CPI Day: Economists are expecting a 0.3% MoM increase in headline, and a 0.3% increase in core. On a YoY basis, the expectations are for a 7.3% and 6.1% increase respectively.

(Bloomberg Economics)

Americans Cut Back on Spending With Inflation Hitting Holidays

(…) About 60% of respondents said they plan to buy fewer gifts and to purchase gifts for fewer people. A similar percentage are cutting back on holiday travel.

Meanwhile, more than one-third have decided to skip gift-giving altogether due to the costs. (…)

Among those still planning to buy presents, 70% are using debit cards or cash to fund their purchases, while 60% are using credit cards, 29% are dipping into their savings accounts and 22% are turning to buy now, pay later services.

BTW, the latest Gallup poll says that the average household is seen spending $867 on gifts, down from the $932 prediction at the end of October. This is actually lower than the levels prevailing in the comparable pre-COVID-19 period in 2019.

BTW #2: Quotes from a Goldman Sachs’ Conference last week, courtesy of The Transcript:

• When we look at our own consumer spend information and we talk to the companies that we bank, there are some that are doing quite well, and there are some that are struggling more — Net-net-net, the growth is shrinking that we’ve seen in card, albeit there’s still growth. Debit card spend is about flat with transactions being down a little bit, offset by inflation” – Wells Fargo (WFC ) CEO Charles Scharf
• “We are seeing sales growth moderate. So, card sales were up 14% in September. That slowed to 11% in October and then now 9% for November, but still pretty robust. In terms of the holiday spending, a bit early to get a — we saw retail sales for that Thanksgiving week and Black Friday, up 3%. And again, hard to know whether that’s timing. We’ll see how the rest of the season plays out.” – Discover Financial Services (DFS ) CEO Roger Hochschild
• So the consumers are still spending more money this right now than they did last year at this time, and they’re spending more money this quarter than they did last quarter, but the rate of growth is slowing.” – Bank of America (BAC ) CEO Brian Moynihan
• “It’s a hurricane. Right now, it’s kind of sunny, things are doing fine, and everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way. We just don’t know if it’s a minor one or Superstorm Sandy or Andrew or something like that. You better brace yourself. What I said about a hurricane, I said those storm clouds could mitigate. It could be a hurricane. We simply don’t know. As a risk manager, I prepare for both, but I’m not guessing which one’s going to happen.” – JPMorgan Chase (JPM ) CEO Jamie Dimon
• (…) the current market is challenging. And we’re in it every day, and we see it, and that challenge is both on the linear side and on the digital side, again, no surprise as probably what you heard yesterday.” – Paramount Global (PARA ) CEO Robert Bakish
• “I think we’ve seen material or real weakening of that across the month of November. And like anything, it’s — like it’s been, since May, different trends across different sectors. But you saw real softness and pullbacks across CPG, some pharma, a few other sort of discretional ad budgets where both on the premium side — well, let’s start with the premium side. They’re not — they’re just pulling back on campaigns or not executing. So you have a slowdown there” – IAC/InterActiveCorp (IAC ) CFO Christopher P. Halpin Executive
• “The industry downturn is continuing and continues to be pretty severe — Our goal is that we quickly get to a point where the demand growth is ahead of supply growth so that the significant amount of — inventory starts to normalize..The sooner [inventories] start to normalize the better it will be because the current trajectory is for these inventories to continue to increase. Changing the trajectory of these inventories is a hugely important focus item for us. In order to address that, we are significantly reducing our capital investment in the short term” – Micron (MU ) EVPP & Chief Business Officer Sumit Sadana
• “Our estimation is that inventory digestion that’s been going on with our customers, probably doesn’t finish at the end of this year, it continues into next year. That, coupled with macro headwinds in basically every geography out there. Didn’t give us a ton of confidence that there would be some reason for us to be better than seasonal.” – Intel (INTC ) CFO David Zinsner

NFIB: Inflation Pressures Ease Slightly on Main Street but Remains the Top Business Problem The Small Business Optimism Index rose 0.6 points in November to 91.9. November’s reading is the 11th consecutive month below the 49-year average of 98.

• The net percent of owners raising average selling prices increased one point to a net 51% seasonally adjusted, a high reading but lower than earlier this year.
  Unadjusted, 8 percent (unchanged) reported lower average selling prices and 56 percent (unchanged) reported higher average prices.

• The net percent of owners who expect real sales to be higher improved five points from October to a net negative 8%, a weak economic reading.

• Layoffs & Hiring Freezes Surge: 15% of SMB Employers Reduce Staff (Up 7%) & 74% Halt Hiring (up 12%)

The percentage of small business employers now laying off staffers has nearly doubled in one month’s time, going from 8% in November to 15% in December.

