Month: April 2023

U.S. Inflation Eases to 5%, Lowest in Nearly Two Years Underlying price pressures increased slightly in March

The consumer-price index, a closely watched inflation gauge that measures what consumers pay for goods and services, rose 5% last month from a year earlier, down from February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday. (…)

Core prices, a measure of underlying inflation that excludes volatile energy and food categories, increased 5.6% in March from a year earlier, accelerating slightly from 5.5% the prior month.

The CPI rose 0.1% in March from the prior month, down sharply from February’s 0.4% increase, while core CPI increased 0.4%, down slightly from 0.5%. (…)

More breakdowns:

• Core CPI: +0.4% MoM (+4.8% a.r.) after +0.5% and +0.4% in Feb and Jan. Last 3 m +5.3% a.r.. Last 2 m +5.4%.
• Core Goods CPI: +0.2% MoM (+2.4% a.r.) after +0.0% and +0.1% in Feb and Jan. Last 3 m +1.2% a.r.. Last 2 m +1.2%.
• Core Services CPI: +0.4% MoM (+4.8% a.r.) after +0.6% and +0.5% in Feb and Jan. Last 3 m +6.1% a.r.. Last 2 m +6.1%.
• CPI Rent: +0.5% MoM (+6.1% a.r.) after +0.8% and +0.7% in Feb and Jan. Last 3 m +8.2% a.r.. Last 2 m +7.9%.
• Services less Rent: +0.0% MoM (+0.0% a.r.) after +0.1% and +0.6% in Feb and Jan. Last 3 m +2.8% a.r.. Last 2 m +0.6%.

@M_McDonough

Deceleration but at a slow pace. As expected (here) Services ex-rent is very encouraging, 27% of CPI, 35% of core CPI. When rent slows down to its usual 0.2-0.3% monthly pace (this summer?), services inflation will reflect wage growth (black) around its Q1 trend of 3.2%, and its pre-pandemic pace.

From a consumer spending standpoint, my CPI-Essentials series was unchanged MoM in March after 0.8% in January and 0.5% in February and is up 6.4% YoY from 8.0% in February and 8.4% in January. It has been growing at the same pace as labor income since June 2022.

US Credit and Debit Card Spending Slows to Weakest Pace in Two Years, BofA Says

After a strong start of the year, spending per household rose 0.1% [in March] from a year ago, the slowest pace since February 2021, Bank of America Institute said Wednesday. The weakness was broad-based across goods and services.

Based on BofA internal data, households that make more than $125,000 a year saw a drop in annual after-tax wages for the first time since May 2020. The decline in pay may be due in part to hiring freezes and job cuts in industries such as technology and financial services, according to the report.

For lower-income families, the expiration of the Child Tax Credit program and of increased food stamp benefits probably weighed on discretionary spending. (…)

 

@MikeZaccardi

• Business Inflation Expectations Decrease to 2.8 Percent Firms’ inflation expectations for the coming year decreased significantly to 2.8 percent.

Fed Keeps May Interest-Rate Increase on Table High inflation and tight labor markets led Fed officials to signal they could raise interest rates at their next meeting, despite a higher likelihood the economy would enter a recession later this year, according to minutes from their March gathering.

(…) Officials concluded that given the strength of price pressures and the demand for labor, “they anticipated that some additional policy firming may be appropriate” to bring inflation down to the central bank’s 2% goal, the minutes said. They also said they would pay close attention to bank lending conditions as they weigh their next move. (…)

The question ahead of the Fed’s May 2-3 meeting is whether officials place more emphasis on anecdotes and surveys of credit conditions if they signal a pullback in lending, which could call for forgoing an increase or raising rates while signaling a pause, or whether they place more weight on economic data that might show less effect on credit availability but be more dated. (…)

• Fed Leans Toward Another Hike, Defying Staff’s Recession Outlook Fed staff advisers are forecasting a “mild recession” later this year.

