Month: September 2022

U.S. Retail Sales Rose 0.3% in August, Showing Resilience in Face of Inflation Shoppers spent more on vehicles, groceries and clothing as gasoline prices eased

Retail sales, a measure of spending at stores, online and in restaurants, rose 0.3% in August from the prior month, the Commerce Department said Thursday. The gain outpaced inflation and marked a reversal from July’s 0.4% decline. (…)

Retail sales also rose in August from a year earlier at a quicker pace than inflation, which this summer trended near a four-decade high. (…)

Consumer prices rose 0.1% in August from July and 8.3% from August last year, the Labor Department reported Tuesday. (…)

August’s retail spending growth was led by a 3% gain in auto dealership sales, the Commerce Department said. (…)

Spending at bars and restaurants, the only services category in the retail sales report, increased 1.1% in August—showing consumers are eager to dine out despite increased menu costs. (…)

Retail sales data is confusing as the pandemic and inflation are causing unusually wide fluctuations by month and by categories. The Census Bureau does not provide real sales data, leaving it to analysts and reporters to decipher the data. 

Last 3 months: sequential nominal growth and (category CPI) = real growth, all annualized:

• Grocery stores:                  +9.3% (+12.6%) = -2.7%
• Motor vehicle and parts:    -6.5%  ( +8.4%)   = -14.9%
• Furniture stores:                -8.9%  (+10.0%) = -18.9%
• Apparel stores:                  -2.4%  ( +3.6%)  = -6.0%
• Sporting goods stores:      +7.7% ( +1.6%)  = +6.1%
• Restaurants:                      +8.1% (+10.1%)  = -2.0%

So much for “resilience in face of inflation”.

More broadly, control retail sales which exclude food, vehicle-related sales and Home Depot-type stores, are up 6.0% a.r. in the last 3 months. CPI-core goods is also up 6.0% a.r..

Last 2 months: +4.2% a.r. vs 4.2% a.r.. Last month: sales were flat while CPI-core goods rose 0.5% or 6.1% a.r..

Goldman Sachs has its own estimate of real sales:

Headline retail sales increased by less than expected and core retails sales were flat, also below consensus expectations. Combining data from the latest retail sales and CPI reports, we estimate that real core retail sales decreased by 0.6% in August and decreased by 0.6% on a 3-month annualized basis.

And yet, the WSJ today writes:

Consumer Spending May Be Better Than It Looks A volatile mix of factors is affecting retail sales, making it hard to decipher the underlying trend

The good news is that, against economists expectations, the Commerce Department on Thursday reported that Americans boosted their spending substantially in August. The bad news is that July spending figures were revised substantially lower.

Retail sales rose 0.3% in August from July, adjusted for seasonal swings but not inflation, versus estimates that they would be unchanged. But sales in July are now figured to have shown a 0.4% decline from June; previously they were reported to be flat. And wait, there’s more: June sales figures were nudged up. (…)

Moreover, for many retailers the better-than-expected August sales growth and lowered July figures net out to a positive. That is because August is a big month for back-to-school sales—something the Commerce Department’s seasonal adjustment process accounts for. (…)

What is difficult to ascertain is how reduced spending on items such as furniture is affecting sales elsewhere. Although the retail-sales report does encompass sales at restaurants and bars, it has nothing to say about other services categories, such as travel, dentist visits and rents. All told, the report accounts for somewhat less than half of consumer spending.

For investors, the danger in the confused spending outlook is that it can turn into something like a choose-your-own-adventure book, with one version saying consumers are in retreat, another that they are simply redeploying resources elsewhere, and so on. In the end, only one version will prove true.

• Did Americans “boost their spending substantially in August”? Certainly not on goods.
• True, they may have “redeployed resources elsewhere”. We will know at month-end, but we know that real expenditures on services were up a low 1.6% a.r. in June-July. It is difficult to redeploy depleting resources.

FedEx to Reduce Operations After Sales Warning The delivery giant said it would close offices, reduce Sunday ground operations and park some cargo aircraft after it warned of revenue shortfalls from declining package deliveries.

FedEx Corp. FDX -0.07%▼ said its quarterly revenue fell below its expectations and it was closing offices and parking aircraft to offset declining volumes of packages moving around the world.

