performance. The #S&P 500, typically one of the stronger indices, closed the week with a 2.39% decline. The #NASDAQ didn't fare any better, closing down by 3.16%.
Over in Europe, the #Stoxx600 saw a notable 3.44% drop, and similar trends were observed in Asian markets. The #Nikkei Index ended the week with a 3.19% decline, while the #HangSeng experienced a sharper decline at -3.47%.
Market volatility indicators have also been on the move. The #VIX index closed above 21 for the first time since April this year, indicating increased market jitters. Additionally, the #SKEW Index, which likely reflects market participants' perception of higher and more visible risks, saw a significant drop from 144.3 to 136.74, representing a 5.24% decrease.
US
US GDP growth estimates saw an uptick as September's retail sales exceeded expectations, rising by 0.7% compared to the estimated 0.3%. The strength in sales was widespread. In the same vein, U.S. business inventories climbed 0.4% in August, setting the stage for the upcoming holiday season.
However, homebuilder confidence continued to decline in October, primarily due to elevated interest rates, impacting affordability.
The United Auto Workers (UAW) strike remains a concern for the major automakers. General Motors (GM) has announced a delay in the production of all-electric trucks at its Michigan plant until late 2025. Ford's executive chairman, William Clay Ford Jr., emphasized the strike's potential impact on the American automobile industry.
In the housing sector, U.S. housing starts surged by 7% in September to reach 1.36 million units, slightly exceeding Wall Street estimates. Building permits saw a milder decline than anticipated, dropping 4.4% versus the expected 6%. Conversely, mortgage demand hit its lowest point since 1995 as mortgage rates approached 8%. Existing home sales in September fell just below 4 million units, a level not seen since October 2010, with a 15.4% annual decline according to the National Association of Realtors.
Federal Reserve Chairman Jerome Powell reiterated the concern over persistently high inflation, stating the central bank's commitment to its 2% target. Despite rate hikes, monthly inflation has slowed to 3.7%. Powell emphasized that sustained progress would require a period of below-trend growth.
On the labor market front, initial jobless claims remained below 200,000, defying some expectations of weakness. However, home sales for September decreased by 8% year-on-year, marking the slowest pace since October 2010. The median home price stood at $394,300, reflecting a 2.8% year-on-year increase.
During earnings season, the financial industry is under scrutiny, particularly regional banks, as concerns persist about underlying conditions that could lead to further stress in the sector.
In economic indicators, the Philadelphia Federal Reserve's manufacturing index stayed in contraction territory for October, with the current general activity index at -9.0. While an increase of five points was noted, it marked the 15th negative reading in the past 17 months. A reading above zero signals improvement, while values below indicate worsening conditions.
Europe
Eurozone CPI in September stood at 4.3% year-on-year, down from the previous month's 5.2%. Core CPI also decreased, ending at 4.5% year-on-year, compared to the prior month's 5.3%.
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The primary drivers of the Eurozone's annual inflation rate were services, contributing +2.05 percentage points, followed by food, alcohol, and tobacco at +1.78 percentage points, non-energy industrial goods at +1.06 percentage points, and energy, which had a dampening effect at -0.55 percentage points.
In the most recent data for September, the PPI in Germany surprised economists and analysts. It revealed a monthly decrease of 0.2%, which is quite unexpected, especially when compared to the predicted 0.4% increase. This divergence indicates that prices at the primary market level, where goods are first produced, have experienced a notable decline.
The annual figure is even more striking, showing a substantial 14.2% decrease. This annual decline is significant because it deviates from the market's expectations, suggesting that the price reduction is more pronounced than previously anticipated.
Such variations in the PPI can have significant implications for the broader economy. For instance, a decline in producer prices can potentially indicate lower costs for businesses, which may or may not be passed on to consumers in the form of lower prices. This, in turn, can influence inflation rates and consumer spending. The unexpected data serves as a reminder of the inherent unpredictability in economic trends and highlights the importance of monitoring indicators like the PPI to gain insight into the state of an economy.
China
The People's Bank of China injected a net 289 billion yuan ($39.6 billion) into the financial system through a one-year policy loan on Monday, marking the largest such injection since December 2020. Simultaneously, it withdrew a net 134 billion yuan of short-term liquidity via open-market operations.
In line with expectations, the PBOC maintained the MLF interest rate at 2.5%. As a result, yields on sovereign bonds with maturities ranging from two to ten years increased by one to three basis points on Monday.
This move comes as Beijing contemplates a fresh round of economic stimulus to meet the official annual growth target of approximately 5%. In September, the Ministry of Finance issued 1.2 trillion yuan in central government bonds, a figure 60% higher than the historical average for the same period over the past three years. Additionally, more supply is expected, including a 1 trillion yuan program aimed at helping regional governments refinance hidden debts, a risk that Beijing is keen to mitigate. Policymakers are also considering further sovereign bond sales, amounting to at least 1 trillion yuan, for investment in infrastructure.
China reported third-quarter growth of 4.9%, surpassing expectations of 4.6%. GDP increased by 1.3% quarter-on-quarter. The property sector had a dampening effect on fixed asset investment, but industrial production and retail sales contributed to the economy's overall resilience as it is experiencing a mixed recovery.
In September, China's industrial output expanded by 4.5% year-on-year, matching the growth rate seen in August. This growth was supported by policy measures, which are helping stabilize parts of the world's second-largest economy, even as deflationary pressures persist. Data released by the National Bureau of Statistics (NBS) on Wednesday exceeded expectations, with a Reuters poll of analysts anticipating a 4.3% increase.
Retail sales, an indicator of consumption, accelerated in September, rising by 5.5%, compared to a 4.6% increase in August. Analysts had predicted a 4.9% expansion. Fixed asset investment grew by 3.1% in the first nine months of 2023 compared to the same period the previous year, slightly below the expected 3.2% rise. In the January to August period, it had grown by 3.2%.
Definition
Producer Price Index
The Producer Price Index (PPI) is a measure of the average change over time in the selling prices received by domestic producers for their goods and services. It is often used as an economic indicator to assess inflation at the producer or wholesale level. PPI tracks price changes from the perspective of the seller, in contrast to the Consumer Price Index (CPI), which measures price changes from the perspective of the consumer.
PPI is calculated by collecting and analyzing price data for a "basket" of representative goods and services at various stages of production, such as raw materials, intermediate goods, and finished products. The index provides insight into inflationary or deflationary trends within specific industries and sectors of the economy. It is a valuable tool for businesses, policymakers, and economists to monitor and analyze price movements in the production and distribution of goods and services.
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