Weekly review 8 May 2023: What goes up must come down – right?


Market sentiment has been serene in recent weeks; even the central bank meeting week did little to disturb it. Key interest rates were raised in both Europe and the USA, but the markets are already looking towards the lowering of key interest rates.

Market sentiment has remained quite calm over the past couple of weeks. Equity markets started last week on a low note but ended it with a rally. Europe has kept its position as the best equity market year to date. Price volatility has been minor and moderated also in the fixed income markets. The VIX index, a measure of the future price volatility priced in by the markets, has fallen below 20, which is a perfectly normal level of price volatility. Since the beginning of 2022, VIX has been over 20 most of the time.

The meetings of the European and the US central banks held last week also did not deliver any major market-shaking surprises. Both central banks raised their key interest rates by one quarter-point, i.e. 0.25 percentage points.

The hike raised the range of the US central bank’s (Fed) key interest rate to 5.00–5.25 per cent. Despite the hike, the Fed softened its message somewhat, stating that it wants to look into how the measures that have already been carried out will impact the real economy, as the measures usually affect inflation with a lag of a few months. The markets interpreted this as meaning that the Fed will now pause the interest rate hikes after a long series of hikes. Nevertheless, Fed Chair Jerome Powell did not exclude the possibility of continuing the hikes if required.

Market pricing is still one step ahead of central bank communications: the first interest rate cut is expected to take place at the September meeting, and the central bank is expected to lower its key interest rate by three quarter-points (i.e. 0.75 percentage points) by the end of the year. However, the central bank’s communications do not make any reference to interest rate cuts.

Timewise, the European Central Bank (ECB) has been lagging somewhat behind the Fed in the fight against inflation. That said, the ECB also slowed down its interest rate hikes last week, only raising its key interest rate by one quarter-point. The interest rate on the main refinancing operations (i.e. the interest rate at which banks can borrow money from the central bank) is now 3.75 per cent, and the rate on the deposit facility (i.e. the deposit rate that the central bank pays to banks on their deposits) is 3.25 per cent.

Beforehand, the ECB was anticipated to carry out a hike of one or two quarter-points. The final decision in favour of a hike of one quarter-point was seen to suggest that the interest rates would peak faster than was expected earlier. The markets are pricing in further hikes of 1–2 quarter-points for summer.

In the press conference, Christine Lagarde, the President of the ECB, stressed that the hikes will continue as core inflation persists. However, the ECB finds itself between a rock and a hard place: core inflation is showing no signs of easing, but according to the latest data, bank lending has decreased more than expected, which increases risks of economic activity stalling.

The disclosure of the US April inflation figures this week will provide more information on the impact of the central banks’ measures on inflation. Inflation is expected to have remained at +5.0 per cent year-on-year and core inflation to have moderated to 5.5 per cent (5.6 per cent in March). This week will also see the publication of the latest European inflation figures from, among other countries, Germany, France and Spain.

Earnings season outperforming expectations

The second half of the earnings season is underway on both sides of the Atlantic. Companies’ earnings were stronger than expected in the USA and clearly stronger in Europe.

In the USA, around 85 per cent of companies have now reported their Q1 earnings. Of these, some 70 per cent – a typical proportion – exceeded expectations. Average net sales growth was +4 per cent, but the inflation illusion should be factored in when considering the results: month-on-month inflation in the first quarter was 5–6.5 per cent, which means that in real terms, net sales contracted on average. Earnings contracted by -3 per cent. Among sectors, the transport and logistics sector has been strong, as well as (large) banks and the oil service sector. The figures for the consumer sector are driven up by Amazon’s good earnings. Earnings growth in the raw materials sector is dwindling.

In Europe, two thirds of companies have outperformed expectations, with around 60% of companies having reported their earnings so far. These companies have posted earnings growth of +17 per cent and net sales growth of +6 per cent on average. Performance has been strong especially in technology companies and the financials sector. Banks have recorded solid earnings while earnings in the raw materials sector are dwindling in Europe too. Weak growth has also been observed in the consumer discretionary and services sectors.

Earnings forecasts are now being revised up following the better-than-expected earnings season.


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