Last week closed out in a negative fashion as US inflation (more info below) once again dominated much of the market narrative. However, late on Friday we saw the start of the Q3 earnings season in the US. It has traditionally kicked off with the big US financials and we saw JP Morgan, Wells Fargo, and Citigroup all report on Friday, with big names like Bank of America and Goldman Sachs to follow early this week.
Headline figures were down significantly, but importantly broadly managed to beat market expectations. Banks in general do better in a higher rate environment (aided by the spread between loans and deposits) and they did. However, they are also a bellwether for the economy. With that in mind the forward guidance, which was negative, gives us a decent insight into where banks think the US economy is going. But this isn’t necessarily a bad thing. If a recession does in fact materialise, it is likely to be the most expected and forecast recession in history. As always, stock markets remain forward looking instruments and certainty for the future (even with a negative outlook) could well help equities find their feet at the bottom of this market trough.
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Weekly Investment News
Last week saw the US consumer price index come in higher than expected with core inflation rising 6.6% for September, faster than the 6.3% rate in August. Headline inflation rose by 0.4% month on month, double market expectations. The sticky inflation reading consolidated predictions of a 75bps rate hike by the Fed in November. The most notable reaction to this was within US Treasuries, with both the 10-Year and 30-Year Treasury yields rising above the psychologically significant number of 4% on Thursday.
Friday also saw the release of corporate earnings reports for major banks and financial institutions, which gave investors an insight into the health of companies amid rising borrowing costs. JPMorgan Chase for example displayed lower earnings this quarter, showing a net income of $9.7bn, down from $11.7bn for the same period last year. This was higher than expectations of $8.9bn. The consensus for earnings was mixed with other banks such as Morgan Stanley coming in below expectations showing a 30% drop in profits. Despite some strong earnings, equities continued to be guided by inflation concerns and the US market ended the week down 1.5%.
In Europe, the UK ‘Mini Budget’ continued to move markets as UK Prime Minister Liz Truss backtracked further after plans to pause an increase in corporation tax were reversed. UK gilt yields continued to rise with the 30-Year reaching 4.8% on Friday, as investors showed little confidence in UK policymaking. The UK Chancellor of the Exchequer Kwasi Kwarteng resigned on Friday after just one month in office. The 10-Year German Bund yield, which serves as a regional benchmark, rose to 2.4% on Wednesday, its highest since 2011 with some investors viewing this as a possible inflection point within European sovereign bonds.
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