Beyond that, nearly three out of four small business employers (74%) say they can’t afford to hire anyone now, and don’t expect to hire again until at least Q2 2023. That finding is up 12 percentage points over last month’s number: 62%. (…)

the rates of hiring freezes and layoffs are the same among Canadian small business employers as they are in the U.S. right now — 74% and 15%, respectively. 

This chart shows how similar these trends are across North America. Many businesses are scaling back hiring based on economic conditions. (…)

• Only 11% of retailers said Q4 2022 has helped them rebound or has otherwise reflected a major increase in revenue.
• By year’s end, 40% said they expect Q4 2022 will yield less revenue than they generated this time last year. One percent of that group has already decided to shut down for good. 
• Another 9% predict Q4 might also be the “end of the line for them,” as they contemplate closing their business.
• Finally, the remaining 40% say sales have been “disappointing,” but they’re still hoping for a last-minute surge in revenue before December 31st.

(Alignable is the largest online referral network for small businesses with 7.5 million+ members across North America.)

FYI: There are over 32 million small businesses in the U.S., generating 44% of economic activity, according to the Small Business Administration. (Axios)

China Postpones Key Economic Policy Meeting Due to Covid Spike China is delaying a closely watched economic policy meeting due to start this week after Covid infections surged in Beijing, according to people familiar with the matter.

(…) Signs are now emerging that the virus is spreading rapidly, including in Beijing where there are long lines at hospitals and growing shortage of medication to treat fevers. Beijing’s fever clinics reported 22,000 visits on Sunday, 16 times greater than the previous week, state broadcaster CCTV reported Monday, citing Li Ang, a spokesperson from the municipal health commission. (…)

• China Braces for ‘Massive’ Covid Outbreak on Faster Reopening
• Covid Rips Through China Trading Desks, Banks Prep Backup Plans Half of the currency traders at one Chinese bank in Beijing were off sick as of yesterday, one of the people said.

Bonds Cheap, Stocks Not

This is from Topdown Charts’ Callum Thomas:

(…) I chose this chart for this edition because it’s interesting to reflect on where this chart sat this time last year. Back then, both stocks and bonds were about 2 standard deviations expensive. And I think this line is uncanny, how I just nonchalantly stated:

It would be nearly unthinkable that both stocks and bonds could fall at the same time to the extent required to drive both of those valuation indicators back to their mean. But a heavy dose of inflation and or/policy tightening could be one thing to do that.

(…) as things sit here and now, the odds are firmly in favor of bonds vs stocks, just from a valuation standpoint. But when you factor in the macro backdrop where next year likely features a global recession — that’s a situation where stocks likely suffer, and bonds outperform.

So a very interesting chart in how it prepared us for this year, but also for its implications headed into next year…

Investors Are Losing Faith in Cathie Wood’s ARK Innovation The ETF founder is seeing a drop in large holdings such as Tesla and Zoom

Investors who bought the dip in Cathie Wood‘s ARK Innovation ARKK exchange-traded fund have been punished this year. Some finally appear to be losing their conviction.

Shares of the fund, a pandemic-era favorite largely made up of unprofitable, growth-oriented technology companies, are down 63% this year. While the S&P 500 index has rallied 12% since mid-October to cut its 2022 losses to 16%, Ms. Wood’s flagship fund is hovering near a five-year low.

Investors heeding a “buy the dip” rallying cry poured money into the fund in each of the first five months of the year—a net $1.89 billion—as markets tumbled. Since then, their enthusiasm has waned. They pulled money in three of the next six months, or a net $76.5 million, according to FactSet. On Nov. 30 alone, they yanked $146 million, which was among the largest single-day outflows of the year. (…)

Since Jan. 1, the number of accounts holding the fund is down 8%, Webull Chief Executive Anthony Denier said. By mid-November, the total had fallen to the lowest level of the year.

“The big change started happening in July,” Mr. Denier said. “It’s been steadily declining.” (…)

ARKK could see another hit come in the coming weeks, Mr. Denier said, if savvy individual investors target their holdings for what is known as tax-loss harvesting—selling losing positions before year-end to realize losses and write them off as a tax loss. (…)

• Crypto exchange Binance temporarily halts withdrawals of the stablecoin USDC. (CNBC)

WeWork’s Once Robust Cash Reserves Have Dwindled, Raising Chances of Default Recession fears and tech-industry job cuts are lowering demand for co-working desks. Meanwhile, money-losing companies such as WeWork are hurt by higher interest rates.

