Uncertainty dominates macro headlines, sidelining investors. 162 S&P 500 report this week, biggest week of 3Q23 season.

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We discuss: There are widening uncertainties around Israel-Gaza, Washington, rates and EPS season.  This explains why investors are sidelined but we need to be mindful that markets bottom on bad news. This is the day to watch for.  This week is the biggest week for 3Q23 EPS with 162 companies reporting.

Please click below to view our Macro Minute (Duration: 7:06).

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Equities fell 1.4% last week, a relatively modest loss but the downturn felt much greater because of the persistence of selling in the final days of last week. If I had to summarize the prevailing issue, it is the growing uncertainty around some key variables:

• The litany of “uncertainties” is large but the key items are:
  – Israel-Gaza war and risks of a widening conflict
  – Rise in long-term yields that even Fed views with “humility”
  – Washington political circus (House Speaker) at a time when deficits worry markets
  – Earnings visibility given hits to consumer from student loan debt resumption
  – General negative price momentum on risk assets (sentiment)
• Last year, in the Fall, almost every investor we spoke with told us “stocks will get hit because the recession is here” – and a year later, many have not shifted from that view. And in fact, many are now more convinced that recession risks are even more elevated given the rise in long-term rates. We know this is adding to the downward reflexivity of negativity. As risk assets fall, this is reinforcing those negative perceptions.
• The key economic data this week is back-end loaded:
  – 10/26 Thu 8:30 am ET: 3Q23 GDP released, Street +4.3%
  – 10/26 Thu: ECB rate decision, consensus expecting a “pause”
  – 10/27 Fri 8:30am ET: Sept PCE deflator, core PCE +0.3% MoM
  – 10/27 Fri 10:00am ET: Oct final U Mich inflation, 1-yr +3.8% YoY
• Will the incoming economic data sway markets this week? Given the cumulative uncertainties above, the bar is high for markets to be persuaded from the sidelines. But we think this data will help, to the extent this will provide some economic clarity.
• Earnings season is underway and 162 companies report this week. The largest share is Industrials with 33 reporting. To an extent, a recession is not likely to come from large corporates since they have operated with caution since early 2023. And as the chart below highlights, large businesses have low debt service ratios and less exposure to floating rate debt. Thus, the risk to corporates is a sudden change in conditions that are unexpected. And this would have to be from consumers suddently slowing. Earnings season 3Q23 is being viewed as mixed as beat ratios at 78% are solid, but many companies cite weaker guidance. Companies do not have a crystal ball and the above constellation of concerns means CEOs have to be somewhat cautious as well.
• Among some of the major earnings report this week:
  – Mon 10/23: CDNS 0.77%
  – Tue 10/24: MSFT 0.57% , GOOGL -0.91% , V 0.79% , KO 0.60% , TXN, VZ, RTX 0.56%
  – Wed 10/25: META 0.09% . IBM 0.53% , BA -1.51%
  – Thu 10/26: AMZN -1.05% , MA 0.32% , MRK -0.13% , INTC -0.70% , UPS
  – Fri 10/27: XOM, CVX 0.27% , ABBV 0.22%
• Several reports by US economists caught our eye this weekend. JPMorgan economists noted that US consumer debt service ratios remain at 40-year lows. And this does mean US households are in a somewhat better position to absorb higher interest rates. On the margin, though, delinquencies are picking up on subprime autos and other floating rate debt.
• And Goldman Sachs Economics show that small biz have a higher share of floating rate debt. The estimates range from 50% to 70% depending upon the survey, but the message is that small-biz is where we should see the effects of higher interest rates. And generally, small biz have higher leverage already. This is something to monitor, but also a reason to doubt those who claim the economy is so strong the Fed needs to keep raising interest rates. If anything, one has to wonder if small-biz caution is being properly captured by the broader economic statistics.

Bottom line: Investors are cautious, and at some point, markets will bottom on “bad news”

Unfortunately, equities are caught in a buyers strike. That is, investors are sidelined as the above uncertainties are cumulatively preventing investors from adding risk. And at the moment, these risks have crept higher. However, one needs to be mindful that this loop could reach a turning point. We do not have an idea when this will come:

• But markets bottom on bad news. That is, there will be a day when equity markets reverse on what appears to be bad news. That is when many will become more confident some sustainable low is in place.
• As the sector relative performance charts show (equal weight sector vs equal weight S&P 500), Cyclicals are relatively outperforming, despite this uncertainty.
• The best relative performance has been Technology and Financials. Both looking very strong in the last few months. Financials is a surprise but reflects the relative resilience of bank earnings.
• Industrials is overall strong but recently weakened on the multiple geopolitical risks above. Moreover, financial conditions have tightened and this is a headwind short-term for Industrials.
• The rise in the 10-year yield remains a problem for stocks. That is, until markets either adjust to higher rates or interest rates turn lower. Mark Newton, Head of Technical Strategy, believes such a turning point could come in the near future. But the upside momentum in interest rates is hard to fight.

