The Factory Daily Letter
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A quick recap on what was, what’s coming up, and what we are watching
Signs of peaking inflation together with talk of frontloaded-Fed-hawkishness (that could give the central bank more flexibility later on) supported the relief rally in US equities into the end of last week; the S&P500 and Nasdaq both closed it up more than 6% allowing the market to put a pin in its protracted losing streak, while the US 10-year Treasury Yield is at around 2.74%. Month-end rebalancing flows and potential corporate buybacks were also behind the shift in sentiment.
US markets are closed today for the Memorial Day holiday, while the UK will be enjoying a two-day Queen's Jubilee & summer holiday Thursday and Friday. This week the focus will be on the EU summit at which European leaders will discuss war, inflation, energy and food security as the stalemate over oil sanctions continues, while in the US QT begins on 1 June with markets also watching consumer prices and the monthly employment report. We also have European inflation figures, global PMI data and this morning some encouraging news-flow that authorities in China may very gradually be starting to ease some of the stricter Covid-zero restrictions.
On the monetary policy front Atlanta Fed President Bostic said Monday that a pause on rate hikes in September may make sense, his comments coming after St. Louis Fed President Bullard said the previous Friday that the Fed could even be easing policy in 2023 and 2024 because it had got inflation under control. FOMC minutes of the May 4-5 meeting reflected agreement over the need to raise rates in 50 basis-point increments over the next two meetings – with evidence of the rationale being that such may indeed allow them more flexibility later on if required. Elsewhere on the central bank front Christine Lagarde signalled that ECB was likely to start raising rates in July and exit sub-zero territory by the end of September. In Japan Kuroda reiterated that prices were unlikely to rise substantially absent wage hikes, underscoring his commitment to maintaining stimulus amid the view inflation pressures will dissipate, while the markets started last week digesting the PBoC’s cut to the five-year loan prime rate (a reference for mortgages) by 15 basis points, in the biggest reduction since the rate overhaul in 2019 with Covid cases still on the rise in the country;
Financial headlines around the war in Ukraine included the US Treasury Department letting a key sanctions waiver expire, effectively rendering US investors unable to receive interest on Russian foreign debt. This while Russia said it would open shipping corridors from seven Ukrainian ports following international criticism around its blockade triggering an international food crisis – on the condition that sanctions were lifted. G7 reported to be putting pressure on Opec oil–producing countries to pump more oil in order to cool markets. At the WEF gathering in Davos the prevailing themes worked around absence of Russia and China; concerns around de-globalisation, Ukraine and the potential consequences of an ongoing (hot and cold) war.
In other news, US Secretary of State Antony Blinken delivered a much-awaited speech detailing the Biden Administration's "Approach to the People's Republic of China”, saying that the US is not seeking a ‘Cold War’ with China but does want China to adhere to international rules, emphasising "we will remain focused on the most serious long-term challenge to the international order – and that’s posed by the People’s Republic of China”. He also clarified that the US does not support Taiwan independence but will continue to strengthen relations. In the UK the Treasury announced a 25% windfall tax on oil and gas companies to raise money to help with the cost-of-living crisis. It also signalled its first trade deal with a US state (Indiana) saying it was working towards several arrangements with six more (amid uncertainty over an overall US-UK agreement). It also said it aims to introduce controversial bill to override parts of the Brexit deal with the EU in the spat over the Northern Ireland Protocol within the next three weeks.
On the macro front in the US, the Markit Flash reading for its Manufacturing PMI index referred to a fall of 1.7 points MoM in May to 57.5, a miss on estimates of 58.0 and its lowest reading in three months. Output and new orders were however stronger, while employment accelerated to fastest pace since July 2021, but output charges were at their third-highest on record and input costs highest since November 2021. The flash services PMI reading was down 2.1 points MoM to 53.5, missing estimates for 56.0 - its lowest in four months. New-home sales in April plummeted by the most in nine years (~17% MoM), while the decline in pending-home sales decline was sharper than expected. Revised Q1 US GDP also came in worse than expected (-1.5%) while PCE came in higher, and initial jobless claims pulled back after a small rise in the prior week. On Friday April’s core PCE price index was largely as expected (up 0.3% MoM) with the YoY increase at 4.9% dropping from March’s 5.2%, the deflator slowing slightly 6.3% vs 6.6% MoM, while the final May Michigan Consumer Sentiment reading released at 58.4 points (coming off April’s 65.2) with 5-year inflation expectations at 3% and the current conditions measure at 63.3 (from 69.40 in April);
In Europe, Germany’s Ifo business climate indicator was better than feared with the headline index rising for a second month (to 93). This was followed Tuesday by preliminary eurozone PMI indicators for May; the S&P Global Flash Germany manufacturing PMI edged higher to 54.7 in May (beating forecasts); the Eurozone composite however fell to 54.9 in May (from 55.8 in April) but still reflected robust growth in private sector activity despite the war, pandemic supply constraints, and cost of living headwinds (the services gauge falling to 56.3 and manufacturing to 54.4);
In Japan inflation remained stable in May, the consumer price index for Tokyo rising 2.4% to 101.8 points in May after nationwide data surpassed BoJ's 2% target for first time since 2015. The Jibun Bank Japan Composite PMI made a five-month high of 51.4 in May. The Manufacturing gauge however fell to a three-month low of 53.2 (albeit still beating forecasts) while the services gauge rose to a five-month high of 57.1 – also beating forecasts).