Moderna’s mRNA Cancer Vaccine Shows Promise in Preliminary Study The shot combined with a Merck immunotherapy reduced the risk of relapse in people with skin cancer in a study, Moderna said.

Europe Strikes Deal to Tax Imports Based on Greenhouse-Gas Emissions The European Union agreed to impose a tax on imports based on the greenhouse gases emitted to make them, inserting climate-change regulation for the first time into the rules of global trade.

(…) The plan aims to protect European manufacturers from competitors in countries that haven’t regulated carbon-dioxide emissions. It would also use the bloc’s economic heft to push countries to set a price on carbon—either through a tax or other means such as a cap-and-trade system; manufacturers from those countries would benefit from a deduction of that cost from the tax when their goods arrive at Europe’s borders. (…)

The tax would apply first to some of Europe’s most-energy intensive industries: aluminum, steel, fertilizers, cement, some chemicals and hydrogen production, which is expected to grow quickly in the coming years. It would come into effect in October 2023, first just as a requirement to report the greenhouse-gas emissions associated with imports. (…)

U.S. Supplier Price Increases Moderated in November Producer-price index rose 7.4% last month from year earlier, down from 11.7% peak in March and 8.1% in October

On a monthly basis, the PPI increased 0.3% in November, the same as the prior two months. That was slightly above the average monthly gain in the two years before the pandemic and well below month-to-month gains in the first six months of 2022. Economists polled by The Wall Street Journal had estimated a 0.2% November increase. (…)

Food prices surged by 3.3% in November from the prior month, offsetting a similar drop for energy prices related to lower gasoline prices. (…)

The core PPI—which excludes often-volatile food, energy and supplier margin categories—rose 4.9% in November from a year ago, down from 5.4% in October. On a monthly basis, core PPI rose 0.3% in November from the prior month, up from 0.2% in October.

On a core, core basis, PPI-Final demand less foods, energy, and trade rose 0.3% in November and has been rising at a steady 3.0% annualized rate since June.

PPI-Final demand for services was up 0.4%, an acceleration from 0.1% and 0.2% in the previous two months. Services prices are strongly influenced by wages and energy costs. The energy component is partly reflected in PPI-transportation and warehousing services which have declined in 4 of the past 5 months (-6.0% a.r.), leaving PPI-Final demand services less trade, transportation, and warehousing up 0.4% in November and +4.9% a.r. in the last 4 months vs +2.7% YoY.

(Haver Analytics)

I suspect Mr. Powell might use this San Fran Fed chart at this week’s FOMC to convince the doves that “demand-driven inflation” remains problematic.

He will certainly flag the 0.6% jump (+7.3% a.r.) in hourly earnings in November (0.7%, 8.5% a.r., for production and nonsupervisory workers), a sharp acceleration from +4.5% (4.9%) a.r. during the previous 3 months.

The doves will then cite Goldman Sachs which to explain the nasty surprise blames the data and argues that “the strong AHE print was an outlier that will unwind before too long” mainly because “the response rate to the November establishment survey was unusually low at just 49%”.

Perhaps Mr. Powell will have done what Axios did: ask the BLS about it.

We asked the Bureau of Labor Statistics about it, and they say that the window for responses ranges between 10 and 16 days, and this month was at the low end of that range.
Moreover, that window collided with Thanksgiving, and “the timing of holidays near the end of a collection period can negatively impact collection rates,” BLS economist Hyun Choi tells Axios in an e-mail.

Does the low response rate make the numbers less reliable? “Our research does not show a correlation between low collection rates and revisions,” Choi said. The low response rate is “more curiosity than signal,” JPMorgan Chase economist Daniel Silver said in a research note.

StoneX’s brilliant Vincent Deluard sides with Powell:

Predicting the change in monthly inflation is almost impossible, but I would guess that December’s release will come higher than expected. The Cleveland Fed inflation Nowcast is significantly above the consensus estimate for CPI (7.3%) and core CPI (6%). The preliminary report on productivity and costs also supports my stagflationary view: nonfarm business sector labor productivity decreased 1.4 % year-over-year in the third quarter, the first instance of three consecutive declines in this measure since 1982. If productivity keeps dropping, even a slowing economy will not ease wage pressures as it takes more workers to produce the same output.

Last but not least, consumption should be supported by a historical 8.7% Cost-of-Living Adjustment for social security beneficiaries. The COLA will go into effect with December 2022 benefits and will be credited on about 60 million checks going out in January 2023.

Economists generally do not believe that 70s-style wage/price spirals are possible due to the de-unionization of the US labor force, but there are a lot more social security beneficiaries today than there were union members in the 70s.

