Heavy rain continues – driven by very turbulent rates once again. Tough week for risk-on, with US Equities down, rates up, and bonds down again. Navigating the uncertainty by staying on the sidelines in both equities and bonds until there is greater clarity on where rates are headed. The Fed paused in September, but the next few meetings are now live, and a first cut is not presently on the cards until July 2024. 3Q23 earnings (starting in October) will be key if they can steal the show from rates and bonds and re-establish faith in the US Economy. 

Major market events 25th – 29th September 2023 

Highlights for the week

Mon: DE IFO Business Climate 

Tue: JP BOJ Core CPI, US Consumer Confidence

Wed: JP Monetary Policy Minutes, US Durable Goods Orders

Thu: DE CPI, US GDP, US Initial Jobless Claims, US Fed Chair Powell Speaks

Fri: JP CPI, UK GDP, FR CPI, FR PPI, EU CPI, US PCE Price Index

Performance Review

• Index	15/9/2023	22/9/2023	WTD	YTD
  Dow Jones	34,618.24	33,963.84	-1.89%	2.50%
  S&P 500	4,450.32	4,320.06	-2.93%	12.97%
  Nasdaq 100	15,202.40	14,701.10	-3.30%	35.34%
  Euro Stoxx 50	4,295.09	4,207.16	-2.05%	9.10%
  Nikkei 225	32,533.09	32,402.41	-3.37%	26.00%

  Source: Google
  
  * Stop-loss week – the worst for the US Markets since March. So the Fed did hold, but completely re-set the bar regarding rates going forward. Higher for longer was mentioned again, and the dot plots cut from 4 to 2 cuts in 2024 – with Governor Powell mentioning that he does not see rate cuts any time soon. The rout in bond markets continued, and I believe there needs to be a capitulation before a respite can begin – maybe with 10-year treasuries reaching a yield of as much as 5% (currently 4.43%). Some market pundits are stating that it is nonsense to think that interest rates will go up forever (like it was nonsense to think that negative rates would persist for long), but the current dislocation can last for quite a while until we see inflation starting to recede. There’s no question in my mind about the Fed’s hawkishness – they are clearly looking at inflation and if in order to win the game they will send the economy into a recession, so be it. We have three more weeks to go before we can look at earnings, and in the meantime, it’s probably better to hedge your bets. Data will be key in driving the Federal Reserve going forward, but under the current environment talking about 6% is no longer taboo. The market is definitely not sold on Fed cuts and fears we have yet to touch the summit in rates.
  
  * Clearly, growth was bettered last week, as well as small caps and anything with a lofty valuation. It is however the rout in bonds that worries me the most. German yields reached their highest since 2011, at the height of the Euro crisis, and their run seems unstoppable, sadly fanned by a hawkish Fed. The BOJ risks getting very late to the party of hiking cycles, making so far some very prudent moves while others have completed, or are about to complete, their hiking cycles. Some of inflation’s bounce derives from something that hasn’t got anything to do with investments or consumer spending, namely oil, raw materials, and politics. At this point in time, I would want to see how the crisis in rates unfolds before stepping into the equity market – as it seems only to go down. A prudent stance on bonds is also welcome – as recommended by Tom. The great Ray Dalio mentioned that he prefers cash at the moment over bonds, as further testimony that the wild moves in rates are yet to stabilize. And why not? With yields so enticing, why take on board more risk (especially if you think that inflation, sooner or later, is headed downward?).
  
  * Once again the markets are licking their wounds, and we need more clarity on earnings before the correction in equities can stop. At the moment the CME FedWatch tool is pricing a decrease of 75bps by the end of 2024. While both the ECB (who hiked another time) and the BOE (who paused) tell us that we are close to the peak in rates, Governor Powell gives us a different message: that the Fed might hike another time, and that he doesn’t see room for rate cuts now. The release of the US GDP on Thursday – as well as the weekly Jobless Claims – may shed more light on where we are (at the moment, in a very uncomfortable place). Meanwhile, the CME FedWatch tool has updated the first cut to July 2024 – I just wonder if will it be too late?
  
