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24 April, 2023 - Cracks have started to appear in the US labor market.

Recent data point to a deterioration of the US jobs market, which is only normal after the most aggressive interest rate hike campaign of the last forty years and as companies have been laying off thousands of employees since last year. The recent banking crisis with consequences to a number of companies, primarily smaller ones, which will see their borrowing ability seriously damaged or become more expensive, is only going to make matters worse.

Up to recently, the data were still influenced by the last waves of the pandemic shock. Non-farm payrolls as well as initial jobless claims were showing a robust jobs market, albeit the rate of growth in 2022 was already almost half of that of 2021. The main (if not the only) driver of continuing growth in 2022 was the services industries (travel, restaurants, hotels etc). Companies in these sectors, up until last month, were still struggling to hire personnel as demand after the pandemic continued to increase tremendously, and workers were still enjoying their government-received benefits. But all these are coming to an end in the immediate future. Government compensation has now been exhausted by most people and prices for these services have increased significantly since 2021, making people less willing to travel, stay in nice hotels and eat out, especially if unemployment will start to rise.

The weekly initial jobless claims were again announced close to 250k last week. It was the fifth straight week that the number of new people asking for unemployment benefits stayed around these levels. As a reference, this figure was averaging 200k during most 2022 while it fell even as low as 180k during the last quarter of last year. Even more worrisome is the spike in the continuing jobless claims, which is less volatile than the weekly numbers and was announced at 1.87mn, the highest since November of 2021. A move of the weekly claims above 300k-350k will be consistent with a recession, so we are still away from that level, for now.

The Eurozone PMIs confirmed the recent trends. Services continue to do well, with the Eurozone PMI rising further to 56.6, from 55.0 in the last month and compared to the expectations for a fall back to 54.0. The Manufacturing PMI continued to move lower and deeper into recession territory. It was announced at 45.5 vs 47.3 last month and compared to the expectations for a rise to 48.0. On a country level, both France and Germany posted very weak manufacturing numbers and strong services.

But US Manufacturing PMI improved in April. It rose back above 50, at 50.4, better than the expected rise to 49.3, from 49.2 the previous month. The Services PMI came in at 53.7, also higher than the previous month and compared to the expectations for a fall to 51.0.

The US Leading Economic Indicators Index fell by 1.2% in March, more than expected. The leading indicator index has been falling (on a monthly basis) since the beginning of last year and it is now at the lowest level since the pandemic (November 2020). According to the Conference Board, which calculates and publishes this macro economic data, the current levels of the index are showing a very high probability of recession in the coming months.

China's first quarter GDP was announced better than expected. It was announced at 4.5% vs expectations of 3.4% and compared to just 2.9% in the previous quarter. As a reminder, the Chinese government has a target for 2023 GDP growth close to 5.0-5.5%, so growth will have to accelerate in the coming months, in order for these targets to be achieved.

Equities have risen close to the 2023 highs again but they are showing signs of fatigue, especially given all the risks that abound. For the week, US broad indices posted small losses with the S&P500 down 0.1% and Nasdaq close to -0.5%. Europe continues to perform better than the US. It finished the week positive, with Switzerland posting solid gains of 1% for the large capitalization companies, followed by France (0.8%) and Germany (0.5%). In terms of sectors, Technology, Energy, Materials, Communications posted losses of 1-2%, while defensive sectors such as Staples and Utilities rose between 0.5% and 1%.

Bond prices moved lower, but only marginally. The equity comeback and the stabilization of the banking situation has led traders and investors take profits in their bond holdings, which has pushed yields higher again. The 2-year US yield rose to 4.20% and the 10-year is trading around 3.60%. The German equivalent rates are 2.90% and 2.50% respectively.

Commodities were weak, amid selling pressure. Oil prices finished 6% lower for the week, with the WTI closing around 78$ again. Gold fell back below 2000$ to trade closer to 1980$, while most raw materials also lost significant ground (iron ore -3%).

First quarter corporate results were a bit disappointing last week. Tesla announced a large drop in operating margin, caused by the six (!) price reductions it has already announced this year. Inventory buildup is a sign of slowing demand and the price cuts are a clear sign of this. Morgan Stanley underwhelmed with its results, with Net Interest Income missing the forecasts and the Wealth management division showing a worse than expected operating margin. American Express posted worse than expected profits due to higher provision for credit card losses and higher costs. ASML, the world's leader (if not monopoly) in semiconductor machines manufacturing posted solid profits for this quarter, but warned that incoming orders have slowed down.

Chart of the Week : Volatility has fallen back, close to the 2021 lows.

Volatility is usually associated with fear and in times of turmoil it moves higher and usually in a sharp manner. One can see in the chart the huge spike in the volatility index (called VIX) in March 2020, when the pandemic broke out and reached a whopping 70. The VIX is usually around 15-20, in times of rather calm waters, while it can move closer to 10, in times of complete "market nirvana" , when a long bull market is running. In 2022, the VIX was trading between 20 and 30 most of the time, which are considered levels consistent with significant uncertainty and nervousness. They are also usually good levels for investors to invest in the stock market as valuations have been influenced by fear. Last week however, the VIX fell to a new cycle low of 17, which shows a remarkable lack of nervousness in the equity markets despite all the significant uncertainties with respect to the banking situation, the next FED interest rate decisions and the slowdown in the economy. And yes, bull markets usually climb a "wall-of-worry", but the problem is that according to the volatility index , there seems to be no worry at all ... We advise prudence instead.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Factset

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