Please see the below article from Brooks Macdonald providing their Weekly Market Commentary. Received this morning 18/04/2023.
A slightly lighter economic calendar, but more company results instead this week
Despite a weaker day on Friday in dollar terms, equity markets managed to finish the week in positive territory, as financial stress fears continued to recede after last month’s hiatus. The flipside though, is that markets have been rebuilding expectations around a Fed hike on 3 May when the Fed next meets, with probability of a 25bps hike now at 81. Turning to the week ahead, it’s a slightly lighter economic calendar. In terms of what to look out for, China’s Q1 growth following its reopening will be in the spotlight when it releases Gross Domestic Product (GDP) numbers tomorrow. Elsewhere, investors will be focusing in on labour market and inflation releases from the UK due tomorrow and Wednesday respectively. Over in the US, the Fed releases its latest ‘Beige book’ on Wednesday, where the regional Fed banks gather up anecdotal information on current economic conditions in their areas. With the US Q1 earnings season now underway, company results ramp up with more bank results due this week, including Bank of America, Morgan Stanley, and Goldman Sachs, as well as results from Tesla, IBM and Netflix. Finally, the global flash PMIs for April due Friday will bookend the week, as investors continue to focus on recession risks.
US bank sector results gets off to a good start
Friday saw US bank sector results get underway, with bellwether JP Morgan easily beating expectations. Alongside an expected boost to deposit inflows following customers seeking perceived safety in the bigger banks, JP Morgan also posted a huge jump in its net interest income (which is broadly speaking the difference between what it pays on deposits and earns on loans and other assets). Significantly, JP Morgan CEO Jamie Dimon and his team stressed that the 1Q deposit inflows were not driving its higher interest-income forecast, now expected to be $81bn this year, up from a previous estimate of $74bn, with Dimon saying that “the US economy continues to be on generally healthy footings, consumers are still spending and have strong balance sheets, and businesses are in good shape,” Clearly one bank’s results doesn’t dictate the whole sector, and it’s likely that results from some other US banks, including smaller regional banks in coming weeks might look less robust, but as results go, it was a good start to the earnings season, which investors are watching closely in terms of the expected earnings outlook for this year.
US debt ceiling talks still a tail-risk
Later today sees US House of Representative Speaker Kevin McCarthy (Republican) giving a speech that’s expected to cover the Republicans’ position on the issue. As a recap, the US is expected to come up against the debt ceiling again this summer, and the Republicans have said they want concessions like spending cuts in return for passing an increase. Since the Republicans now have a majority in the House of Representatives, versus a Democrat-controlled Senate, it suggests that there will have to be some concessions from both sides. For the time being, investors on balance seem to be framing these talks as largely political still, but that does leave a tail-risk for markets should the mood on Congress deteriorate.
What does Brooks Macdonald think
Despite firming expectations of a Fed hike next month, markets are still expecting cuts later this year, with the Fed December meeting rate expectation currently at 4.50%. While that’s up a long way from the 3.75% low at the height of the US banking turmoil last month, it is still at odds with a Fed which on balance is likely looking to want to hike and then hold rates at those higher levels. With the next Fed meeting only two weeks away on Wednesday, this week is the last time we’ll be able to hear from Fed speakers before their blackout period begins on Saturday.
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Alex Clare
18/04/2023