(…) John Williams, the New York Fed President and vice chair of the FOMC, said Tuesday that one more hike followed by a pause was “a reasonable starting place” for debate as officials approach their May 2-3 meeting. (…)

San Francisco Fed President Mary Daly, who isn’t a voter but is seen as a key ally of Chair Jerome Powell, said in a speech Wednesday that inflation may cool enough on its own without further rate hikes. That followed comments from Chicago Fed President Austan Goolsbee, who does vote this year, calling for prudence and patience on policy. (…)

• Brainard, Unlike Yellen, Sees Signs of a Pullback in Bank Credit

Treasury Secretary Janet Yellen has said she’s seen no indication of a contraction in credit following the failure of a string of US banks last month.

Maybe she should talk to her Biden administration colleague, Lael Brainard.

“Banks are showing some signs of pulling back a little on credit,” Brainard, the new head of the President Joe Biden’s National Economic Council, told CNN’s Poppy Harlow at Semafor’s World Economy Summit on Wednesday.

Her comment came just a day after Yellen spoke to reporters in Washington about a variety of topics, including the banking turmoil. “I’ve not really seen evidence at this stage suggesting a contraction in credit, although that is a possibility,” the treasury secretary said. (…)

If you missed Monday’s Daily Edge, you missed this:

Everybody is focused on bank liquidity. But since the Fed has guaranteed all deposits for the next year, the risk to the economy is really on the lending side, corporate liquidity.

Banks had already started to retreat in February (C&I loans down $13B)…

…but just in the 3 weeks after SVB, total bank credit dropped $172B with the biggest hits in C&I and CRE loans.

It got even worse during the first week of April. The -$243B decline in bank credit during the 2 weeks ended April 5 was more than twice the worst 2 weeks during the GFC.

• Credit Investors See Defaults Rising, 84% Chance of US Recession

Credit portfolio managers are forecasting a rise in corporate defaults in the coming year while more than four-out-of-five participants see a chance of a US recession in 2023, according to a survey by the International Association of Credit Portfolio Managers.

The poll found that 81% of fund managers see defaults picking up in the next 12 months, compared with 80% in the survey last December, as reduced bank liquidity and credit risk concerns land on top of macroeconomic issues. For North American corporates, 86% of respondents see defaults rising, while 91% see defaults rising in Europe.  (…)

Survey respondents are also predicting a recession in the US, with 84% expecting one to occur sometime this year. That’s higher than the 61% of participants who see a recession this year in Europe and the UK.

Credit spreads are expected to move higher, with almost 60% of participants seeing North American credit spreads widening over the next three months and 80% of participants forecasting high-yield spreads rising. (…)

Crosscurrents Hide a Rapidly Cooling Labor Market Even with less demand, a constricted worker supply is keeping pressure on wages, inflation and interest rates

Greg Ip’s analysis leads him to conclude that the Fed is not done:

Add it all up, and there simply isn’t as much labor for employers to draw on. So even if their need for labor has cooled, they must still pay up. Wage growth has slowed in recent months, but not to levels consistent with 2% inflation. The modest 0.3% rise in hourly pay in March was more like 0.4% when adjusted for the shifting composition of jobs, according to independent analyst Riccardo Trezzi, formerly an economist with the Fed and the European Central Bank.

The bottom line is that while labor demand may be weakening, it will likely have to weaken further, perhaps into recessionary territory, for the Fed to consider easing.

The bottom line is that while labor demand may be weakening, it will likely have to weaken further, perhaps into recessionary territory, for the Fed to consider easing.

The Atlanta Fed’s Wage Growth Tracker, which adjust for composition, suggests that wage growth is stuck around 6% YoY:

Looking at various employment sectors, the deceleration has further to go for wage growth to be back to pre-pandemic YoY rates:

Looked at sequentially, however, the same sectors are working their way below the 1% QoQ rate that prevailed in 2019:

The labor market increasingly appears to be headed toward a somewhat more intense version of its pre-pandemic state, when it was quite tight by historical standards but nonetheless did not generate problematic wage pressures.