Key incoming data October

•  10/2 10am ET September ISM ManufacturingTame
•  10/3 10am ET JOLTS Job Openings AugustHot
•  10/4 10am ET September ISM ServicesTame
•  10/6 8:30am ET September Jobs ReportMixed
•  10/6 9am ET Manheim Used Vehicle Index September FinalTame
• 10/10 11am NY Fed Inflation ExpectationsMixed
•  10/11 8:30am ET September PPIMixed
•  10/11 2pm ET Sep FOMC Meeting MinutesTame
•  10/12 8:30am ET September CPIMixed
•  10/13 10am ET U. Mich. September prelim 1-yr inflationMixed
•  10/16 8:30am ET October Empire Manufacturing SurveyTame
•  10/17 8:30am ET October New York Fed Business Activity SurveyTame
• 10/17 8:30am ET September Retail Sales DataHot
•  10/17 9am ET Manheim October Mid-Month Used Vehicle Value IndexTame
•  10/17 10am ET October NAHB Housing Market IndexTame
• 10/18 8:30am ET September Housing StartsTame
• 10/18 2pm ET Fed releases Beige BookTame
•  10/19 8:30am ET October Philly Fed Business Outlook SurveyTame
• 10/19 10am ET Existing Home SalesTame
• 10/19 12pm ET Fed (including Powell) at Economic Club of New York
•  10/24 9:45am ET S&P Global PMI October Prelim
•  10/26 8:30am ET 3Q 2023 GDP Advance
•  10/27 8:30am ET September PCE
•  10/27 10am ET Oct F UMich Sentiment and Inflation expectation
•  10/30 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  10/31 9am ET August S&P CoreLogic CS home price
•  10/31 10am ET October Conference Board Consumer Confidence

Key incoming data September

•  9/1 8:30am ET August Jobs ReportTame
•  9/1 10am ET August ISM ManufacturingTame
•  9/6 10am ET August ISM ServicesMixed
•  9/6 2pm ET Fed releases Beige BookTame
•  9/8 9am ET Manheim Used Vehicle Index August FinalTame
•  9/8 2Q23 Fed Flow of Funds ReportTame
•   9/13 8:30am ET August CPIMixed
•  9/14 8:30am ET August PPITame
•  9/15 8:30am ET September Empire Manufacturing SurveyTame
•  9/15 10am ET U. Mich. September prelim 1-yr inflationTame
•  9/18 8:30am ET September New York Fed Business Activity SurveyTame
•  9/18 10am ET September NAHB Housing Market IndexTame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value IndexMixed
•  9/20 2pm ET September FOMC rates decisionMarket saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook SurveyMixed
•  9/22 9:45am ET S&P Global PMI September Prelim
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  9/26 9am ET July S&P CoreLogic CS home price
•  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

• 8/1 10am ET July ISM ManufacturingTame
• 8/1 10am ET JOLTS Job Openings JunTame
• 8/2 8:15am ADP National Employment ReportHot
• 8/3 10am ET July ISM ServicesTame
• 8/4 8:30am ET July Jobs reportTame
• 8/7 11am ET Manheim Used Vehicle Index July FinalTame
• 8/10 8:30am ET July CPITame
• 8/11 8:30am ET July PPITame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker JulyTame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook SurveyPositive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity SurveyTame
• 8/29 9am ET June S&P CoreLogic CS home priceTame
• 8/29 10am ET Aug Conference Board Consumer ConfidenceTame
• 8/29 10 am ET Jul JOLTSTame
• 8/31 8:30am ET July PCETame

Key incoming data July

• 7/3 10am ET June ISM ManufacturingTame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM ServicesTame
• 7/6 10 am ET May JOLTSTame
• 7/7 8:30am ET June Jobs reportMixed
• 7/10 11am ET Manheim Used Vehicle Index June FinalTame
• 7/12 8:30am ET June CPITame
• 7/13 8:30am ET June PPITame
• 7/13 Atlanta Fed Wage Tracker JuneTame
• 7/14 10am ET U. Mich. June prelim 1-yr inflationMixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Indexin-line
• 7/18 Manheim July Mid-Month Used Vehicle Value IndexTame
• 7/25 9am ET May S&P CoreLogic CS home priceTame
• 7/25 10am ET July Conference Board Consumer ConfidenceTame
• 7/26 2pm ET July FOMC rates decisionTame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM ManufacturingTame
• 6/2 8:30am ET May Jobs reportTame
• 6/5 10am ET May ISM ServicesTame
• 6/7 Manheim Used Vehicle Value Index MayTame
• 6/9 Atlanta Fed Wage Tracker AprilTame
• 6/13 8:30am ET May CPITame
• 6/14 8:30am ET May PPITame
• 6/14 2pm ET April FOMC rates decisionTame
• 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
• 6/27 9am ET April S&P CoreLogic CS home priceTame
• 6/27 10am ET June Conference Board Consumer ConfidenceTame
• 6/30 8:30am ET May PCETame
• 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutesDovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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