Investor focus on inflation report and earnings season

Chief Investment Officer's team
10 October 2022
Investor focus on inflation report and earnings season
Last week started on a positive note but gains were retraced on a buoyant US job report


  • Last week started on a positive note but gains were retraced on a buoyant US job report
  • Monetary tightening is here for long, and global PMIs show that pressure is starting to be felt
  • Our recommended positioning is only marginally cautious, yet selective

The first week of any month is always rich in terms of economic data. Activity indices, especially the September PMIs for major regions, consistently indicated a global slowdown, with the notable exception of the ISM Services in the US. The post-covid recovery is maturing and the synchronized monetary tightening is starting to have an impact, at least on sentiment and investment decisions. Alas, the week ended with a – marginally – better than expected US employment report, which reversed the initial rebound of risk assets. The US job market remains hot, and the Fed outright hawkish. All in, last week was extremely volatile but modestly positive for most asset classes.

The data is not inconsistent with our central scenario which still gives a chance of success to bringing inflation down without pushing the US into a severe recession. The jury is obviously still out, which is why we also expect volatility to persist for longer. This week’s inflation data and the minutes of the Fed’s last FOMC will of course be highly scrutinized. We may however pay even more attention to the Q3 corporate earnings season which just starts. The bar of expectations doesn’t look so high, and management guidance should provide interesting reading about business reality. Our positioning is now marginally less risky than our strategic allocation, with an overweight in cash and in the safest segments of fixed income, while we are clearly underweight on high yield and debt from the emerging markets. We are more balanced on equities, where we are close to neutrality, with a preference for the US as a region, along with UAE and India within emerging markets. It’s time to be patient and potentially opportunistic as volatility seems unlikely to abate anytime soon. Stay safe.

Cross-asset Update

Markets attempted a rebound last week, that, depending on the preferred narrative, can be put down to a cherished renewed Fed pivot, low valuations or oversold technical conditions. Although a rally may well unfold in Q4, it should eventually fail as the previous ones due to investor-unfriendly central banks. In this respect the outlook for growth and earnings will be key, without forgetting that the Fed remains firmly in tightening mode. Technically markets are imbalanced, with a combination of panic, as indicated by the inverted VIX term structure, and extremely low breadth pointing to oversold levels being reached.

We don’t see a recession by year-end, while equities are discounting a mild one already, with an S&P 500 peak-to trough drawdown of -25% this year. The labor market remains exceptionally strong and it will take the Fed quite some time to raise the unemployment level above 4-4.5%, the area above which a harsher slowdown is expected to kick in. Hence, a hard landing should be more of a H1 2023 possibility than an impending certainty. Investors may on the other hand be concerned about receding earnings, and on this front as well we cannot be too negative either. Bottom-line growth is projected to run in the low single-digits for US large caps in Q3, quite a low hurdle to overcome given the still healthy economic conditions. As for yields, one has to distinguish between the shorter- and the longer-dated ones. Investors will be tempted to look through the current tightening cycle once we are past the November hike, with only few more left in 2023 according to consensus. And at the longer-end of the curve Treasury yields are now well-above market-implied inflation, a sign that initial undervaluation has been closed, at least for now. Also, a market low before the mid-term elections, to be held in early November, would a common seasonal pattern in the four-year presidential cycle. Overall, recession odds, the low earnings hurdle, the way investors could be expecting the tightening to evolve, and seasonality should provide some support for a fledgling rally.

If market action proceeds along these lines, one should expect the change in sentiment to extend to other asset classes, like high-yielding bonds, the US dollar and gold. Credit spreads should tighten, the dollar be range-bound and gold continue to rebound. A Q4 rally should not have hope to turn into a new bull-market, though, running counter to the tightening of financial conditions the Fed is pursuing at all costs. Should financial conditions ease meaningfully, Fed officials would be striking back with a vengeance by means of reinforced hawkish rhetoric and renewed impetus for jumbo hikes now unexpected in 2023.

Fixed Income Update

Fed officials kept up their hawkish talks throughout the week to temper last Monday and Tuesday’s rally. The heightened pitch and solid jobs data kept the market on edge. The Treasury yield curve bear flattened, with the 1-year yields increasing by 28 bps over the week. Peak rate expectations increased to 4.63% in Q1 2023. Credit spreads tightened significantly in the first two days last week to reverse course later, ending slightly tighter.

The effect of the Fed's QT is being felt by the smaller banks as they see reserves drain. Their cash assets have fallen by $36bn through Sept 30th. They could fall by another $75bn before year-end. When small banks feel the pinch and start bidding for cash, further declines in aggregate Fed balances will have to come out of the large bank and foreign bank reserve positions or from the reverse repo facility.