  * We’ve heard for some time about a hard (more likely) or soft landing for the economy, with a recession that was supposed to begin as early as in 2Q23, and the US economy seems to have performed better than anyone expected. Indeed, the Atlanta Fed’s GDPNow model is currently forecasting 3Q23 growth of 4.9%, stable from last week. One notable aspect is that – from the same survey – the current forecast derived from the Blue Chip consensus is now nearing 3%. This has led analysts to increase EPS forecasts for the first time in the last 2 years (since 3Q21). Goldman Sachs, which has been spot on in its forecasts on the economy, is now forecasting a 20% chance of a recession in the US in the next 12 months, with lots of disinflation to take place in 2H23, and at the same time, it maintains higher than consensus estimates for US GDP, while being less optimistic than consensus on 2024 S&P 500 EPS. After having gone past the rates tantrum, the baton passes on to the economy, which so far has performed admirably, despite the tough environment. Watch out for earnings, with a -0.2% growth now expected in 3Q23, vs an estimate of -0.4% as of Jun 30th. Revenue growth is faring a little better, at +1.5% in 3Q23, vs 1.2% as of Jun 30th. 
  
  * We need to reach October to have an update on 3Q23, however, if the current estimate of -0.2% is confirmed, it will be the fourth straight quarter of negative year-on-year growth. 

Earnings, What’s Next?

We are still in limbo between 2Q23 and 3Q23. Here’s a list of companies reporting this week. Highlights include Accenture (Thursday, Before Open), and Nike (Thursday, After Close).

Source: Earnings Whispers

Market Considerations

Revenue growth estimates for 2024 are forecasted to grow by 5.6% (5.0% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 12.2% (11.9% on Jun 30th), so the future looks to be bright. We continue to debate whether the US economy will fall into a recession or not and what will be the peak rates for Fed Funds. September and October are traditionally two difficult months, so my optimism is somehow tempered here, even though the strong performance so far should prevent a catastrophe. 

We are probably shifting from a monetary risk to a macro risk, where the economy’s performance is more important than what the Fed does. We should be mindful that the economy is probably just doing okay, even though passing the peak in rates will remove the overhang present on the market. If and when rates diminish in importance, earnings (and top-line growth) will hopefully pick up their pace.

So the breakout happened, with both the S&P 500 and the Nasdaq 100 ahead of their previous Feb 2 highs. Next week will probably be sideways/down again, as the market consolidates and forms a base around current levels. Last week saw some markets decline by 3% hitting the weekly stop loss – my recommendation is to be disciplined and respect the stop, staying out of the market until we have greater clarity on where the rates are headed. Regarding bonds, the trajectory is that yields will eventually fall, but given the run-up at the moment, I advise staying on the sidelines before pouncing. albeit with a few bumps on the road, although given the new Fed’s forecast, we might have to wait until the second half of 2024 for that.

For the less volatility-prone of you, it may make sense to take all opportunities to alter the weights of your asset allocation by increasing the weights of safety assets at the expense of more risky assets by lightening up in equities and reinvesting in bonds at attractive (4%+) yields. 10-year yields were up once again last week in the US and Europe, though the ceiling should be near for both. For those wishing to keep their money in Equities with lower volatility, suggest switching to Japan as the company with the most stable outlook (the country with the more precise picture of rates at the moment) until rate perspectives become clearer in the US and Europe. They got a boost given the recent buy recommendation by Warren Buffett, and the oracle is very rarely wrong. So Japanese Equities are now investable regardless of the lower volatility derived by being the only nation in G7 not to raise rates in the current environment. Just watch out for the JPY – if the current strength in the economy and markets continues, you may want to hedge it as it will likely continue to slide (against all major currencies).

Happy trading and see you next week!

InflectionPoint

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