Year: 2023

Consumer Spending Growth Slowed in February Consumer spending increased a seasonally adjusted 0.2% in February, compared with January’s revised 2% increase, which was the largest one-month gain in nearly two years.

I generally post excerpts of the WSJ articles because it is the most read financial media and I think important to convey the mainstream narrative. I am skipping it today because this particular piece on consumer spending does not differentiate between nominal and inflation-adjusted data and can be misleading.

My own narrative:

• Real expenditures declined 0.1% MoM in February, following a 1.5% jump in January, itself following very weak Q4’22 data, particularly during the important months of November and December.
• The large January jumps in disposable income and expenditures hide what could be seen as slowing trends since last summer.
• January’s disposable income benefitted from annual wages and salaries adjustments, a weather-related jump in hours worked, an 8.7% inflation boost to social security payments and sharply lower income taxes.
• Americans chose to quickly spend the bounty after skimping on Christmas. Nominal spending on goods jumped 3.6% MoM in January with durables up 7.0%.
• The glass-half-full reading combines January and February to conclude that the consumer is flush, happy and spending merrily.
• The glass-half-empty reading says that January was an aberration and that February data confirms the slowing trends observed at the end of 2022.

The debate will persist through spring data. It is fair to say, however, that the positive spending numbers early in 2023 helped merchants reduce their bloated inventories. This may explain the rise in goods prices in January and February (+3.2% a.r.) when most economists, including the Fed’s, were expecting continued goods deflation for a while.

Core PCE inflation is not slowing much. In fact, since October 2022, any combination of 2 or 3-month data shows core inflation accelerating. The red line below is where monthly inflation needs to be for the Fed to reach its 2% target.

Growth in Compensation is also slowing, even more so if we normalize January. Note also the 5 consecutive monthly declines in current taxes, boosting disposable income growth well above personal income. Since October, personal income rose 6.0% annualized but disposable income 11.1% a.r..

Meanwhile, the savings rate keeps rising, 4.9% in February, from 2.7% in June 2022 while consumer credit growth slowed to +3.2% annualized in December-January, down from +8.1% a.r. in the 6 months prior.

My conclusions:

• Overall, consumers remain reasonably solid financially but basic inner trends are worrisome.
• There is no immaculate disinflation just yet.
• The Fed’s focus on inflation, at some point, will impact employment and wages. If inflation does not react rapidly, the income squeeze will intensify.
• Rising interest rates encourage savings and discourage borrowing.
• Post covid-helicopter money, consumer spending is now more dependent on its basic fundamentals: labor income (employment, hours, wages).
• February data was back on trend: slowing employment growth, slowing wages and declining hours. Even with the strong January, labor income growth has slowed to the 6% annualized range on 3 and 6-month periods, only about 1% above inflation. But the downward trend in labor income is clear, and faster than the downward trend in inflation (see the inflation chart above). With a hawkish Fed still on board.

I bet that most people would be surprised to learn that, on an annual basis, personal disposable income actually declined 0.1% in 2022, in nominal dollars. How then could consumer expenditures jump 9.1%?

The bars below represent annual $ changes in the contributors to personal expenditures. It illustrates the wild swings in savings during the pandemic and the disappearance of disposable income contribution in 2022 supplemented by an abnormally large increase in credit. All in nominal dollars.

As seen above, labor income growth is slowing and threatens to fall below inflation. And Americans have increased their savings rate since last September.

Moody’s last week warned us of developing adverse trends in consumer credit:

Loans originated in 2022 have gotten off to a rough start, though this trend varies by product. The performance for recently originated first mortgage and
home equity accounts is comparable to vintages that originated prior to the pandemic, though their performance is worse than that of loans written in 2021 and 2022. (…

The situation is more concerning for nonresidential loans, particularly consumer spending-related credit products. Credit card and consumer finance lenders aggressively expanded lending in late 2021 and early 2022, looking to make up for falling demand during the height of the pandemic. At the same time, a combination of excess savings on the part of households and borrower support programs on the part of creditors pushed down delinquency and default rates, which, by proxy, lifted credit scores. As a result, the risk profiles for borrowers, visible to lenders and underwriters, improved, even if the underlying creditworthiness of the borrower pool was unchanged.

These two factors likely led to riskier consumer loans being underwritten, the toll of which is now beginning to materialize. (…)

Consumers are stretching to deal with higher prices but thus far have been able to lean on excess savings and credit to cover the shortfall between income and expenditures. The unemployment rate will rise from 3.6% to approximately 4% by the end of 2024, while monthly job gains slow from their current pace of 250,000 per month to less than 100,000.

