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July 10, 2023 - The markets have turned their focus on interest rates (again).

Just three months ago, everyone including ourselves, were worried about the collapsing banks and an imminent recession. Fast-forward to today and we hear no such worries around us, any more. Instead, markets just started worrying about a re-acceleration of growth, which will lead to a re-acceleration of inflation and higher interest rates eventually. The June FED meeting's minutes which were released last week, showed a committee whose concern for the banking system had receded but whose concern for too-high inflation has re-emerged. Chair Powell, in his June post-meeting press conference, had a lot fewer words discussing the banks than in March or May. In contrast, in June he mentioned the lack of progress on core inflation several times.

Looking into the published minutes with detail, it is very interesting to see that two concerns that we shared for some time now, just surfaced among the committee members. First, we have been of the opinion that the headline jobs market report (non farm payrolls) are overestimating the real situation for the last 6-9 months or so. And copying from the minutes we find these words: "Some participants noted that some other measures of employment—such as those based on the Bureau of Labor Statistics’ household survey, the Quarterly Census of Employment and Wages, or the Board staff’s measure of private employment using data from the payroll processing firm ADP—suggested that job growth may have been weaker than indicated by payroll employment". Then, it terms of growth, we have been pointing out that there are quite a few metrics showing that the economy is actually weaker than it appears. And also taken from the minutes : "In their discussion of economic activity, several participants pointed out that recent GDP readings had been stronger than expected earlier in the year, while gross domestic income (GDI) readings had been weak. Of those who noted the discrepancy between GDP and GDI, most suggested that economic momentum may not be as strong as indicated by the GDP readings." This is not to say that the most-known and most widely considered data should not be trusted. But the divergent messages that we receive from various parts of the US economy are puzzling, to say the least.

The recent data show a re-acceleration of the US economy in June, making the markets concerned about the future path of interest rates, which will influence most asset classes. After the GDP's revision and the jump in new home sales, the ISM Services showed an unexpected jump, last week. The index jumped to 53.9 from 50.3 in May and against expectations for a much smaller rise to 51.0

The US labor market data, which were announced last week, were once again puzzling. The private survey by the data-processing company ADP showed a blow-out figure for June, with 497'000 added jobs against expectations for about 250k. We have to note however that this survey has produced very large numbers every June of the last three years, only for the number to go significantly down afterwards, so a seasonal trend could be in play. However, it was enough to scare the markets that employment not only remains robust but maybe it is accelerating. However, we also received two more sets of data. The monthly non-farm payrolls which rose by only 209k , a little less than expected and which is the lowest monthly growth since early 2021 ! And the JOLTS jobs opening figure, which dropped to 9.8mn, again close to the lowest levels since the summer of last year. All in all, we should stick to our view that the jobs market is slowly deteriorating, even if there are some peculiar data that emerge from time to time.

Swiss inflation dropped below the 2% target of the Swiss National Bank, in June. The CPI was announced at 1.7%, down from 2.2% in the previous month. Although these news are very welcome, there have been rent increases lately after many years of stability and specific items such electricity bills are expected to move higher in 2024. So, before declaring victory, the SNB will be monitoring the situation and chose to remain in-line with the ECB and the FED, being on the hawkish side, that is.

China announced restrictions on the export of specific metals (Gallium and Germanium), in response to the latest round of semiconductor restrictions imposed by the US and the Netherlands against the country. These metals are used in the manufacturing of some semiconductors and China is producing 80%+ of the global supply of these metals. On one hand, it is apparent that the US and China have made steps to re-approach each others and the recent trip of Treasury Secretary, Mrs. Yellen to China over the weekend is just another positive example. But at the same time, the US continues to maintain a tough stance against China, partly because elections are coming up next year.

It was a week where both Equities and Bond fell in tandem, as the focus was again on central banks' intentions. The US markets did better, finishing about 1% lower on average, but Europe registered losses of about 3.5%, including the defensive, Swiss market. Chinese equities managed to stabilize, with the local markets losing just 0.5% for the week. After the lackluster non-farm payroll data on Friday, bonds regained some ground but not enough to avoid a negative week. The US 2-year is now at 4.95% and the 10-year is back above 4%. We are getting again at very interesting levels of yields to continue adding to high quality bonds, especially in Europe, where we need to remind our readers that Germany is already in a technical recession (two negative quarters of GDP growth).

The big reversal in the EURUSD and the mini rally in bonds late on Friday evening sets up the background for a very interesting week ahead. The EURUSD had fallen to a low of 1.0820 on Wednesday, after a very strange jump in jobs data from the private ADP survey (497k vs 250k expected). But as already mentioned, the other jobs data that followed did not show a similar rosy picture and the EURUSD jumped to a high of 1.0950, as the US 2-year yield fell a whopping 20bp from the highs in a matter of a few hours. Gold also managed to recover from the low 1900$, to finish the week at 1930$.

The corporate earnings reports for the 2nd quarter are about to start, in the US. The expectations are for S&P 500 earnings to decline 6.8% compared to the same period of last year, and this would be the worst performance since Q2 of 2020. According to FactSet, the EPS estimate for Q2 fell by 2.9% over the course of the quarter, despite the hype of AI and the market rallying in this period. Of course, as expectations are lower than three months ago, it would be easier for companies to surprise positively. This week we are expecting the first major banks to report, such as JPMorgan, Citigroup, Wells Fargo as well Blackrock, Pepsico and Delta Airlines among others.

Chart of the Week : If history is any guide, Technology's outperformance could be coming to an end.

This is an interesting chart by "Les Cahiers Verts" which shows the top five companies in the S&P500 as a percentage of the total market capitalization. Back in the 70s the top five companies had reached almost 25% of the index, and afterwards they performed much worse than the market, as their total weight in the index started shrinking. The huge rally of Tech stocks in 2021 brought the new top five to a similar total weight, only to strongly under-perform in 2022, and this total weight shrunk again. This year's rally in the top-5 names is approaching again the same level of market concentration which has resulted in the past into under-performance of that group in the following months/years. For the market to move significantly higher, a broadening of the rally is desperately needed.


• 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 : Les Cahiers Verts

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