Month: November 2023

CONSUMER WATCH

Walmart Sinks on Cautious Consumer Outlook, Late-October Dip Retail giant modestly raises forecast but sees rising pressure

There was a “sharper falloff” in sales during the last two weeks of the fiscal third quarter, which ended Oct. 31, said Chief Financial Officer John David Rainey. While the exact cause is hard to identify, higher interest rates, dwindling savings and student-loan repayments are weighing on demand, he said. November is off to a good start so far, thanks in part to promotions and holiday shopping.

“We are more cautious on the consumer than we were 90 days ago at this time,” Rainey said in an interview as Walmart reported financial results Thursday. “The takeaway for us is that we’re seeing strength, we’re seeing share gains versus others, but there still is pressure on the consumer.” (…)

Excluding fuel, comparable sales at Walmart’s US unit rose 4.9% during the three months ending in late October. Target Corp. and Home Depot Inc. reported declines in that metric this week, as consumers continued to pull back from discretionary purchases. (…)

“We think we may see dry groceries and consumables start to deflate in the coming weeks and months,” McMillon said on an earnings call.

In the US, McMillon said, the price of beef is up versus a year earlier but dairy, eggs, chicken and seafood are down. General merchandise prices, meanwhile, “came down a little more aggressively in the last few weeks or months.”

• US Continuing Jobless Claims Rise to Highest in Almost Two Years Recurring applications rise for eighth week, to 1.87 million

Recurring jobless claims, a proxy for the number of people continuously receiving unemployment benefits, jumped to 1.87 million in the week ended Nov. 4, according to Labor Department data out Thursday. That marked an eighth straight week of increases.

Initial jobless claims also rose, to 231,000 in the week ending Nov. 11. That was the highest since August. (…)

It may be just short-term noise but the sharp drop in Indeed Job Postings so far in November (through Nov.10) is worrisome.

Indeed’s breakdown confirms the shift in leadership, not really healthy in my view:

The pullback in job postings has been most stark in sectors tied to previously high-flying industries, including tech, where stock valuations have fallen and hiring plans have returned to earth. Sectors connected to companies that provide in-person services, including restaurants, hotels, and hospitals, represent a continued source of robust hiring demand.

The Conference Board’s ETI keeps declining:

“While changes have been minimal month to month and the index remains elevated, there are signs of cooling as recent job gains have been mostly concentrated in industries facing major labor shortages including in-person services and government. If labor markets continue cooling and wage growth slows further, the Federal Reserve may be done with interest rate hikes for the current tightening cycle.”

Eric Basmajian (@EPBResearch) observes that both the leading and coincident ETI “are nearing the historical “brink” of the waterfall.”

The eight leading indicators of employment aggregated into the Employment Trends Index include:

• Percentage of Respondents Who Say They Find “Jobs Hard to Get” (The Conference Board Consumer Confidence Survey)
• Initial Claims for Unemployment Insurance (U.S. Department of Labor)
• Percentage of Firms with Positions Not Able to Fill Right Now (© National Federation of Independent Business Research Foundation)
• Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)
• Ratio of Involuntarily Part-time to All Part-time Workers (BLS)
• Job Openings (BLS)
• Industrial Production (Federal Reserve Board)
• Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)

Speaking of manufacturing, recently released regional indexes show no upturn just yet.

NAHB Housing Market Index: Builder Confidence Down Again

INFLATION WATCH

Oil Collapses Into Bear Market as Robust Supply Pressures OPEC+ Rising US inventories spur selloff with WTI near $73 a barrel.

(…) The latest slump has been driven by a myriad of factors. Prices for real-world barrels have been steadily softening over the last few weeks, in part as supply exceeds expectations. Shipments from Guyana and the North Sea are set to rise next month, while US exports have been surging.

Those higher volumes muddy the outlook ahead of a meeting of the Organization of Petroleum Exporting Countries and its allies at the end of next week. Saudi Arabia and Russia — the group’s biggest producers — have pledged to keep additional output curbs in place until the end of the year, though Russia’s crude exports have risen in recent weeks. (…)

“All eyes are now back at OPEC+ after the recent fall in oil prices, along with weakening crude curve structures and weakening economic statistics,” said Bjarne Schieldrop, chief commodities analyst at SEB AB.

Inventory data from the US earlier in the week pointed to a sharp increase in stockpiles recently, particularly at the key storage hub of Cushing, Oklahoma. Those builds come as refineries undergo seasonal maintenance, reducing their demand for crude. Overseas shipments have also been leaping as US production rises, adding supply to the market.