At the same time, excess savings will be exhausted, particularly for lower-income households. Credit stress will intensify, particularly for lower-credit-score borrowers in the consumer finance and credit card segments. Fortunately, these markets are small enough that the shock will not change the outlook of no
recession under the baseline forecast, but creditors with significant exposure to these products should be watched. (…)

Recession risks are elevated. The Federal Reserve remains aggressive; the baseline forecast assumes the central bank will continue to raise rates during the first half of the year. The concern is that the Federal Open Market Committee could overshoot its target, tightening in the face of slower job growth and difficult financial conditions, tipping the U.S. into recession. Credit markets would contract under this scenario, while performance, which has deteriorated in recent months, would worsen further.

• Citi card spending: “March to date is down 8.9% and is on pace to be the weakest month since April 2022. Ex-Food spending decreased 13.7% vs -13.0% in March” (ZeroHedge)
• Even High-End Travelers Are Reining In Their Spending So much for a golden age of revenge travel. Tighter budgets, busy airports and soaring prices are seeing a more frugal tourist return

OPEC+ Makes Shock Million-Barrel Cut in New Inflation Risk Oil Surges 8% After OPEC+ Blindsides Market With Production Cut

Via Bloomberg:

• The announced cuts from OPEC+ will amount to “about 1.1% of global supply in the next two months and about 1.6% of global supply in the back half of this year,” said Vivek Dhar, Commonwealth Bank of Australia’s director of mining and energy commodities research. The eight countries planning to shave production do have the capacity to do so, he added. “So we are talking north of one million barrels a day that can be an actual reality,” Dhar said. “People should be paying attention to these cuts because they can actually be realized.” (Commonwealth Bank of Australia Ltd.)
• “Any unexpected 1 million barrel per day change in supply or demand conditions over the course of a year can impact prices between $20 and $25 per barrel,” said Francisco Blanch, head of commodity and derivatives research at Bank of America. “OPEC is no longer afraid of a major US shale oil supply response if Brent crude oil prices trade above $80 per barrel, so cutting volumes to push oil prices higher does not carry the same risks it did five years ago,” he said.
• “Given extremely low managed money positioning, low open interest and high volatility, the markets can expect a price overshoot just as Fed tightening and banking turmoil led prices to fall two weeks ago far more than balances warranted.” (Citigroup)

OPEC’s Shock Cut Is a Capitulation to Oil’s Decline

(…) The question, then, is why those countries want more oil cash, and what they plan to do with it.

In Saudi Arabia, the biggest player, the money very clearly isn’t mainly going into building additional production capacity. During annual results last month, Saudi Arabian Oil Co. Chief Executive Officer Amin Nasser was unyielding in rebutting analysts’ suggestions that the company should be using its $159 billion in net income to upgrade its spending plans. Capital expenditure will instead level off around the middle of this decade, with only half of the total dedicated to boosting output and no plans to build capacity beyond 13 million barrels a day. That represents a modest increase from current levels, especially when inflation is taken into account.

What we’ve seen instead is a flurry of investments in everything except new crude output — $7 billion for a refinery in China announced last week; $8.5 billion in contracts signed in February to build a green hydrogen plant near the Neom planned city close to the Jordanian border; 33 billion riyals ($8.8 billion) for new tourist facilities on the Red Sea and another $50 billion for another development on the outskirts of the capital Riyadh. In total, the government expects some $1.3 trillion to be invested by 2030 with the goal of diversifying the economy away from oil production. (…)

While the numbers of operating oil rigs in the US have more or less returned to pre-pandemic levels, in the Middle East, they’re struggling to break above three-quarters of previous numbers. (…)

• At the Eurozone level, online sales signal weakness ahead for total retail sales.

Source: Pantheon Macroeconomics via the Daily Shot

Flight to Money Funds Is Adding to the Strains on Small Banks Silicon Valley Bank’s collapse has caused savers to seek out alternatives, but the shift poses risks to the financial system and the wider economy

(…) And smaller banks are feeling the pain much more acutely than their giant peers. Deposits at such lenders slumped $120 billion in the week ended March 15 while those for the 25 largest firms rose almost $67 billion, Federal Reserve data showed. Outflows at US lenders more broadly continued the following week, with $125.7 billion withdrawn, though smaller banks posted a slight increase. (…)

Actually, the jump in large bank deposits during the week ended March 15 was almost totally withdrawn the following week, likely moved to other instruments such as mutual funds. In total, deposits at all banks declined $362B (2.1%) in three weeks. American banks stopped bleeding the week ended March 22, but foreign banks saw further deposit losses which explains that total deposits kept dropping.

