The Weekend Edition # 111 - Keeping an eye on growth
Strong rally week; Macro Roundup - Growth, inflation and rates; Earnings growth has improved
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to all the new subscribers this week!
Here’s what we cover:
Market Recap - Strong rally week
Macro Roundup - Growth, inflation and rates
Earnings Season Q3 - Growth has improved
The Week Ahead - Economic & Earnings Calendars
Closing Thoughts - Keeping an eye on growth
Let’s dive in ⬇️
Market Recap - Oct 30 - Nov 03, 2023
What an incredible week! The markets closed at least 5% higher over the course of last week.
It was indeed a very busy week with the Fed meeting, which came out as expected, Treasury issuance announcement which was lower than expected and Apple earnings that disappointed.
Friday brought us the unemployment report with Nonfarm Payrolls coming in at 150k vs. the consensus of 175k. The unemployment rate inched up to 3.9% vs. 3.8% last month. Even a dismal job report didn’t stop the market from rallying.
We saw breadth improve considerably and the move higher was led by smalls caps.
Interestingly, this is something we’ve been wanting and it gives the market a very “risk-on” view. But, we want to see a sustained recovery before we can confirm that this is indeed a rally and not just an oversold bounce led by short covering. The S&P 500 closed October in the red - down three months in a row.
We were just talking about a “correction” last weekend, and price still remains below the 200-day moving average. The S&P500 has barely flipped in to positive gamma at 4316 and there’s still reason to be cautious. We may see this rally continue until 4400 (a major price level) but, given the market cycle we still favor low volatility, quality plays.
We’re seeing some of the impact on global markets with regard to the Middle East conflict start to fade. As the market starts to price in lower risk to oil supplies, we’re seeing prices come down from their initial spike over the first two weeks. Gold, as well, had pulled back and the safe haven trade is no longer active. Agriculture however, continue to catch a bid and that may be something to watch in terms of a resurgence in inflation.
Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount
Macro Roundup - Growth, Inflation and Rates
No major surprises from the Fed this week. They held rates steady and left the door open for another hike. The market is almost certain now that the Fed is done hiking, with the Fed also leaning into the narrative that tightening financial conditions have effectively done their job for them.
Much of the rally in bonds has been driven by the strength in the US economy and inflation expectations. So now, we’re at a critical juncture where the weakening of the economy and a decline in inflation could actually be contrary to financial conditions tightening creating an odd situation where rates decline due to lower inflation and weaker growth. Something we likely saw preview of, this past week
As of November 1, the Atlanta Fed’s GDPNow model revised US Q4 GDP growth down to 1.2% from 2.3% earlier. This comes after the advance estimate for Q3 US GDP Growth came in at 4.9% in October. That’s a major drop in growth estimates. While we may see both the Q3 and Q4 numbers revised, the likelihood that the US sees a slowdown in growth is high, given that rates have surged and demand has slowed down.
We continue to keep an eye on inflation though, as the latest reading shows some signs of resurgence in Headline inflation. But, of further concern remains core inflation. We’re not seeing shelter inflation decline the way it should, and post the UAW strikes, we’re likely to see the tailwind from the vehicles category fade. Finally, we also have sentiment data that shows consumer confidence is beginning to decline again with inflation expectations in particular starting to increase. This may continue to provide some lift to rates or at least counteract the effects of lower growth.
While everyone attributes the pull back in rates this week to the lower-than-expected treasury issuances at the long end, I don’t think it’s just that simple. Given below is the table of from the US Treasury on the expected issuances.
Source: US Treasury
To me, it doesn’t seem like the level is lower than what we saw between Aug to Oct at longer end. For the 10Y, issuances will increase this quarter from $108B to $114B and for the 30Y, issuances will increase from $63B to $66B. They may have come in lower than expected but, the actual issuances are still higher and may be revised up mid-quarter. This means we still have to contend with that level of supply.
Earnings Season - Earnings Growth has Improved
FactSet Earnings Recap:
Earnings growth has definitely made a significant recovery. We went from -0.4% at the beginning of the quarter to 2.7% growth the previous week to 3.7% growth this past week. Guidance still continues to come in weaker and for the most part, the market is still punishing bad news, as we saw with Apple this week.
In terms of sector performance, Communications Services and Consumer Discretionary continue to lead while, Energy, Healthcare and Materials continue to lag.
The top and bottom 10 companies in terms of reported YoY EPS growth are:
The Week Ahead - Calendars
US Earnings Calendar
US Economic Calendar in Eastern Time (Source: Trading Economics)
Closing Thoughts - Keeping an eye on growth
As always, it’s never just one thing. The market suggests the rally we saw last week was primarily because of a decline in rates. We can’t discount the fact that we’re also seeing earnings growth improve. The Fed’s likely pause and some of the Middle East risks being absorbed are also likely factors.
However, the decline in rates is quite likely a confluence of factors sparked by the Treasury announcement and the Fed. But, lower growth and inflation expectations can be contradictory and it remains to be seen how this plays out.
Here’s wishing you safe investing.
Ayesha Tariq, CFA
There’s always a story behind the numbers.