The International Energy Agency said earlier this week that production growth means the global market won’t be as tight as had been expected this quarter. (…)

“We believe that OPEC will ensure that Brent oil prices end up in a $80-to-$100 range in 2024 by ensuring a moderate deficit and leveraging its pricing power,” Goldman Sachs Group Inc. analysts including Daan Struyven said in a note. The latest selloff was driven by non-OPEC supply topping expectations, they said.

The demand outlook has also been cloudy. Figures from China, the world’s largest importer of crude, show that refiners cut daily processing rates in October as apparent oil demand fell from a month earlier. Meanwhile, US unemployment benefits rose to the highest level in almost two years, signaling a slowdown in the world’s biggest crude consumer.

• Iran told US it did not want Israel-Hamas war to escalate Hossein Amirabdollahian says Tehran has used back channels to convey fears of conflict in Gaza spreading across region

More from Indeed:

• Wage growth looks to be settling down. Hopefully, inflation follows.

One of the most apparent signs of the ongoing US labor market cooldown is that wages are no longer growing as quickly as they recently were. Falling employer demand, increasing labor supply, and diminished quitting has resulted in employers handing out smaller raises.

This slowdown in wage growth can be seen in a variety of measures of wage growth, including the Indeed Wage Tracker and those from the federal government. The Indeed Wage Tracker peaked first, in January 2022, and the Atlanta Fed’s Wage Growth Tracker peaked last, in early 2023.

While wage growth has slowed, by several measures, it hasn’t yet returned to its pre-pandemic growth pace. But there are indications it may fall to that level relatively soon. According to the latest data from the Indeed Wage Tracker, posted wages in October were up 4.2% from a year prior, down from 4.8% in July and well below the January 2022 peak of 9.3%.

If posted wages continue to slow down at roughly the rate they have for the past three months, the Indeed Wage Tracker will return to its pre-pandemic pace before the middle of next year.

Wage growth seems on a track back to the healthy and sustainable rate seen before the pandemic. Wage growth between 3.5% to 4% would be consistent with 2% inflation, assuming labor productivity grows between 1.5% and 2% annually. Labor productivity is up 2.2% over the past year, but the underlying pace might be lower than that moving forward.

Where Have All the Foreign Buyers Gone for U.S. Treasury Debt? Overseas private investors and central banks now own about 30% of all outstanding U.S. government debt—down from roughly 43% a decade ago.

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. 

Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. (…)

A group of Wall Street executives that advise the U.S. Treasury, known as the Treasury Borrowing Advisory Committee, recently flagged waning demand from two big-time buyers: banks and foreigners.

Over the medium term, the committee said it expects “demand from banks and foreign investors to be more limited.” (…)

Overseas investors sold a net $2.4 billion in long-term Treasurys in September, bringing their holdings to $6.5 trillion, according to data from the U.S. Treasury released Thursday. On a rolling 12-month basis, which helps to smooth out volatility in monthly data, the pace of foreign buying has eased to around $300 billion in recent months from levels above $400 billion for much of last year, according to data from the Council on Foreign Relations that also adjusts for changes in valuation.

The makeup of overseas demand has shifted. European investors bought $214 billion in Treasurys over the past 12 months, according to Goldman Sachs data. Latin America and the Middle East, flush with oil profits, also added to holdings. That has helped offset a $182 billion decline in holdings from Japan and China. (…)

“In the U.S. it might look a bit bleak, but from our perspective over here [UK], you look in a much better shape than we are,” he said. “You’ve got some real value at these levels.” (…)

Ramjee said he remained concerned about the U.S. government’s widening deficits. But few other developed-market government bonds offer real yields—or interest rates exceeding expected inflation—comparable to those offered by U.S. bonds.

Demand from private investors in Europe, however, isn’t enough to offset the longer-term structural changes that are weighing on foreign demand for Treasurys, said Praveen Korapaty, chief interest rates strategist at Goldman Sachs.

“Are they actually swinging the needle here? Not really,” he said. “The foreign ownership of Treasurys continues to decline and we expect that will remain the case for the foreseeable future.” (…)

Central banks, voracious buyers of U.S. Treasurys in the 2000s and early 2010s, remain a weak spot for overseas Treasury demand. The strength of the dollar has spurred many central banks, including those in China and Japan, to stop adding to their stockpiles of U.S. Treasurys or even to sell them down, analysts say. They use the dollars they get from selling U.S. bonds to buy their own currencies, boosting the value.

