Week in Review: Investors’ Focus Shifts to Earnings Season

JPMorgan Chase, Wells Fargo and Citigroup beat Wall Street expectations while Morgan Stanley reported earnings and revenue that missed analysts’ forecasts, sending the stock lower. Strong earnings sent the banks’ share prices higher amid a largely declining market, proving how significant the third-quarter earnings season is for investors. A big week of earnings lies ahead, with Goldman Sachs (GS), Netflix (NFLX), Tesla (TSLA) and IBM (IBM) being among the many blue chips on tap to report results.

Inflation in the U.S. slipped to 8.2% y/y in September from 8.3% in August, but the core reading (excluding food and energy prices) rose 6.6% from 6.3% – a forty-year high. Even though energy prices declined over the month, rising prices for services, which are stickier in nature, fuelled the advance. Worker wages were lower, falling 0.1% monthly and 3% y/y when adjusted for inflation. Markets are now expecting that the Fed could initiate consecutive 0.75 basis point rate hikes in November and December, with next month’s 0.75bp hike fully priced in.

The minutes of the Federal Reserve Open Market Committee’s September meeting, released this past week, showed that the Committee believed the cost of doing too little to rein in inflation outweighed the risk of doing too much. The minutes also signalled that the Committee will keep hiking the policy rate, and then maintain a restrictive stance, in an effort to bring inflation down.

The International Monetary Fund (IMF) has warned that the risk of a global recession is increasing as nations continue to battle rising inflation. In the U.S., the labour market is still strong but is losing momentum due to the impact of higher borrowing costs. The euro zone is slowing as natural gas prices soar, as is China due to Covid-19 disruptions and instability in the housing sector. The IMF calculates that about one-third of the world economy will have at least two consecutive quarters of contraction this year and next year, and that the lost output through 2026 will be $4 trillion.

Continued fallout in the U.K prompted Liz Truss’s government to significantly alter its proposed tax plan. Kwasi Kwarteng was replaced by Jeremy Hunt, a former health and foreign secretary, as chancellor of the exchequer. Prime minister Liz Truss also reversed a key proposal to scrap the increase in corporation tax, having earlier abandoned her plan to reduce the U.K’s top tax rate from 45% to 40%.

Major indexes were mostly lower this week, as investors weighed inflation data and its implications for the Federal Reserve’s policy. In the U.S., stocks saw their biggest move on Thursday, with a sharp decline followed by a 5.5% spike to the upside in the S&P 500 index – marking its largest intraday move since March 25, 2020. By weekend, the index was down -1.55%, while the Nasdaq dropped -3.11%. The Dow Jones index ended the week +1.15% higher, held up by moves in banking shares. Shares in Europe rose +0.19% after suffering a sharp pullback last week, while the FTSE 100 ended -1.89% lower.

In Asia, the Shanghai Composite rose +1.57% after supportive central bank comments boosted investor sentiment. China’s Communist Party congress begins on Sunday, with the party expected to grant President Xi Jinping a third term. In Japan, the Nikkei 225 ended flat over the week. Brent oil prices declined by -6.82%, while gold dropped by -2.95%.

Market Moves of the Week 

It was a quiet week on the South African economic data front. Mining production fell by 5.9% y/y in August, marking the seventh month of decline. Stats SA said that PGMs production fell by 12.9% in August, while gold output shrank by 17.4% and iron ore by 15.2%. The ramping up of Eskom’s rotational load shedding in the country weighed heavily on the energy-intensive sector as production was continuously disrupted.According to a new study, South Africa is likely to be added to a global illicit-finance watchlist and the government must act swiftly to improve compliance measures in order to limit the economic impact of the decision. There’s an 85% probability that the Financial Action Task Force, which polices compliance with anti-money laundering and terror-financing measures, will add the country to its so-called grey list in February.Mining companies are losing R815 million in export revenue per day due to an ongoing strike at state-owned logistics firm Transnet which has hit commodity exports, an industry body said on Thursday. Transnet said on Thursday it had raised its wage offer to 4.5% from 3-4% previously, with additional 5.3% annual increases over the next two years. However, the United National Transport Union (UNTU) and the South African Transport and Allied Workers Union (SATAWU), representing most Transnet workers, rejected the latest offer and said they would remain on strike.The JSE (-2.14%) followed global peers lower this week. Resources (-5.29%) sold off while listed property (+1.84%) was stronger on the week. The rand weakened over the week to end at R18.35/$.  

Chart of the Week 

While headline inflation continues its decline, core inflation is proving harder to tame. Excluding volatile food (+0.8%) and energy prices (-2.1%), the increase in core CPI can be largely attributed to a rise in the closely watched shelter costs (+0.7%), which make up about one-third of CPI, and transportation services (+1.9%). Source: Bloomberg