Is that all, -2.1%?

John Authers:

(…) For a notion of how serious the US crisis is, it’s worth looking at this great piece of data visualization from Bloomberg Opinion’s Paul Davies and Elaine He. The banks that ran into trouble were outliers that had made themselves hugely exposed to rising interest rates. This is one of several charts in their piece that makes clear that disaster for these banks does not necessarily imply disaster for the entire financial system:

Long-term and Short-term Bonds

SVB and Silvergate were outliers in the types of assets they held as a % of their total assets

(…) it’s important to look at how serious an effect the banks will have on the economy. Obviously, this would change if one of the biggest systemically important institutions ran into problems, but reasonable estimates at present suggest that the damage should not be that great — and also that Europe might suffer a more negative impact than the US. After a stress test that involved adding the tightening of lending conditions to the raising of policy rates that has already happened, Silvia Ardagna of Barclays said the effect would be noticeable, but not overwhelming. Tighter lending standards as a result of the banks’ problems would reduce GDP growth by about 0.25 percentage points. (…)

China Home Sales Continue to Rise in Latest Sign of Recovery New home sales by the 100 biggest real estate developers climbed 29.2% YoY after a 15% rise in February, when the market posted its first increase in 20 months.

EARNINGS WATCH

The Q1’23 earnings season is only 2 weeks away.

Compared with Q4’23, we have 10% more pre-announcements and 40% more negative ones.

S&P 500 earnings are now seen down 5.0% in Q1 (+1.4% on January 1), slipping another 3.9% in Q2 (-0.3%) before hopefully turning 2.8% positive in Q3 (+5.5%), reaching +10.5% in Q4 (10.6%!). Why is Q4 hanging in?

From 9 negative sectors in Q4’22, 7 are expected negative in Q1’23, 5 in Q2, 4 in Q3 and only 1 in Q4. Note how Consumer Discretionary companies are forecast to lead the way. This while the FOMC is fighting demand.

These numbers look increasingly fragile as analysts rethink their assumptions. Forecasts for the current fiscal year are increasingly negative:

  

(Factset)

Yet, forward estimates at $220.59 are only 0.5% below trailing EPS ($221.49) and have only declined 0.8% since their November 2022 peak. That seems like a real tail risk to me, only apparent in large caps since forward estimates for S&P 400 and S&P 600 companies are 8.1% and 4.2% below trailing EPS respectively.

(Factset)

Social Security Reserves Projected to Run Out Earlier Than Expected The program won’t have enough money to pay all beneficiaries the amount they are entitled to starting in 2034, a report said.

Low Jobless Claims Show Labor Market Stays Robust Worker filings for unemployment benefits rose to a seasonally adjusted 198,000 last week but were still historically low, showing that the broader labor market remains robust.

Initial jobless claims, a proxy for layoffs, increased by 7,000 to a seasonally adjusted 198,000 last week, the Labor Department said Thursday.

The level of claims fluctuated earlier this month, but broadly remains low. The four-week average of weekly claims, which smooths out volatility in the weekly numbers, ticked up by 2,000 to 198,250. Weekly claims have remained near the 2019 prepandemic average of about 220,000 for several months. (…)

Through March 24, job postings on Indeed have declined 9.5% since the last BLS Job Openings data (January). The horizontal black line is the BLS Job Openings prepandemic.

• Fewer companies are talking about labor shortages, but more firms are mentioning job cuts.

Source: @M_McDonough, @TheTerminal, Bloomberg Finance L.P.

Fed Officials See More Work on Inflation Despite Bank Strains

The comments from the three regional Fed presidents Thursday echoed remarks from Chair Jerome Powell last week that policymakers will not shrink from their responsibility to restore price stability despite banking strains.

“Inflation remains too high, and recent indicators reinforce my view that there is more work to do, to bring inflation down to the 2% target associated with price stability,” Boston Fed President Susan Collins told a conference hosted by the National Association for Business Economics in Washington. (…)

Minneapolis Fed President Neel Kashkari, who votes on policy this year, said it was premature to judge what impact the banking turmoil will have on the economy but the Fed also needs to focus on lowering inflation.

Kashkari, who was at the center of the government’s response to the 2008-2009 financial crisis, said banking stresses tend to last longer than policymakers initially expect. But he also noted that inflation was too high and that the services sector, excluding housing, has yet to slow down despite a series of aggressive interest-rate increases by the Fed over the past 12 months. (…)

“If inflation persists, we can react by raising rates further,” [Richmond Fed President] Barkin said. “It was only a few weeks ago that some were calling for a 50 basis-point increase.”