At the same time, China has diversified reserves away from Treasurys and has been investing in bonds backed by U.S. government agencies such as Freddie Mac that offer higher yields than Treasurys. China has bought a net $32 billion of those in the year through August, according to data from the Council on Foreign Relations. 

Japanese private investors—including banks, pensions and insurers—are a source of worry. Many have invested heavily in U.S. Treasurys as a way to escape ultralow, and at times negative, interest rates at home. Between those investors and the Bank of Japan, the country is the largest foreign holder of U.S. Treasurys with a stockpile worth more than $1 trillion.

The Bank of Japan has allowed government bond yields to rise as the country finally looks set to escape its deflationary spiral, which should encourage investors to invest more in the domestic government bond market. (…)

Masatoshi Yamauchi, an executive officer at All Nippon Asset Management, whose main clients include regional banks, said Japanese banks have continued to invest in U.S. Treasurys, but with shorter durations, and without hedging currency risk, which is currently very costly for Japanese investors. But they, too, might soon lose interest in the U.S., he warned.

“They are getting full,” he said. “Interest rates are becoming more attractive in their mother market.”

@YuanTalks:

• #China cut holdings of #US #Treasuries for 6th straight month in Sept to $778.1 bn, lowest since May 2009, falling below $800 bn for first time in 14 years, showed data from US Department of Treasury
• #China‘s new #home prices fell for 4th straight month in Oct, fewest cities saw 2nd-hand home price rise since Oct 2014

U.S. Retail Sales Fall for First Time Since March as Holiday Season Approaches Declining spending adds to signs the economy is cooling after hot summer

U.S. retail sales fell 0.1% in October from a month earlier, the Commerce Department said Wednesday. That is the first decline since March and comes after a 0.9% increase in September and robust gains earlier in the summer. (…)

Americans spent less at auto dealerships as higher interest rates could deter some from making big-ticket purchases. Declining prices at the pump resulted in less spending at gas stations. But even when excluding those categories, sales advanced just 0.1%, after averaging a 0.6% gain in the prior six months. (…)

Sales also declined in October at department, hardware and furniture stores and rose more slowly at restaurants and bars and online.

One of the nation’s largest retailers, Target, said Wednesday that consumers continue to pull back on discretionary items that make up much of its annual revenue.
(…)

Target’s comparable sales, those from stores and digital channels operating at least 12 months, fell 4.9% in the three months ended Oct. 28 from the prior year. (…)

Comparable food sales fell in the quarter due to slightly lower prices, while sales by units rose, said Hennington.

Home Depot said Tuesday that same-store sales fell 3.1% last quarter. “We saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories,” Chief Executive Ted Decker said. (…)

• How Consumers Are Spending Is a Reason for Cheer Retail spending data is a lot better than the headline figures suggest

(…) Indeed, the composition of retail spending in October was more favorable than what the headline figure on Wednesday’s report showed. Sales excluding gasoline stations, car dealers, building-materials stores and food services—the so-called control group that economists use to track the underlying pace of consumer spending—rose 0.2% in October from a month earlier.

Don’t forget what is going on with prices, either. Tuesday’s benign inflation report from the Labor Department showed that consumer prices were unchanged in October from September. Overall prices for goods—what gets sold in stores—fell by 0.4%, while goods prices stripping out food and energy items slipped 0.1%. (…)

As an added bonus, gasoline prices have continued to decline: As of Monday, the average price for a gallon of regular was $3.35, according to the Energy Information Administration, which compared with an October average of $3.61. (…)

Retail inflation was +0.4% YoY in October (0.35*CPI Durables + 0.658 CPI ND) against nominal sales up 2.5%. On a MoM basis, retail inflation was -0.6% against nominal sales -0.1%. Real sales are still positive per these measures.

My measure of CPI-Essentials (food, energy, shelter, weighted) remains high at +4.6% YoY in October, down from 5.4% in September but above June’s 4.1%. But October was flat MoM after averaging +0.7% in August/September.

CPI-ESSENTIALS & CORE CPI

Flat nominal retail sales were in line with aggregate payrolls (0.0% MoM) in October, indicating that Americans did not dissave or borrow much last month.

The consumer income math:                          

jobs: (jobs + hrs) 0.8 – 1.5% (1.4% last 3 ms, 1.1% last 2, -1.2% in Oct)

wages:                3.0 – 4.0% (3.2% last 3 and 2 ms, 2.5% in Oct)

PCE inflation:     3.0 – 4.0% (3.8% last 3 ms, 4.4% last 2, 4.3% in Sept.)