FedEx shares tumbled 13% on the warning, which came after markets were closed Thursday and about a week before the company was scheduled to report results for the quarter ended Aug. 31. (…)

The Memphis, Tenn.-based company said results from its largest unit, Express, were curbed by macroeconomic weakness in Asia and service challenges in Europe. That led to a revenue shortfall of about $500 million compared with the company’s forecast.

Revenue at FedEx Ground, which mostly handles e-commerce deliveries in the U.S., was about $300 million below company forecasts. Overall the company expects revenue of $23.2 billion and earnings of $3.33 per share. Wall Street had been expecting first-quarter revenue of $23.6 billion and earnings of $5.14 per share, according to FactSet.

The company said it was withdrawing its full-year financial forecasts issued in June. (…)

• FedEx CEO says he expects the economy to enter a ‘worldwide recession’

(…) While the company anticipated demand to increase after factories shuttered in China due to Covid opened back up, it actually fell, he said.

“Week over week over week, that came down,” Subramaniam said.

The chief executive also said that the loss in volume is wide-reaching, and that the company has seen weekly declines since around its investor day in June.

“We’re seeing that volume decline in every segment around the world, and so you know, we’ve just started our second quarter,” he said. “The weekly numbers are not looking so good, so we just assume at this point that the economic conditions are not really good.”

“We are a reflection of everybody else’s business, especially the high-value economy in the world,” he later added.

U.S. Industrial Production Unexpectedly Declines in August

• IP -0.2% in August, +0.5% in July (revised down from +0.6%), 0.0% in June.
• Manufacturing IP (only +0.1% in August; downwardly revised for July and June) increases for the second consecutive month after two straight m/m drops, w/ durable goods virtually unchanged and nondurable goods up 0.2%.
• Motor vehicle output decreases 1.4%, the third m/m drop in four months, after a downwardly revised 3.2% July increase.
• Utilities output falls for the second successive month while mining activity holds steady.
• Consumer goods output declines for the third time in four months while business equipment rises for the second consecutive month.
• Capacity utilization eases 0.2%-pt. to 80.0%; mfg. capacity utilization unchanged at 79.6%.

(ZeroHedge)

Railroad Strike Averted With Tentative Deal

(…) The deal, which is retroactive to 2019, includes a 14.1% wage increase upon ratification. Workers would then get a 4% raise in July 2023 and 4.5% increase in July 2024, as well as five annual $1,000 lump-sum payments. There are no changes to health insurance copays or deductibles in the new deal. (…)

The agreement allows for one additional paid day off, on top of existing paid time off—in keeping with what the federal mediation panel had recommended.

Unions had sought raises of 31% over the five-year term of the contract, while railroads offered 17% before the presidential panel drafted a proposed compromise last month. In the previous five-year contract, wage increases amounted to around 13%.

From 13% to to 24%. Add the $1k/yr payments, you get about 6-7% annual pay raise vs +2.6% in the previous 5-year contract.

• More Workers Head to Picket Lines Amid Higher Inflation and a Tight Job Market There were 180 strikes involving roughly 78,000 workers in the first six months of this year, up from 102 strikes involving 26,500 workers in that period last year, according to Cornell University researchers.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 0.5 percent on September 15, down from 1.3 percent on September 9.

Housing Prices Grind Lower in Canada, Aiding Fight Against Inflation Benchmark home prices fell 1.6% in August compared with July. That brings the cumulative drop from February’s peak to 7.4%.

UK Retail Sales Drop Most This Year as Squeeze Tightens

China’s Downturn Moderates, Though Property Woes Linger China’s economy showed modest signs of improvement in August as stimulus measures kicked in, though renewed Covid-19 curbs and a worsening property downturn continue to damp the outlook.

(…) Chinese fixed-asset investment in the first eight months of 2022 was up 5.8% from a year earlier, beating the median 5.5% forecast of economists surveyed by The Wall Street Journal. The pickup in investment was led by robust spending on infrastructure projects, a sign that Beijing’s rescue measures are starting to have some effect.

Industrial production, a measure of factory output, mining and other activities, edged higher as power shortages triggered by drought and extreme heat across large swaths of the country eased. In August, the measure was up 4.2% from a year earlier, beating both expectations and July’s 3.8%.