CFOs Modestly Upgrade Economic Outlook Despite Labor Market, Inflation Concerns

Financial decision-makers became slightly more optimistic about the U.S. economy and increased their expectations for real GDP growth in 2023, while citing labor availability and inflation as the most pressing concerns for their company, according to the results of The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.

The survey, which closed on March 10, found that CFO optimism about the U.S. economy was 55 on a scale of 0 to 100, modestly higher than last quarter but well below the historic average of about 60. Additionally, CFOs revised upward their expectations for real GDP growth over the next four quarters to 1.4 percent from 0.7 percent in the prior survey. Moreover, the probability respondents assigned to negative year-ahead economic growth fell from 31 percent last quarter to 19 percent this quarter. (…)

The business spending picture has deteriorated somewhat. The share of firms that decreased spending (excluding capital expenditures) in the past 3 months rose to 23 percent, an increase of 5 percentage points from last quarter’s survey and nearly twice the share of firms that had decreased spending in a survey conducted this time last year.

For capital expenditures, the share of firms planning investments has also edged lower over the past year. Among companies not planning to invest at all in the next six months, most cited ample capacity, and the share of these CFOs noting unfavorable financing conditions increased to 24 percent, up from 14 percent in Q3 2022 and 7 percent a year ago.

In a series of special questions on energy, roughly three-quarters of firms noted that their costs associated with energy usage increased since the start of 2022. Most of these firms noted that increased energy costs decreased their profitability. Only about 20 percent of respondents indicated passing the majority of their cost increases on to customers.

  

  

Revenue growth expectations for 2023 rose from 5.0% to 7.2% while price expectations declined from 5.4% to 5.2%. Not what the Fed wants.

Economy-wide total business sales grew 7.7% in Q4’22 but slowed to 5.0% in January.

S&P 500 companies grew revenues 5.8% in Q4 but analysts are forecasting +1.7% in Q1’23, -0.1% in Q2, +1.2% in Q3 and +3.9% in Q4. Recall that the S&P 500 index is heavily weighted on the goods economy.

If the wage bill actually comes in at +7.1%, goods producers and distributors will find it difficult to maintain profit margins this year.

Fed’s Emergency Loans to Banks Fall in Sign of Easing Turmoil

US institutions had a combined $152.6 billion in outstanding borrowings in the week through March 29, compared with $163.9 billion the previous week.

The latest figures suggest efforts by policymakers to stem contagion following a string of bank collapses is working, though banks are still borrowing much more than is typical during periods of low stress. (…)

Foreign central banks tapped the Fed’s Foreign and International Monetary Authorities repurchase agreement facility for $55 billion in the week through March 29, data show. That’s after it reached an all-time high of $60 billion the prior week.

South Korea Cuts Chip Production Most Since Global Financial Crisis as Demand Cools Production dropped 41.8% YoY, worsening from a 33.9% fall in January. Inventories increased by 33.5% and factory shipments fell 41.6%, adding to signs of continued weakness.

• Japan will tighten curbs on exports of chip technology following months of lobbying by the US to limit China’s access.

Eurozone Core Inflation Hits Record High The headline inflation rate fell sharply in March but policy makers worry the search for bigger profits may keep other prices rising

(…) The European Union’s statistics agency said consumer prices in the eurozone were 6.9% higher in March than a year earlier, a decline from the 8.5% rate of inflation recorded in February and the lowest in just over a year. Economists surveyed by The Wall Street Journal last week had expected to see a decline to 7.1%. (…)

The core rate of inflation however, which excludes volatile food and energy prices, rose to 5.7% from 5.6%, reaching the highest level since records began in 2001. (…)

Some ECB rate setters are now also looking at the inflationary potential of widening profit margins, with one official warning of a “profit-price spiral.”

“Opportunistic behavior by firms could also delay the fall in core inflation,” said Fabio Panetta last week.

ECB President Christine Lagarde has echoed that concern, saying that a refusal on the part of business owners—not just workers—to accept a decline in their real incomes could entrench high inflation. (…)

Eurozone wages rose at an annual pace of 5.1% during the last quarter of 2022, the fastest rise since records began in 1996, with the exception of the second quarter of 2021, which was boosted by one-off pandemic-related effects.