Data out of China showed that industrial profit growth slowed markedly (rising 3.5% to CNY 26.58 trillion Jan-April vs 8.5% prior) (which was not unexpected as lockdowns dealt a blow to production while surging raw material prices weighed on manufacturer earnings).
What’s coming up this week?
Markets will have an eye on flash European inflation data, global PMIs (both flash and final) and the US payrolls report. The EU gets under way with a stalemate remaining over the proposed Russian sanctions package. Monday is a non-trading day in the US for Memorial Day, while the UK will be celebrating the Queen’s Platinum Jubilee Thursday and taking its summer bank holiday Friday.
- Monday: Holiday in the US; euro-area sentiment data (May); Germany preliminary inflation (May); EU Summit;
- Tuesday: China NBS Manufacturing PMI (May); Japan consumer confidence (May); France preliminary inflation (May); Euro-Area flash inflation (May); Germany unemployment (May); GB Mortgage lending; US Case-Shiller Home Price (March); US Chicago PMI (May), CB consumer confidence (May), Dallas Fed Manufacturing;
- Wednesday: China Caixin Manufacturing PMI (May); Germany retail saes (Apr); euro-area S&P Global manufacturing PMI (final; May), unemployment rate (Apr); GB house prices (May); US ISM manufacturing PMI (May); JOLTs report (Apr); Fed Beige Book;
- Thursday: Holiday in the UK; EA PPI (Apr); US ADP employment report; US weekly jobless claims, factory orders (Apr);
- Friday: Holiday in the UK: Germany trade balance (Apr); US Non-Farm Payrolls report (May) and ISM non-manufacturing PMI (May);
What themes and topics have we been following?
- Beneath the surface, is something cooking? In last week’s Technical view we took a look under the lid and screened for better-quality names that could perform better in a rebound;
- Assessing the consensus: in the US while the economists are blue and the analysts more cautious, the macro strategists are more optimistic;
- Recovering from the bottom-up blues? In Europe however, a recent uptick in EPS revisions suggests that it is the analysts that are now feeling more buoyant;
We revisit each of these in summary below and as ever wish all our readers a good week ahead.
The technical view
Is something cooking?
A long run of negative performance put the S&P500 on the brink of a bear market and to key technical support. However, and while many investors have indeed turned defensive, they appear to be stopping short of liquidation / capitulation. Moreover, some signals under the surface have been suggesting that a short-term rebound could be brewing.
Of particular interest is that some of the larger-cap names have been holding steadier these past few weeks while some of the more speculative corners of the market (that led the decline) have even been outperforming once again (a technical break in the ratio of high-beta stocks to the S&P500 could reflect high-beta outperformance in a positive sign that risk appetite is returning - thereby supporting the possibility of a relief rally in the market:
The US consensus: an update
Bottom up vs top down
The bullish outlook presented by the Street at the beginning of the year has petered out. Out of Davos last week there was much talk of darker days ahead in light of the prevailing risks to growth including the omnipresent culprits that include inflation (and the policy demanded to manage it) as well as war in Ukraine and ongoing lockdowns in China. But while the economists are blue and the analysts more cautious, in the US the macro strategists appear more bullish. Moreover, if we apply the prevailing year-end consensus target on the S&P to the technical picture it suggests the S&P500 can’t fall further from here (the market currently is currently sitting close to the most bearish year-end target on the Street).
The reflation sectors such as industrials, materials, and energy are among the Street favourites – and indeed those that are among the best performers year to date. Unsurprisingly, the three worst-performing sectors so far this year are those that are now sitting the furthest distance from their average price targets. Worth noting is that the energy sector, with a year-to-date performance of 52% remains 8.3% below the average target price
As the economic outlook continues to change shape, and following the S&P500’s protracted selloff, last week we checked in with how the US consensus has been evolving, presented our updated technical scenario on the S&P500, and screened the most loved/hated names of the sell-side analysts. See it again here.
The consensus in Europe
Recovering from the bottom-up blues?
While last Wednesday (summarised above) we discussed how the US consensus outlook has been evolving since March as the economic outlook has been deteriorating (particularly since the Russian invasion in Ukraine, noting how states-side analysts have become more cautious than the macro strategists.
In Europe however, the picture is a little different; a recent uptick in EPS revisions suggests that it is the analysts that are now feeling more buoyant. Moreover, while strategists tend to take more of a top-down approach, it is also possible to derive some implied target prices for indices by weight-averaging component index target prices made by analysts, and such a (“bottom up”) method implies that the analysts currently hold a more bullish view than the strategists, implying an upside move for the Euro Stoxx 50 of 32.1% (vs 11.6%). Only the DAX index is showing a higher distance to this target price than the average:
On the short-term technical chart, the Euro Stoxx 50 has been forming a symmetrical triangle, a technical pattern that reflects uncertainty - a market that is currently waiting for a break of resistance or support that might signal the direction of the next move:
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