China’s labor market improved as well. The country’s headline measure of joblessness, the urban surveyed unemployment rate, inched down to 5.3% in August from 5.4% the previous month. Youth unemployment also declined, to 18.7%, from a record high of 19.9% in July. (…)

Retail sales, a key gauge of China’s goods and services consumption, remained soft. While year-over-year growth accelerated to 5.4% in August from 2.7% in July, in large part due to a lower base for comparison in the year-earlier period, seasonally adjusted retail sales actually declined 0.8% when compared directly with July’s, according to Capital Economics. (…)

Tourism spending during the three-day holiday fell 22.8% from a year earlier, according to government data. A mobility index by Chinese technology giant Baidu Inc., meanwhile, showed the number of passenger trips falling 38% from the previous year.

Movie box-office revenue plunged 25.9% from a year earlier over the long weekend, despite an increase in the number of movies released, according to industry tracker Lighthouse Data Pro. (…)

Average new-home prices in 70 major Chinese cities in August were down 2.1% from a year earlier, accelerating from a 1.7% decline in July, according to calculations based on data released Friday by China’s statistics bureau. (…)

(ZeroHedge)

(bloom.bg/3BKrWkt)

(bloom.bg/3QRYHR4)

US shale bosses tell Europe: ‘There’s no bailout coming’

Germany seizes control of Rosneft oil refineries

France to raise bank capital buffer to 1% in December

Global equity funds see fourth weekly outflow on rate hike expectations Investors sold a net $13.11 billion of global equity funds after withdrawing a net $23.02 billion in the previous week, data from Refinitiv Lipper showed.

Trump warns of violence if indicted

DT: I think you’d have problems in this country the likes of which perhaps we’ve never seen before. I don’t think the people of this country would stand for it .

HH: What kind of problems, Mr. President.

DT: I think they’d have big problems, big problems. I just don’t think they’d stand for it. They will not, they will not sit still and stand for this ultimate of hoaxes. We went through phony impeachments. We went through phony Mueller reports that came out with no collusion. We came, everything that they’ve done to try and stop progress. And on top of that, I did more than virtually any president. You take a look, with the biggest tax cuts, with the rebuilding of our military, with all of the things we’ve done. I don’t think the people of this country would stand for it, especially since they know, especially since they know I’m totally innocent. (…)

That’s not, that’s not inciting. I’m just saying what my opinion is. I don’t think the people of this country would stand for it. (…)

If they ever did anything on indictment, I just think it would just tear this country apart. I think this country would be torn apart. (…)

Supplier Inflation Stayed Elevated in August The producer-price index, which measures what suppliers are charging businesses and other customers, rose 8.7% in August from a year earlier.

The producer-price index, which measures what suppliers are charging businesses and other customers, fell 0.1% in August from July, after a decline of 0.4% in July from June, the Labor Department said Wednesday.

On an annual basis, that left the PPI 8.7% higher in August than a year earlier, down from annual increases of 9.8% in July and 11.2% in June. (…)

The so-called core PPI—which excludes the volatile categories of food, energy and supplier margins—rose 0.2% in August from July, up from a 0.1% increase in July from June. (…)

The recent figures suggest the core PCE index was up 0.5% in August from July, according to Omair Sharif, head of the advisory firm Inflation Insights. That would mark a notable increase from the 0.1% gain in July from June, bringing the 12-month reading to 4.8% in August from 4.6% in July. (…)

More PPI data:

• Core finished consumer goods prices increased 0.5% (8.4% YoY) following a 0.6% July rise.
• Durable consumer goods prices gained 0.3% (7.7% YoY).
• Core nondurable consumer goods prices rose 0.6% (8.9% YoY).
• Services prices increased 0.4% (6.6% YoY) after a 0.2% July gain.

BofA Survey Shows Investors Fleeing Equities en Masse on Fear of Recession

A historically high 52% of respondents said they are underweight equities, while 62% are overweight cash, according to the bank’s global fund manager survey, which included 212 participants with $616 billion under management in the week through Sept. 8.

As concerns over the economy escalate, the number of investors expecting a recession has reached the highest since May 2020, strategists led by Michael Hartnett wrote in a note on Tuesday. Sentiment is “super bearish,” with the energy crisis further weighing on risk appetite, they said. A net 42% of global investors are underweight European equities, the largest such position on record.