Retirees get an 8.7% benefit increase, average hourly earnings are growing by 5-6%, the gig economy is soaring, credit balances are rising fast from historically low level, checking accounts are still flush with the savings accumulated during COVID, and bank credit is growing by double digit: the 2022 consumption boom continue in 2023.

The Fed’s real pivot will not be to cut rates because consumption is weak, but it will be to accept that 4-5% inflation rate is a small price to pay for a long-postponed pay raise for blue-collar workers and give Millennials and GenZ-ers a chance to buy homes and start families.

Inflation is the solution to Western countries’ debt and generational crisis.

Deluard’s point on the gig economy (“instead of discouraging consumers, higher prices incentivize workers to take a second job in the booming gig economy”) is interesting and could get support from the fact that income tax receipts have been rising 20-30% since Q2’21 while personal income growth was in the 4-5% range. The widening gap occurred after inflation spiked in 2021.

But it may also be due to high capital gains taxes for retail investors since household employment (red, which would normally tally multiple jobs) has recently been weaker than establishment employment. If so, personal income tax receipt will soon decline abruptly (see below).

• Workers Have High Hopes for Pay Hikes Next Year. Perhaps Too High Employees have been able to call the shots for a while in a tight labor market, but that’s starting to change as layoffs mount, uncertainty spreads and firms adjust their salary budgets for next year

(…) One thing that’s clear is the gap between the raises that workers expect for next year — 5.5%, according to Gartner — and what companies have budgeted for, typically between 3.5% and 4.5%. (…)

Americans are growing more pessimistic about the labor market. The share of job seekers who expect there to be fewer jobs available six months from now recently surpassed those who expect there to be more, according to a survey from ZipRecruiter. (…)

The quits rate, a measure of voluntary job leavers as a share of total employment, dropped to 2.6% in October, the lowest since May 2021. [Though still above the pre-pandemic level of 2.3-2.4%] (…)

Who’s too high? Workers who got 8.1% raises switching jobs last month or management seeking pre-pandemic wage increases when inflation has tripled, the employment gap remains very large and corporate profits are 40% higher vs wages up 14%?

Retail Traders Lose $350 Billion in Brutal Year for Taking Risks

The average active amateur investor’s portfolio is down about 30% in 2022, according to data compiled by Vanda Research, which studies self-directed retail traders globally. By contrast, the S&P 500 Index has lost 17%. (…)

“The losses this year were unprecedented, especially for the younger generation of investors,” said Giacomo Pierantoni, the head of data at Vanda in Singapore. Whether they keep plowing money into the market — buying the dip, as they say — or lose faith in investing and give up altogether could help determine their ability to retire in the coming decades.

Another sharp selloff for Tesla, which accounts for about 10% of the average self-directed global retail trader’s portfolio, or Apple Inc. could determine sentiment, according to Pierantoni. (…)

JPMorgan Chase & Co. is even more pessimistic about the performance of retail traders, estimating they suffered losses of 38% this year.

For individuals who also dabbled in the cryptocurrency market or digital assets like non-fungible tokens, the losses are likely even uglier. Bitcoin is down 64% this year, while the Bloomberg Galaxy Crypto Index, a basket of different tokens, has erased two-thirds of its value. (…)

US Household Net Worth Falls for Third-Straight Quarter on Stock Retreat

Household net worth decreased $392 billion in the July-September period, or 0.3%, after falling a record $6.3 trillion in the second quarter, a Federal Reserve report showed Friday.

The value of equity holdings dropped $1.9 trillion and the value of real estate held by households rose by about $820 billion. (…)

The Fed’s report also showed household checkable deposits, or the money Americans have in checking, savings and money market accounts, continue to rise. (…)

Still, Americans have been leaning on credit cards and dipping into savings to keep spending.

Consumer credit not including mortgages rose at a 7% annual rate in the third quarter. (…)

Amid all the talk about the excess cash, a pretty large number of Americans saw fit to boos their credit card balances in 2022

More than half (53%) of all active credit card accounts carried a balance in the second quarter of 2022, the most recent quarter for which we have data. It was 60% in Q1’19.

Delinquency rates remain historically low…for large banks (black) but smaller banks, accounting for 28% of revolving cc debt, are already deep in the red.

Smaller banks’ lending standards have obviously loosened in the last 10 years (their market share was 21% in 2012). So far in 2022, large banks grew their cc loans 15.8% but smaller banks grew theirs 22%.

Note that, in the last recession, delinquency rates at large banks exceeded that at the smaller banks. The big banks seem to have learned something, something that the smaller banks are about to learn…. Pity their card holders, however.

