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Economic and Market Review / 31.3.2023

U.S. equities were higher this week, with the S&P 500 and Nasdaq Composite posting their third straight week of gains. The S&P 500 Index rose 3.48% to 4109.05; the Dow Jones industrial average was up 3.22% at 33274.15; the Nasdaq Composite was up 3.37% at 12221.91. All sectors ended the week higher, as energy outperformed the most, up 6.17% and communication services rose the least up 1.46%.

Bank stocks, which have declined sharply since Silicon Valley Bank (SVB) earlier in March, advanced outperforming the broad market. On Thursday, the Biden administration released a set of proposed new regulations for mid-size banks, or those with assets between USD 100 billion and USD 250 billion. The potential new rules would impose more stringent capital and liquidity requirements as well as require mid-size banks to pass more frequent stress tests. The proposed changes would bring regulation of mid-size banks more in line with the rules faced by the country’s largest banks. Rising oil prices boosted energy stocks, U.S. benchmark West Texas Intermediate crude oil rose more than 9% for the week, climbing back above the USD 75 per barrel. The Brent Crude rose more than 6.5% or USD 79.9 per barrel. Last week was also the end of the first quarter of 2023. The technology-heavy Nasdaq Composite jumped more than 16% for the quarter, while the broad market S&P 500 Index rose approximately 7%. However, the narrowly focused large-cap Dow Jones Industrial Average was only modestly higher +0.38%.

Treasuries were weaker, the 10-year Treasury yield slipped seven basis points to 3.482%, with the curve flattening, as the 2-year yield rose above 4%. The 2-year to 10-year U.S. Treasury spread inversion continued to widen into negative territory. Cboe's Volatility Index go the week was down 3.04 basis points (13.98%) at 18.7o. The dollar index ended the week lower.

Shares in Europe rallied as fears of financial instability waned. In local currency terms, the pan-European STOXX Europe 600 Index ended 4.03% higher. Major stock indexes also posted strong gains, with France’s CAC 40 Index rising 4.38%, Germany’s DAX adding 4.49%, Italy’s FTSE MIB increasing 4.72%, and the Swiss Market Index gaining 4.41%. The UK’s FTSE 100 Index rose 3.06%. Yields on benchmark 10-year German government bonds increased slightly as demand for save haven investments decreased. French and Swiss bond yields also increased. Annual consumer price growth in the euro area slowed to 6.9% in March from 8.5% in February as energy costs decreased.

Japan’s stock markets rose last week, with the Nikkei 225 Index up 2.40% Sentiment turned positive due to easing concerns from the turmoil in the global banking sector and the expectations that the U.S. Federal Reserve may moderate its monetary tightening. Japan’s government announced plans to restrict exports of certain types of leading-edge semiconductor manufacturing equipment. The decision comes after the U.S. imposed export restrictions on chipmaking tools to China and called on other suppliers, including Japan and the Netherlands, to follow.

Personal income increased by more than expected and personal spending increased by less than expected. The saving rate increased to 4.6% from a downward revised 4.4% in January. The February core PCE price index rose by 0.30% month-over-month, below consensus expectations, and the year-over-year rate decreased to 4.60%. Consumer confidence unexpectedly increased in March; the resilience of the labor market offset concerns about financial stability. The Conference Board’s Consumer Confidence Survey rose to 104.2 in March from 103.4 in February. Despite the rise in the headline confidence index, consumers are curtailing to buy homes, major appliances, as everyday items become more expensive given higher interest rates. While confidence remains high for the time being, analysts assess that there are headwinds from higher rates, intensified by tightening financial conditions, which eventually will heart the broader economy, probably not until the second half of the year.

Growth in home prices decelerated in January and analysts believe that will further moderate in the upcoming months. The Federal Housing Finance Agency Home Price Index increased by 0.2% month over month and only grew by 5.3% year over year in January, after increasing by a stronger 6.7% YoY in December. Home price growth slowed more on the West Coast than on the East Coast. While the recent stress in the banking sector could accelerate the decline in housing activity in the near term, it is expected the slowdown in home prices to continue this year. The Federal Reserve released its report that the U.S. money supply is falling at its fastest pace since the 1930s. The M2 money supply, the total measure of cash and cash-like assets present in the U.S. economy, fell by $130 billion in February and by 2.4% year over year. This sharp decline in money growth is important as less money supply historically lowers inflation, increases financial instability, and weakens economic growth. This could lead the Fed to slow or eventually pause the pace of rate hikes later this year.

Despite recent economic uncertainty, consumers remain resilient, especially when it comes on services. The Personal Consumption Expenditures (PCE) Price Index rose by 0.2% month over month in February after rising by 2% MoM the prior month. Real spending fell by 0.1% MoM due to high inflation. Going forward, as inflation and interest rates remain high and economic growth slows, analysts expect that consumer spending will also slow.

The first quarter of 2023 ended and 1Q earnings reports as coming soon. The main question is, did analysts lower EPS estimates for S&P 500 companies for the first quarter? According to FACTSET the answer is yes. “During the first quarter, analysts lowered EPS estimates for the quarter by a larger margin than average. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) decreased by 6.3% (to $50.75 from $54.13) from December 31 to March 30.” Thus, the decline in the bottom-up EPS estimate recorded during the first quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average.

Equity and bond markets will experience volatility until there’s a meaningful decrease in inflation, and the “data-dependent” Fed eases its stand on the rate hikes policy. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure. We’ve recently become more constructive on International equities, mainly Europe as the energy recession wasn’t as severe as anticipated. In the United States, large-cap equities provide an attractive mix of quality, yield and value. For fixed income, we remain defensive in our credit positioning, with at benchmark duration, and higher in credit quality.

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