Global Markets On Hold After Higher-Rates-Longer Complicates Earnings Outlook

Barry Adams
28 Mar, 2023
New York City

Investors remained on the sidelines despite the growing chorus of reassurances from central bankers and government officials. 

Benchmark indexes struggled to cross the flatline on the worries that the interest rates may stay higher for longer than previously anticipated. 

The ongoing turmoil in the U.S. and European banking sector may not prevent the U.S. Federal Reserve from lifting rates higher at the next meeting in May. 

Despite nine rate hikes over the last fourteen months, the economy is set to expand at 3.2% annual pace in the first quarter, but higher interest rates are expected to slow down the growth in 2023 to 0.4%. 

Economic growth projections from the Federal Reserve indicate that the economy may face negative growth in the second and third quarter, as higher rates kick in. 

Higher rates may weaken economic growth and ease tight labor market conditions, meaning wage gains may slow as well, but slower wage inflation or economic activities may not slow down inflation.

Because supply chain issues and rising cost of services are driving the inflation, and none are in direct control of the Federal Reserve.   

Moreover, higher interest rates for longer are certainly going to increase financial burden on regional banks, forcing the Fed to tread carefully. 

Investors are still pricing for the Fed to pause after the next rate increase in May, but that is based on the assumption that the inflation is cooling and on its way to drop to the 2%-level preferred by the policymakers. 

The watered down measure of inflation, the PCE index, which excludes many drivers of price gains, is stubbornly stuck at more than twice the inflation level preferred by the Federal Reserve, indicating it will take many more rate hikes before the inflation drops to the desired level. 

Higher interest rates have varying degrees of impact on different aspects of the economy, and interest rate is a blunt tool with lagging results forcing policymakers to tighten more than needed.  

The Fed's dilemma is if it waits too long to raise rates then the higher inflation will become even more entrenched in the economy, and if it lifts rates too fast than the stress in the banking system could lead to more defaults. 

In either scenario, stocks are still reflecting rosy earnings scenarios for the current year, and the Fed's inflation-fight is also going to keep earnings subdued for at least three more quarters to come. 

 

International Goods Trade Deficit Held In February 

The international goods trade deficit in February edged up to $91.6 billion from $91.1 billion in January, the U.S. Census Bureau reported Tuesday. 

Exports in February declined to $167.8 billion from $174.6 billion in January but rose from $159.1 billion a year ago. 

imports in February decreased to $259.5 billion from $265.6 billion in January and fell from $264.4 billion a year ago. 

 

Price Unadjusted Wholesale and Retail inventories Advanced in February 

Wholesale inventories, seasonally adjusted but price unadjusted, in February increased 0.2% from January to $920.3 billion, and increased 12.2% from a year ago. 

Retail inventories, seasonally adjusted but not adjusted for prices, in February increased 0.8% from January to $747.3 billion, and up 10.8% from a year ago. 

 

U.S. Indexes & Yields 

The S&P 500 index decreased 6.23 points to 3,971.30 and the Nasdaq Composite index fell 52.76 points or 0.5% to 11,716.08. 

The yield on 2-year Treasury notes rose to 4.05%, 10-year Treasury notes increased to 3.55% and 30-year Treasury bonds advanced to 3.77%.

Crude oil traded up 38 cents to $73.18 a barrel and natural gas edged down 8 cents to $2.00 a thermal unit. 

 

U.S. Stock Movers 

Alibaba Group Holding Ltd jumped  8.02% to $93.03 after the Chinese e-commerce giant said it plans to split the company into six separate units including e-commerce, media and cloud services. 

Lyft Inc increased 6.0% to $10.19 after the ridesharing company said its co-founders, chief executive Logan Green and President John Zimmer, plan to step down from management roles and transition to non-executive roles.  

Former Amazon executive David Risher will become chief executive officer on April 17. 

Occidental Petroleum jumped 2.1% to $60.89 and a regulatory filing showed Berkshire Hathaway acquired additional 3.7 million shares for $216 million, increasing the Warren Buffett controlled conglomerate's stake to 23.5%.   

 

European Markets Erased Early Gains 

European markets struggled to hold early gains after investors turned cautious. 

Benchmark indexes in London, Paris and Frankfurt opened higher but lost gains as the session progressed. 

Investors stepped up to buy banks and financial services stocks after the easing of contagion worries.  

Resource stocks closed higher after crude oil and base metal and commodities prices advanced.  

In the final hour of trading, major averages lost most of the session's gains on the worries of recession and rising risks to losses at banks in the face of rapid rise in interest rates. 

Investors reviewed the latest comments from the Bank of England Governor Andrew Bailey, but skepticism prevailed as rapid rise in interest rates are expected to cause larger losses in assets held by banks. 

The U.K. banking system is in a "strong position capital and liquidity wise,"  Bailey told the Treasury Select Committee of the U.K. 

Investors also overlooked a slight weakening of manufacturers' confidence in France for the first time in four months. 

The manufacturing confidence declined to 104 in March from 105 in February, the statistical agency Insee reported Tuesday. 

UK shop price index, a measure of food and non-food prices, increased in March, the British Retail Consortium reported Tuesday. 

BRC-NielsenIQ shop price index increased 8.9% from a year ago in March, faster than 8.4% in February.  

The annual increase was driven by a record increase in food prices by 15.0% and a record price increase of 5.9% in non-food items.  

 

Europe Indexes & Yields 

The DAX index increased 14.34 points to 15,142.02, the CAC-40 index added 10.07 points to 7,088.34 and the FTSE 100 index advanced 12.48 points to 7,484.25. 

The yield on 10-year German Bunds increased to 2.27%, French bonds to 2.79%, the UK gilts to 3.45% and Italian bonds to 4.14%. 

The euro edged higher to $1.08, the British pound inched up to $1.233 and the Swiss franc to 91.94 cents. 

Brent crude oil increased 72 cents to $78.84 a barrel and the Dutch TTF natural gas price increased 57 cents to Є43.10 per MWh. 

 

Europe Movers 

A rebound in crude oil prices and base commodities lifted resource stocks. 

Anglo American, Glencore, BP Plc, Shell Plc increased between 1% and 3%. 

Diageo Plc declined 1.02% to 3,546.50 pence after the company said chief executive Ivan Menezes will retire at the end of June after ten years of service. 

Debra Crew, current chief operating officer, will assume the leadership role and join the company's board from July 1. 

Ocado Plc increased 2.5% to 463.52 pence after the online grocery delivery company reaffirmed its full-year earnings outlook. 

The company said revenue in the first quarter ending in February increased 3.4% to £584 million and average weekly orders rose 3.6% to 381,000. 

The company said active customers increased 13.8% to 951,000 from 835,000 a year ago.  

RATIONAL AG declined 1.0% to €594.0 despite the commercial kitchen supplier posting a rise in revenue in fiscal year 2022. 

Revenue in the fourth quarter increased 50% to Є290.4 million from Є193.5 million and after-tax net income jumped 182% to Є61.0 million from Є21.7 million and earnings per share rose to Є5.37 from Є1.91 a year ago. 

UBS Group AG increased 1.7% to Sfr 17.74 after chief executive Ralph Hammers said buying Credit Suisse is a growth opportunity for the group. 

"While we did not seek this transaction, we were prepared" and "We did not buy Credit Suisse only to close it," added Hammers in an internal note and reported first by Reuters.