= real labor inc.  0.8 – 1.5%

Even the higher end 1.5% growth rate (black dash) is historically very weak, 0.5% is terrible.

US Producer Prices Decline by Most Since April 2020 on Gasoline Prices paid to producers sank 0.5% in October, core unchanged

(…) Services costs, meanwhile, were flat after rising six straight months. (…)

Global Fight Against Inflation Turns a Corner Falling inflation across industrialized countries opens the door for central banks to start cutting interest rates next year.

Declines in consumer price growth, to below 5% in the U.K. last month and around 3% in the U.S. and eurozone, are fueling expectations that central banks could take their feet off the brakes and pivot to cutting interest rates next year.

That would provide welcome relief to a global economy that is struggling outside the U.S., increasing the prospects of a soft landing from a historic series of interest-rate increases without large increases in unemployment. Europe, in particular, is on the brink of recession.

Yields on government debt in Europe and the U.S. have slumped as investors start to price in earlier interest-rate cuts.

For months this year, economists puzzled over why growth and inflation hadn’t slowed more in response to interest-rate hikes. Now, there is growing evidence that higher borrowing costs are biting hard with a delay. (…)

Even countries where inflation has proved the most stubborn, such as the U.K., have started to show progress. Consumer prices rose 4.6% in October compared with the year-ago month, a drop from the 6.7% rate of inflation recorded in September and the slowest increase since October 2021, the statistics agency said Wednesday. Economists had expected to see a decline to 4.8%. (…)

The eurozone also reported a decline in inflation to 2.9% in October from 4.3% in September. Consumer prices were lower than a year earlier in Belgium and the Netherlands. (…)

Investors are also more optimistic. They are pricing in interest-rate cuts by the Federal Reserve and European Central Bank starting next spring, and by the Bank of England next summer, according to data from Refinitiv.

Markets had priced a 30% probability of another rate increase by the Fed, from its current level of 5.25% to 5.5%, until publication of U.S. inflation data on Tuesday. That probability has now fallen to 5%, according to Deutsche Bank analysts. The prospect of a Fed rate cut by May soared from 23% on Monday to 86% by Tuesday‘s close.

Central bankers are more cautious after being surprised last year by the persistence of inflation. The Bank of England last month said it is too soon to think about cutting interest rates, having forecast that inflation would reach its 2% target in late 2025. Central bankers also point to the still-rapid rise in wages and the risk of higher energy prices if the conflict between Israel and Hamas spreads to other parts of the Middle East. (…)

Fitch says US regional bank challenges to persist in 2024

“Regional banks lacking in scale will be disproportionately pressured to reduce cost bases and optimize loan composition,” Fitch said on Wednesday, adding this would “diminish their ratings headroom, leaving larger players relatively well-positioned to continue to gain market share.”

Fitch said that a delay in meaningful loosening of monetary policy would likely translate into “sustained competition for deposits” and “stubbornly weak loan growth.” (…)

Fitch’s caution follows Moody’s last week saying that the banking sector is not yet out of the woods, with reinflation a risk if banks fail to sufficiently predict rate moves.

VALUATION WATCH

From John Authers’ column:

Alliance Bernstein research suggests that the Seven are wildly overvalued compared to history, even with the 10-year yield at its Tuesday low of 4.44%. On this basis, even the other 493 collectively look a little expensive:

Further, it’s possible to question just how great those seven companies are, for all their visibility in contemporary life. The following chart from Richard Bernstein Associates (a completely separate company from Alliance Bernstein) shows that only one makes it into a list of stocks whose earnings per share are growing at more than 25%:

Rich Bernstein argues cogently that there is simply no need for the market to be so tightly concentrated in a few names, as there are plenty of other stocks registering growth:

Narrow markets are economically justified when growth itself is scarce, like during a profits recession, because investors gravitate toward the fewer companies that can produce substantial growth. The extraordinarily narrow leadership of the Magnificent Seven could be justified if growth was extraordinarily scarce. Importantly, growth is not scarce and is actually accelerating.

Biden, Xi Dial Back Rancor, Stress Cooperation in Summit to Stabilize Ties The two leaders neared modest agreements on restoring military contacts and combating fentanyl trafficking during a summit aimed at steadying relations between the world’s two leading powers.

• Xi Says China Seeks to Be Friends With US, Won’t Fight ‘Hot War’