Carlsquare weekly market letter: Interest rates at a crossroads – will affect the whole market

• All eyes are on inflation (CPI) today. Looking at the oil price, inflation should be lower than expected. But looking at interest rates, it may already be priced in. However, with rates trading at a breakpoint, the reaction could surprise both the bond and equity markets.

The latest CPI reports from the US have been dramatic for the market.

The chart shows the big move in the US 10-year Treasury over the last few CPI reporting days. As the stock market is highly correlated with the bond market, any movement in the bond market is reflected in the stock market.

The standard theory is that higher yields affect the future earnings of companies in the stock market. But the truth is also that money flows between the bond market and the stock market, making the correlation more difficult to predict. As always, it is better to look for the price reaction than to listen to all the talking heads in the market.

There is a high correlation between inflation (in blue) and interest rates (in red).

As you can see from the chart above, the oil price in red is leading inflation, as is the blue line. Note that we are using the sticky CPI data, which excludes food and energy prices. Even when energy is excluded from the CPI, the oil price is a leading indicator.

To jump into the oil price discussion, it is levelling off. The recent rise in the oil price has been reversed by a larger than expected increase in US crude oil inventories.

Now for the most interesting chart of the week. Normally, looking at the US 10 year yield is as boring as watching the paint dry on the wall. But now that the 30-year trend of lower rates has been broken, volatility is on the rise. The 10-year yield is trading in a well-defined range that is heading higher. As the yield is trading at a support line, it will take a lot of energy to break it. Very low CPI numbers may do it today.

But it is much easier to push rates higher by jumping off the support line. This could eventually take rates from 4.5 per cent to test 5 per cent again. That would not be a good outcome for the stock market.

reflection of rising global GDP growth. Our feeling is that it is more speculation about a trend in global growth that is driving the price higher, but it is too early to have an answer.

The S&P 500 is very close to a new all-time high and a test of that is in the cards. It may be better to wait for a pullback than to chase the move now, but with CPI on the dock today, it will set the tone for the market.

The big talking point last days is of course the explosive trend in GameStop (GME), Reddit and other Meme stocks after that Keith Gill made a comeback on Twitter and started to publish mems again. GEM closed up 70% yesterday and with S&P 500 close to all-time-high, maybe this can be the trigger the stock market needs to get the retailers excited again?

We take one day at a time and adjust accordingly.

Happy trading!

Q1 2024 earnings season

As of Friday 10 May 2024, around 460 S&P 500 companies (92% of all companies) have reported their Q1 2024 results. 78% have reported positive earnings surprises and 59% have reported positive revenue surprises.

The average earnings growth rate for S&P500 companies in Q1 2024 is 5.4%. Without the top five earnings growth contributors (Nvidia, Alphabet, Amazon, Meta Platforms and Microsoft), the S&P500 would see earnings decline by 2.4% in Q1 2024, instead of earnings growth of 5.4% today. Analysts now forecast earnings growth for S&P500 companies of 9.3% in Q2 2024, 8.4% in Q3 2024 and 17.4% in Q4 2024. For FY2025, analysts are forecasting earnings growth of 14.0%.

Health Care is the best S&P500 sector with 87% of Q1 2024 reports beating estimates. Information Technology and Consumer Staples are tied for second with 86% of Q1 2024 reports beating estimates. The three S&P500 sectors that have reported the weakest earnings per share relative to expectations are Consumer Discretionary, Real Estate and Energy, with 71%, 69% and 61% of Q1 earnings beating expectations, respectively.

The following table shows the seven major US companies that have reported quarterly results since 8 May, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise is 10.0% and the median is 7.0% for all 109 reporting companies since 11 April. The post-announcement price movement for 109 US companies is 0.1% on average and 0.5% on median.

The next table shows the seven OMX companies that have reported since 8 May and their Q1 earnings, sales and new orders compared with expectations. The results of the 83 OMX companies that have reported since 27 March were mediocre, with 58% reporting better-than-expected results and only 39% beating sales forecasts. In terms of new orders, 53% of companies (eight out of fifteen) beat analysts’ pre-announcement estimates.

Week Ahead

Reports and event on Wednesday, 15 May:  Bergman & Beving, Avance Gas, Leroy Seafood, Citycon, FL Smidth, Jeudan, Lundbeck, Rockwool, Siemens, Cisco Systems, Tencent and Toyota Motor. Assa Abloy’s Capital Markets Day continues (day two).

Statistics Sweden is first with the April CPI at 8.00 CET. France’s April CPI will follow 45 minutes later. The minutes of the Riksbank’s monetary policy meeting on 7 May are due at 9.30 CET. The IEA publishes its monthly oil report at 10.00 CET. From the Eurozone, we get Q1 GDP and employment and industrial production in March at 11.00 CET. The US contributes with April CPI and retail sales, May Empire manufacturing index, March inventories of unsold goods, May NAHB housing index and weekly oil inventories (DOE).

Reports on Thursday, 16 May: Sweco, Nibe, Addtech, Zeeland Pharma, Alibaba, Applied Materials, Deere, Walmart and Baidu.Capital Markets Day for Atlas Copco.

Japan’s GDP for Q1 2024 is due at 1.50 CET. At 10.00 CET we get Italy’s CPI for April. The US will contribute with housing, import prices and industrial production for April, the Philadelphia Fed index for May and initial jobless claims.

Reports on Friday, 17 May:  Synsam, Bioarctic and Lagercrantz.

China presents unemployment, industrial production, house prices, retail sales and investment for April at 4.00 CET. Japan’s industrial production for March is due at 6.30 CET. The eurozone will publish its CPI for April at 11.00 CET. From the US we get the leading indicators for April.

Reports on Monday, 20 May:  Ryanair and Palo Alto Networks.

Germany’s PPI for April will be released at 8.00 CET.

Reports on Tuesday, 21 May: Better Collective and Autozone. Capital Markets Day for Astra Zeneca and Munters.

From the Euro zone we get the March Trade Balance at 11.00 CET. This is followed by Canada’s April CPI at 14.30 CET. From the United States, we get the weekly Redbook retail sales and the weekly oil inventories statistics (API).

Disclaimer:

The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

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