(…) labor supply has now fully recovered to trend from its pandemic decline. The labor force participation rate is back in line with estimates of its pre-pandemic demographic trend, and the immigrant population has grown quickly enough over the last year and a half to reverse a shortfall in the earlier part of the pandemic. The sharp decline in job openings coupled with the full recovery of labor supply has shrunk our jobs-workers gap from a peak of over 6mn to 4.1mn based on the JOLTS data or 3.1mn based on alternative measures of job openings. (Goldman Sachs)

Real-time job openings on Indeed (trough April 7) lead the BLS openings (last point: February). The horizontal line is openings in 2019.

Manhattan Rents Reach Record High With Busy Season Yet to Come Median on new leases rose to $4,175 in March, even as apartment hunters got more listings to choose from.

The median monthly rate rose to a record-high $4,175 in March, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. That’s up $25 from the previous peak, reached in July, and almost 13% more than a year ago.

“Landlords are finding that they’re pushing rents and they’re actually getting it,” said Jonathan Miller, president of Miller Samuel. His proof: The average lease was signed with a 0.7% discount from the listing price, well below the 5% discount that new leases got in February.

“The spread between what they’re asking and what it’s renting for is compressing,” Miller said, “and I don’t think that’s because landlords are lowering the prices of their listings.” (…)

And the busiest and most expensive period of the year for rentals — traditionally July and August — is still ahead, signaling more record highs to come. Only an economic downturn and major job losses would shift that upward trajectory, according to Miller.

The number of new leases signed last month was up 15% from a year earlier, suggesting that many renters opted against renewing and moved on. Those on the hunt had more choices, with listing inventory up 41% from last March. But apartments were scooped up more quickly, spending 39 days on the market, down from 61 days a year ago.  (…)

The borough’s vacancy rate rose to 2.54% last month from 1.89% a year earlier. (…)

Bank of Canada Holds Again and Pushes Back Against Rate-Cut Bets

Policymakers led by Governor Tiff Macklem held the overnight lending rate at 4.5% on Wednesday, in line with the expectations in a Bloomberg survey of economists. Central bankers upgraded their outlook and said recent data are “reinforcing” their confidence that inflation pressures will abate, while keeping the door open to additional hikes should the economy surprise to the upside. (…)

Macklem and his officials said that tighter credit conditions — made worse by recent instability in the global banking sector — are now expected to restrain growth in the US and Europe. (…)

He [Macklem] also poured cold water on trader bets for rate cuts later in the year, saying, “that doesn’t look today like the most likely scenario to us.”

While the central bank acknowledged that output was much stronger than projected in the first quarter, policymakers see that momentum ending soon, as the aggressive rate hikes of the past year bite. Growth will be “weak” for the rest of 2023, implying that the economy will have excess supply in the second half. The Bank of Canada said it still sees inflation returning to near its target by the end of 2024 — but also acknowledged risks to that outlook. (…)

No data dependency there.

Infosys Sales Outlook Disappoints After Slowdown Fears Mount Underscoring how clients are tightening IT budgets to weather an economic slowdown.

AI Can Write a Song, but It Can’t Beat the Market Wall Street has long used automated algorithms for tasks such as placing trades and managing risk, but the investing results using AI haven’t been especially impressive.

(…) But few firms have found success turning all of their operations over to machines, quants say. And they haven’t enjoyed dramatic advances with self-learning or reinforcement learning, which entail training computers to learn and develop strategies on their own. Indeed, Renaissance and others rely on advanced statistics rather than cutting-edge AI methods, say people at the firms.

“Most quants still take a “theory-first” approach where they first establish a hypothesis of why a certain anomaly might exist, and they form a model around that,” says Mr. Larkin.

One big problem: Investors rely on more limited data sets than those used to develop the ChatGPT chatbot and similar language-based AI efforts. ChatGPT, for example, is a model with 175 billion parameters that uses decades—and sometimes centuries—of text and other data from books, journals, the internet and more. By contrast, hedge funds and other investors generally train their own trading systems using pricing and other market data, which is limited by nature. (…)

Just as important, market data is “noisier” than language and other data, making it harder to use it to explain or predict market moves. In other words, earnings, share momentum, investor sentiment and other financial data only partly explain stock moves, and the rest is unaccountable “noise.” As a result, machine-learning models can identify correlations in various market data but prove incapable of predicting future stock moves.

