Centerfin Collective Weekly

Weekly Update October 27, 2023

Mixed earnings from Big Tech, Economy grows more than expected, Japan yields continue to climb

Mixed earnings from Big Tech

This week, we had earnings from four of the Magnificent 7: META, MSFT, GOOGL, and AMZN. META beat expectations, reporting 23% revenue growth, the fastest rate in over two years. GOOGL also beat expectations, reporting 11% revenue growth, its first double-digit quarter in over a year. Both stocks ended the earnings day down despite the beat.  MSFT and AMZN also beat on the top and bottom lines and saw their stocks rise on the day.

  • The market seems to be looking for any reason to sell
  • META's numbers were solid; however, when the CFO mentioned that there was some uncertainty to begin this quarter due to the war, the stock gave up initial gains and traded lower
  • GOOGL also had solid results, but the stock was down as its Cloud division slightly missed revenue targets
  • This is the kind of market action reminiscent of 2022, generally not seen in bull markets

Economy grows more than expected

US GDP grew by 4.9% on an annualized basis in the third quarter, higher than expected. Nominal GDP, which is not adjusted for inflation, was up a stunning 8.5% during the quarter. Strength was driven by consumer spending in the services sector, select goods consumption and government spending. Inventories also added 1.3% to growth for the quarter.

  • While the headline number was very strong, a few data points suggest this may not be a lasting trend
  • Real disposable incomes slipped by 1%, and the savings rate was 3.8%, the lowest level in two years
  • This suggests the acceleration of consumer spending (70% of the economy) mainly came from saving less
  • Business investment contracted by 0.1%, offset by a rise of 3.9% in residential investment, the first growth in 2 years
  • This muddy picture complicates the decision process for the Federal Reserve, which is due to meet next week
  • There are likely enough negatives that the Fed can remain on the sidelines, but it certainly did not indicate the slowing economy (and hence inflation) that the Fed is looking for

Japan yields continue to climb

Yields on 10-year Japanese Government Bonds (JGBs) continued to rise, reaching nearly 0.90% this week. This coincided with the dollar(USD)/yen(JPY) exchange rate topping the psychological 150 JPY/USD level. As the yen reversed sharply, there was speculation that the government intervened to support the currency. This puts further pressure on the Bank of Japan (BOJ) as it meets next week to decide what to do about its yield curve control policy.

  • We note the Japanese government bond market often, as it has important potential ramifications on the US debt markets
  • Given the long history of zero interest rates, Japanese investors have often sought yield in foreign markets, especially in US treasuries
  • If interest rates on JGBs continue to rise, it lessens the appeal of investing in US treasuries
  • A lack of demand could come at a time when the US government needs to sell a very large amount of treasuries to finance the deficit
  • This could further exacerbate the move higher in long-term US interest rates

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