Encouraged by an unemployment rate that fell back to a record low of 6.6% in February, some workers seeking larger pay rises have resorted to strikes. In one of Germany’s biggest walkouts in decades, a large-scale transport strike brought large parts of the country to a standstill on Monday as two labor unions sought raises of 10.5% and 12% respectively. (…)

China’s Consumers Extend Economic Rebound A gauge of activity in China’s services sector reached its highest level in more than a decade in March, a sign that Chinese consumers are heading back to stores and restaurants following the end of strict Covid-19 controls.

(…) China’s official purchasing managers index for nonmanufacturing sectors, which include services and construction, rose in March to 58.2 from 56.3 in February, its highest level since May 2011. A subindex focused just on the services sector reached 56.9, its highest level since March 2012.

China’s PMI for the manufacturing sector declined to 51.9 in March from 52.6 in February, according to figures published Friday by China’s National Bureau of Statistics. Still, the index remained comfortably above the 50 mark that separates an expansion from contraction, and beat the 51.3 forecast made by economists polled by The Wall Street Journal. (…)

Still, for many economists, a range of indicators suggest keeping up the current momentum won’t be straightforward. Chinese families continue to sock away savings and are rushing to repay mortgage loans. Households’ bank deposits are climbing, rising by 6.2 trillion yuan, the equivalent of $903 billion, in January alone, a new monthly record.

Private businesses appear reluctant to hire and invest, reflecting the scars of Covid-19 and regulatory clampdowns on sectors including tech and education. During the first two months of the year, private investment in machinery, buildings and other fixed assets grew by only 0.8% from a year earlier, much weaker than the 5.5% growth in overall fixed-asset investment. (…)

BofA Says Investors Poured $508 Billion Into Cash This Quarter

(…) More than $100 billion have flocked into money-market funds in the past two weeks alone, they said. (…) Assets in US money-market funds have now reached a record $5.2 trillion, according to data from the Investment Company Institute, with more than $300 billion of that added in the three weeks to March 29.

• 2nd wave of deposit outflows on it’s way Barclays: “We expect flows into money market funds to grow by several hundred billion dollars…we are in a midst of a two-stage shift…the second stage is emerging now…” (The Market Ear)

Barclays

Citigroup sees global profits shrinking 5% in aftermath of banking turmoil

Citigroup equity strategists flagged a likely 5% contraction in global profits this year as turmoil in the banking sector raises the risk of a recession. (…) The ongoing confidence crisis could limit banks’ risk appetite and reduce the flow of credit, they warned, downgrading the global financial sector to “neutral.” (…)

• Jim Bianco:

Narrative building that the banking crisis is now over because the S&P 500 has just about retraced all its losses. Someone tell the bank stocks as they are unable to rally …

… and someone tell the other 492 stocks in the S&P 500 as they are collectively down on the year. Eight stocks are keeping the YTD gains in the S&P 500 positive.

Will history rhyme again?

David Rosenberg reminds us:

1. On April 2nd, 2007, New Century Financial was shuttered. The mantra was that this was a one-off “idiosyncratic” event, much like you hear today, and the S&P 500 bounced back 1% the day after and by 6% right through June 20th, 2007
2. Two Bear Stearns hedge funds failed on June 20th, 2007.
3. The Fed cut rates 50 basis points on September 18th, 2007 and the S&P 500 soared 3% that day and tacked on another 3% to the October 9th highs.
4. Bear Stearns fail on March 16th, 2008 and the Fed, over a weekend, orchestrated a shotgun JP Morgan takeover that triggered an immediate 4.2% surge in the stock market.
5. September 6, 2008: Fannie and Freddie are placed in conservatorship — and bang! Investors immediately bid up the S&P 500 by 2% in response.Always the treatment, never the malady that required the triage.
6. October 3, 2008: TARP 1 was passed and the Pavlov Dog market jumped +5.4% in one day!
7. The U.S. government announce an additional $250 billion capital purchase program on October 8th — as investors waded through the details, they ended up taking the market up nearly 12% from October 9th to October 13th.

As Warren Buffett famously said, “what we learn from history is that people don’t learn from history.”

Recall that in 2008-09, inflation was not a factor so the Fed was free to cut rates, which it started to do in September 2007.

Equity valuations were quite reasonable until Bear Stearns failed in March 2008 (#4). The S&P 500 had lost 12% from its June 2007 high.

Valuations per the Rule of 20 peaked in August 2008 at 21.7x (19.2x on conventional P/E). The S&P lost another 50% after. Currently, the R20 P/ is 23.1 while the conventional P/E is 17.6. Inflation is 5.5% and the Fed wished it could be friendlier.