Unlike languages, markets can change quickly—companies alter strategies, new leaders make radical decisions and economic and political environments shift abruptly—making it harder to make trades using models reliant on historic, long-term data trends.

And while ChatGPT has proven impressive, it regularly makes the kinds of obvious errors that would cost investors’ money and jeopardize their reputations. (…)

AI-adherents believe their approach will eventually perform well. Machine-learning models could eventually sort the meaningful from the meaningless. (…)

In the near term, the recent advances could shake up areas such as research and sales, some say.

“Now, you can create automated, bespoke information for clients, and that’s a lot of what salespeople [at investment banks] do,” says Jens Nordvig, a former Goldman Sachs and Bridgewater Associates staffer who runs MarketReader, which uses AI to distill financial news.

   That is based on experiments with ChatGPT. But there is now GPT-4, a much improved version still in beta. Watch this great video to better understand what’s coming at an exponential rate.

Sparks of AGI: early experiments with GPT-4

Unpacking the commercial real estate problem

From Axios:

Data: Moody’s Analytics; Chart: Axios Visuals

If you’re waiting for the commercial real estate apocalypse to hit, it might be a while — maybe forever, Emily writes.

Commercial real estate, particularly the office sector, is slumping — and the regional banks that lend to the space aren’t looking so hot either — leading to concerns about a “doom loop.”

• “There’s definitely been an overreaction in the market about the relationship between banks and CRE [commercial real estate],” said Kevin Fagan, a senior director and head of CRE economic analysis at Moody’s Analytics.

Market watchers were spooked by Federal Reserve data showing that the holders of commercial real estate loans are a highly concentrated group — with small and regional U.S. banks (those not in the top 25) collectively holding 67%.

Stock of outstanding US commercial bank lending by small banks (% of total)

Source: Macrobond, ING

That eye-popping number turns out to be a bit misleading. Under the hood, the situation is more nuanced, as detailed in two reports from the Mortgage Bankers Association and Moody’s Analytics.

• The 67% figure includes loans backed by traditional commercial real estate — apartment complexes, office buildings, retail space — but it also includes construction loans, loans backing farmland, or loans to owner-occupied properties like two-family houses.
• (You can read more in the footnotes to this report from the Fed if you want to nerd out on this.)

The traditional commercial real estate lending market is incredibly diverse. That means borrowers should have options when it comes time to refinance.

• Banks — large and small — account for 39% of outstanding loans, per Moody’s Analytics.
• Regional banks hold just 14% of outstanding loans.
• Fannie Mae and Freddie Mac also make a lot of these loans as do life insurance companies. (The chart above has the breakdown.)

Regardless of the lender mix, there’s sure to be pain in the commercial real estate market in the coming years — likely driven by growing distress in the office building segment.

• Office loans represent about 17% of outstanding commercial real estate debt, as calculated by the MBA.
• Rents aren’t what they used to be, and building values are going to fall.
• With a glut of loans coming due soon, some will surely default. Morgan Stanley estimates that $1.5 trillion in commercial real estate debt is set to mature over the next two years.

“They’re not systemic risks to the overall economy,” says Fagan.

• Lower leverage in the system

Data: Moody’s Analytics; Chart: Axios Visuals

Commercial real estate underwriting standards improved after the global financial crisis — similar to what happened in the residential mortgage market. Loan-to-value (LTV) ratios are much lower now, as the chart above shows.

Borrowers have more equity (and proportionally smaller loans) on their properties.

• That’s going to help when it’s time to refinance these loans. Borrowers may still have a shot at affording new loans, despite lower building values and higher interest rates.
• And when defaults do happen, lower LTVs should mean smaller losses for the lenders.

IMF Says Banking Troubles Create Headwinds for Global Economy International lender sees growth slowing this year, then picking up

Total economic output is projected to increase 2.8% this year, a slowdown from 3.4% last year, as nations continue recovering from slumps caused by the pandemic and the war in Ukraine, the IMF said in its latest World Economic Outlook report. Its new 2023 forecast was little changed—just 0.1 percentage point lower—from its January projection.

The multilateral financial organization also sees global growth accelerating to 3% next year, the report said, citing some encouraging signs.