The survey showed the market’s grim mood even before Tuesday’s report on US inflation, which ran hotter than estimates in August and cemented traders’ bets on a 75 basis-point rate hike by the Federal Reserve next week. (…)

Source: Bloomberg

The outlook for corporate earnings is also deteriorating. A net 92% of participants in the Bank of America survey now expect profits to decline in the next year, while the number of investors taking higher-than-normal risk has fallen to a record low.

Source: Bloomberg

• The most crowded trades are long US dollar, long oil and commodities, long ESG assets, short US Treasuries, long growth stocks and long cash
• A net 79% of participants see slower inflation in the next 12 months, while 36% say the Fed will stop hiking rates in the second quarter of 2023 (…)

Hmmm…

• Recall Bob Farrell’s rule #9: When all the experts and forecasts agree – something else is going to happen.
• Recall the fall of 2002. The low close on the S&P 500 was on Oct. 9 at 776, a trailing P/E of 17.7, down from 29.5 the previous March. The Rule of 20 P/E was 22.7, down from 32.0. Cheaper, but still not cheap. Yet, that was the low.
• But it was better (safer) to wait until March 2003 (low close of 804 on Mar. 12) when the R20 P/E touched 20.0 (trailing P/E: 16.8). Rising earnings, low inflation (2%) and a dovish Fed.

Ray Dalio Does the Math: Rates at 4.5% Would Sink Stocks by 20%

(…) “It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range),” the billionaire founder of Bridgewater Associates LP wrote in a LinkedIn article dated Tuesday. “This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”

A mere increase in rates to about 4.5% would lead to a nearly 20% plunge in equity prices, he added.

The rate market suggests traders have fully priced in a 75-basis-point hike next week by the Federal Reserve, with a slight chance for a full percentage point move. Traders expect the Fed fund rate to peak at about 4.4% next year, from the current range of 2.25% and 2.5%. (…)

Railroad Strike Averted as Tentative Deal Is Reached The agreement came after a night of late negotiations as strikes threatened to shut down a crucial vein of the U.S. economy and put fresh pressure on prices when inflation is near four-decade highs.

Biotech May Be the Next U.S.-China Battleground Investors in Chinese biotech—and perhaps their U.S. clients too—should be prepared for a rough ride

Shares of Chinese biotech companies, especially those with large revenue exposure to the U.S., tumbled after President Biden signed an executive order Monday to boost domestic manufacturing in the biotech industry. (…)

The executive order is relatively vague for now: It just kick-started a process wherein different departments make reports and come up with plans. But China looms large in the background. The order mentioned risks posed by foreign adversaries and strategic competitors in the biotechnology supply chain. U.S. lawmakers have long raised concerns about the reliance on China for drugs and medical supplies. The pandemic further intensified that worry.

China is a major manufacturer of active pharmaceutical ingredients, the key components in drugs. There is no readily available database tracking how much of these ingredients ultimately come from China. Complicated supply chains often obscure the picture: For example, China is a key supplier of APIs to India, which in turn is a major supplier of generic drugs to the U.S.

Increasingly, pharmaceutical companies are also outsourcing more research and development—especially costly and uncertain drug discovery and preclinical trials—to save costs. Biotech startups are also relying on Chinese companies’ services to avoid big capital outlays.

(…) the selloff—before any official sanctions or policy details have been announced—reflects the worry that something more ominous could be on the way. Chinese biotech could become a new battleground between the two superpowers, similar to what happened in semiconductors. (…)

Billionaire Patagonia Founder Gives Company Away to Fight Climate Change

Patagonia founder Yvon Chouinard and his family are giving away ownership in the outdoor apparel company he created almost fifty years ago to a trust and a non-profit devoted to fighting the environmental crisis.

Chouinard considered selling the company or going public, but decided on the unusual move to ensure the company’s profits will go to protect the environment. (…)

“Even public companies with good intentions are under too much pressure to create short-term gain at the expense of long-term vitality and responsibility.”

Chouinard, his wife and two children participated in the Patagonia transfer, which is valued at about $3 billion, according to the New York Times, which first reported the move.

“Instead of extracting value from nature and transforming it into wealth for investors, we’ll use the wealth Patagonia creates to protect the source of all wealth.” (…)

It’s the latest and most drastic move Patagonia has made to address global warming. The company gives away 1% of sales each year and became a certified B Corp and a California benefit corporation.

“While we’re doing our best to address the environmental crisis, it’s not enough,” he wrote. “We needed to find a way to put more money into fighting the crisis while keeping the company’s values intact.”