The outlook for corporate defaults is worsening quickly as cash cushions built during the pandemic erode, and borrowing conditions tighten. Moody's sounded alarm bells as it mentioned in a largely unnoticed report yesterday that the share of companies failing to pay debt on time could soar more than threefold next year due to a liquidity squeeze and worsening trading conditions. In the US, default rates could grow from below 2% to 7.8% by August 2023 in a more pessimistic forecast, while the baseline calls for 4.4%. That compares to a 3.7% long-term average and a current trailing 12-month default rate of less than 2%. The pessimistic figures are shown to be reaching 6.5% in the EMEA region from about 2%. Meanwhile, the pile of troubled debt in the US is beginning to spike. According to Bloomberg, there was roughly $204bn of dollar-denominated debt trading at distressed levels as of Sept 30th, up 3.7% from the week before.

In emerging markets, Turkey was downgraded by S&P to B from B+, mentioning Turkey's external position as a critical weakness. S&P projects Turkey's general government debt-to-GDP ratio at 38% at 2022-end. However, this figure is considerably more sensitive to exchange rate effects than previously, given that 68% of the debt is denominated in foreign currency, or roughly twice the FX-debt pre-2018 currency crisis levels. Despite this, Turkey could tap the market for a $2.5bn 3-year Sukuk priced at 9.75%, in line with conventional bonds and wider than the existing Sukuk curve.

India's hopes of entering the bond indices took a backseat as global investors are still reluctant to commit to India's $1tn government bond market amid a standoff over tax concessions. As a result, the expectations of inclusion and announcements on this have moved to next year.

GCC primary markets saw some deals last week. Oman's outlook was upgraded to Positive by Moody's. PIF, the KSA's sovereign wealth fund, priced a three-tranche note, including a 100-year maturity one, the first long-maturity green bond in the world. There was strong demand from investors with book coverage of more than 7x as the pricing was significantly wider than the KSA sovereign curve. FAB issued a 5-year Green bond with around 5.25% yield. All issuers offered generous new-issue premiums in a sign of times to attract investors.

Equity Update

A 2 day rally for equities at the beginning of the week lost steam by mid-week and ended with a sharp sell-off on Friday, with strong US job data and consumer credit growth reports, cementing the Fed and other Central banks tightening path. However, overall it was a positive week, with the All Country World Index “ACWI” +1.7% and all regions gaining. In line with higher energy prices, on the back of the OPEC+ cut, the oil exporting economies performed better i.e., the GCC and LATAM and the energy sector gained 10%. This supports our OW positions on the UAE and energy sector. US equities which we prefer, are doing better than European equities though both are down over 20% Year to Date. We recently took the UK to underweight as the weaker Sterling affects USD returns and the fiscal deficit will weigh on consumer demand, as will the higher energy prices.

We are neutral equities with a slight underweight on emerging markets, with the strong USD a burden on returns and inflows as are higher oil prices a drag on the oil importing nations. Whilst valuations look attractive, we continue to see growth downgrades, so we recommend staying invested, but selective. Many regions are trading at 10X or below forward earnings including the UK, China and broader EM. The S&P 500 is at 16.2X forward earnings below 10 years and close to 20 year averages. Value as a factor has outperformed growth so far in 2022, after a decade of growth in the lead (driven by tech) and remains an outperforming factor in a rising rate environment. But earnings will remain the decisive factor for longer term performance.

Financial conditions further tightened last week, with US Treasury yields higher, the yield curve steeper, the USD stronger. Q3 earnings which take off this week, are not only about numbers but guidance - as they will indicate the dynamics of demand. It’s Sophie’s choice: lower earnings and revenue will indicate slowing demand – exactly what Central banks want in order to tame inflation – but also the increased possibility of recession. The US chipmakers Micron and AMD gave disappointing guidance last week. High-end microprocessors are a vital ingredient of manufacturing, and a slowdown in their demand is indicative of a broader slowdown in industry. This week earnings from the banks, PepsiCo and Delta Airlines will provide a broad representation of sectors. CPI data out later this week will also be watched closely.

The UAE continues to see successful listings in a world where IPO’s have dried up. Healthcare provider Burjeel, which priced its offering at the bottom of the range to ensure investors got some support post listing, was multiple times oversubscribed (29X as per Bloomberg) and raised USD 300mn. Burjeel operates hospitals and medical centers in the UAE and Oman and is planning an expansion into Saudi Arabia. The Dubai government has listed 3 of the planned 10 divestments with considerable interest from local and international investors with the balance planned across the next few years. ADNOC’s two divestments have performed well, as have other Abu Dhabi listings. The strong sustainable dividends remain the main attraction for investors.

Written by:

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”), having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.


This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accept any responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they may not be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.


This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.


None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.


Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.


Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investor may lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit


Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.