China’s reopening after its long pandemic lockdowns is injecting vigor into the Asian economy. The U.S. and European economies see their growth supported by resilient consumer demand and strong job markets. Emerging markets are expanding faster than rich countries, and supply-chain crunches seen during the pandemic and following Russia’s invasion of Ukraine are unwinding. 

The eurozone’s economy is forecast to expand by just 0.8% this year, down from 3.5% last year. The U.K.’s economy is projected to shrink by 0.3% in 2023 after expanding by 4% in 2022.

The U.S. economy is expected to grow 1.6% this year, down from 2.1% in 2022, the IMF said.

China’s growth, meanwhile, is seen accelerating to 5.2% this year from 3% last year.

Yet the risks to growth have grown significantly, IMF economists said, alluding to the banking system turmoil that erupted in March. (…) “We are seeing a lot of downside risks going forward.” (…)

The IMF forecasts global inflation to cool, with consumer prices rising 7% this year and 4.9% in 2024, compared with 8.7% in 2022. But the organization projects a slower ebbing of underlying core inflation, which excludes volatile energy and food prices. (…)

The IMF’s longer-term outlook remains dim. The global economy remains weighed down by the effects of the war in Ukraine and the growing rivalry between the U.S. and China. The IMF has cautioned against economic fragmentation, or the breakup of the world trading system into rival blocs comprising either the U.S. and its allies or China, Russia and their allies.

Looking five years ahead, the IMF forecasts global economic growth of 3% in 2028, the lowest such forecast in decades.

• Fed Officials Signal Divide Over Whether to Hike Rates Again New York chief John Williams says one more hike ‘reasonable’
• Fed Official: ‘We Need to Be Cautious’ on Raising Rates After Bank Failures “At moments like this of financial stress, the right monetary approach calls for prudence and patience,” said Chicago Fed President Austan Goolsbee.
• US Small Businesses Face Worst Credit in a Decade After SVB

A net 9% of owners who borrow frequently said financing was harder to get compared to three months earlier, the most since December 2012, according to a survey from the National Federation of Independent Business out Tuesday. The same share expects tougher credit conditions in the next three months, matching the highest level in a decade. (…)

The share of owners who say they believe the next three months will be a good time to expand fell to the lowest since 2009, the report showed. Firms also dialed back capital spending plans.

One in five owners expect to invest in equipment or structures in the next three to six months, the smallest share in two years. Companies scaled back hiring plans and compensation as well.

The survey also showed a net 15% said they expect weaker sales in the next three months, the largest share since August.

  

  

• US bankruptcies increased sharply this year.

Source: S&P Global Market Intelligence (via The Daily Shot)

Online Shopping’s Fast-Delivery Race Is Slowing Down Shoppers are showing more willingness to wait for deliveries as concerns over shipping costs grow.

(…) The dimming attention to speedy delivery comes as the broader boom in online shopping has pulled back, with growth trends now tracking closer to prepandemic levels. E-commerce surged from 11.9% of all U.S. retail sales in the first quarter of 2020 to 16.4% in the second quarter of that year, according to the U.S. Census Bureau. By the fourth quarter of 2022, the share was back down to 14.7%. (…)

Hmmm… This FRED chart using Census Bureau data shows continued rapid growth at nonstore retailers with their market share stabilized around 15-16% and still above trend but recently reaccelerating.

Investors Pull Cash From Oil Despite OPEC+ Cuts as Demand Fears Linger

One oil exchange-traded fund saw its largest one-day outflow in more than three years, a possible sign that some investors remain concerned about the outlook after OPEC+ delivered an unexpected supply cut.

WisdomTree’s Brent Crude Oil ETP — ticker BRNT — had an outflow of $55.7 million on Thursday, the largest one-day fall since late 2019. Another fund, the ProShares Ultra Bloomberg Crude Oil ETF — ticker UCO — saw outflows of $158.5 million last week. That’s its biggest weekly drop since March 2022. (…)

• Chipotle reveals all-electric, wind- and solar-powered restaurant

Chipotle unveiled an all-electric restaurant concept Tuesday that relies entirely on alternative energy to power its stoves, grills, electric car charging ports and more, Axios’ Kelly Tyko reports.

• Most of the restaurants’ energy will come from offsite wind and solar generation.

Chipotle has opened two restaurants with what it’s calling “responsible restaurant design” features so far: one in Gloucester, Virginia, and another in Jacksonville, Florida.

• A third is slated to open in Castle Rock, Colorado.
• Highlights include electric cooking equipment to replace gas-powered variants, rooftop solar panels and heat pump water heaters.

The reveal comes as Chipotle and other fast-food chains are under enormous pressure to reduce their carbon emissions.

• Several major fast-food and retail chains, including Subway, 7-Eleven and Walmart, have recently announced big pushes into electric vehicle charging as part of broader efforts to go green.

Chipotle aims to use all-electric equipment and at least some elements of its new design at more than 100 locations it plans to open in 2024.

S&P 500 2023 Q1 Earnings Preview: Entering an Earnings Recession

Earnings season kicks off this week and using data from the April 7^th publication of the S&P 500 Earnings Scorecard, 2023 Q1 blended earnings (combining estimates and actuals) are forecasted at $419.1 billion (-5.2% y/y, -4.7% q/q) while revenue is forecasted at $3,558.4 billion (+1.6% y/y, -5.5% q/q).

Q1 is expected to mark the second consecutive quarter of negative y/y earnings growth (third consecutive quarter of negative q/q growth) which meets the criteria of an earnings recession. Furthermore, Q1 aggregate earnings have declined by 11.5% from its high watermark set in 2022 Q2, when the index achieved $473.5 billion in earnings.  Finally, Q1 earnings growth is forecasted to be the lowest y/y growth rate since 2020 Q3.

The prior earnings recession started in 2020 Q2, lasting three quarters from start to finish.  Today’s earnings recession may also last three quarters if analyst expectations turn out to be correct as 2023 Q2 y/y growth is forecasted at -4.0%. (…)

Exhibit 2 highlights the trajectory of Q1 earnings growth, which peaked in April 2022 (+13.7%, +15.2% ex-energy) and has now reset to -5.2% y/y and -6.7% ex-energy.  Interestingly, the majority of Q1 downgrades finished by the beginning of March and has remained stable since (even after the banking collapse), which may indicate that analysts are adopting a ‘wait-and-see’ approach once new information is presented from companies.

Furthermore, ex-energy earnings growth is expected to be negative for the fourth consecutive quarter, surpassing the three quarters of negative ex-energy growth seen in 2020. (…)

When deconstructing the P/E ratio into ‘Price’ and ‘Earnings’, we continue to see one of the largest gaps between the two in recent years.

The S&P 500 forward 12-month P/E ratio is 18.3x, which ranks in the 80^th percentile (since 1985) and a 4.6% premium to its 10-year average (17.5x). For reference, the trough forward P/E during the last four recessions were as followed: 10.1x (Oct 1990), 17.3x (Sept 2001), 8.9x (Nov 2008), and 13.0x (March 2020).

Furthermore, the S&P 500 ‘PEG’ ratio is currently 1.9x which ranks in the 98^th percentile (since 1985) and a 35.7% premium to its 10-year average (1.4x).  The PEG ratio is expensive as the forward P/E continues to rise since the October low, while the long-term EPS growth rate expectations continue to decline. (…)

We also look at earnings growth contribution at a constituent level in Exhibit 3.1 and highlight the top 10 and bottom 10 contributors.  Amazon.com Inc is expected to deliver the lion share of earnings growth for Consumer Discretionary this quarter (1.2 ppt) while the same can be said for JPMorgan Chase & Co for the Financials sector (0.5 ppt).

Within Industrials, all three constituents in the top half of the table are related to the airline industry and are mainly benefitting from easy year-over-year comparisons, which can be considered a lower quality of earnings contribution.

In the bottom half of the table, Semiconductors continue to weigh down Information Technology while many of the large pharmaceutical constituents are expected to post negative earnings growth as it largely benefitted from vaccine sales last year. (…)

S&P 500 23Q1 Earnings Growth Contribution by Constituent