BTW: “Interesting that FHA mortgage delinquency rates are rising this quickly without widespread job losses.” (@RickPalaciosJr)

• Rate Buydowns Help Buyers Purchase New Homes

In early December, 75% of nationally surveyed home builders confirmed they are buying down buyers’ mortgage rates to make payments more affordable. Our survey indicates 32% of builders are buying down the full 30-year term and another 30% of builders are temporarily reducing the rate for the first two years of the mortgage. The remaining 13% of builders identified other less common buydowns. Builders pay these costs up front, effectively reducing monthly payments by prepaying for some of the buyers’ interest on the loan. (…)

Incentives have become a necessity in today’s new home sales environment and are helping preserve builders’ backlogs as confirmed by builders in our surveys:

• “Everyone is requiring incentives, including price reductions, rate buydowns, closing costs, etc.” (Riverside-San Bernardino, CA)
• “Rate buydowns and/or rate lock promotions are working best. Sales are still slow; however, cancellation rates have decreased.” (Colorado Springs, CO)
• “100% of backlog is being offered some kind of rate buydown that is comparable to new sales.” (San Antonio, TX)

(…) The dollar amount the builder pays for the buydown varies wildly by loan amount, the buyer’s down payment, type of loan, and the term of the buydown, ranging from a low of roughly $6K to as high as $48K.

EARNINGS WATCH

The Q3’22 earnings season is over and it was not quite as good as many believe:

• 71% of companies beat expectations but the 4.4% actual increase nonetheless only matched the Oct. 1st forecast (+4.5%).
• That is even though revenue growth of 11.7% was better than the +9.7% expected.
• Six of the 11 sectors underwhelmed, four beat and one was in line. The 141% jump in Energy earnings saved the quarter.
• Ex-E, S&P 500 EPS declined 3.4% after -2.1% in Q2.
• Q4 estimates call S&P 500 earnings down -0.7%, a big downgrade from +5.8% expected on Oct.1. Q1 and Q2’23: +2.1% and +0.5% vs +7.4% and +5.3% expected 6 weeks ago.
• Ex-Energy, however, we may be in for 2 more negative quarters: -5.5% in Q4 and -0.1% in Q1’23. That would be 4 consecutive down quarters.

Trailing EPS are now $222.41. Full year 2022: $220.40e. 12-m forward EPS: $224.78. Full year 2023: $231.14e.

Liquidity Tides: As things stand, the global liquidity headwinds remain considerable, but intriguingly do appear to be at least initially incrementally turning the corner… (but let’s not get too far ahead ourselves just yet) (Callum Thomas)

@steve_donze

China’s Top Medical Adviser Says Omicron’s Risks Same as Flu

(…) The death rate from omicron is around 0.1%, similar to the common flu, and the infection rarely reaches the lungs, Zhong Nanshan was quoted in an interview with state news agency Xinhua. Most people recover from the variant within seven to 10 days, he said.

Zhong’s comments follow the government’s latest line on the coronavirus, which talks down the disease’s dangers as China moves toward exiting its Covid Zero policy. (…)

There’s an “urgent need” to increase booster-shot rates as travel during upcoming holidays will raise the risk of a large-scale spread, Zhong was quoted as saying on Saturday.

“It’s unlikely people will stay put for the 2023 Lunar New Year holiday so I advise those who will travel home to get booster shots so that even if they are infected, symptoms will be mild,” he said.

The Lunar New Year holiday runs from Jan. 21 to Jan. 27 but usually lasts about 40 days as people take off before and after the official break. Hundreds of millions of Chinese return to their home provinces for family reunifications during New Year.

China issued a plan on Sunday to enhance capacity of county-level medical facilities to better protect people living in rural areas from Covid. It requested such hospitals to boost their intensive care unit capacity by the end of December. Medical staffers from pediatrics and other units need to receive training on how to look after patients in ICU, according to the plan. (…)

• Beijing Approves mRNA Vaccines for German Nationals in China Beijing will grant German nationals living in China access to mRNA vaccines produced by the European country, according to the foreign ministry. The move was expected after German Chancellor Olaf Scholz said last month that China will make BioNTech SE’s Covid-19 vaccine available to foreigners living in the country.

China Suspends Alcohol Imports From Taiwan as Tensions Mount China also halted imports of some other beverages, including Uni-President Enterprises Corp. products, according to Taiwan’s Next Apple News website.

(…) Beijing has scaled back purchases of Taiwanese products as it seeks to punish the island’s democratically elected government for increasing ties with the US and its allies. While food made up a tiny fraction of Taiwan’s more than $328 billion of two-way trade with China last year, it’s one area where Beijing can find alternative sources, in contrast to semiconductors from Taiwan’s technologically advanced manufacturers.

In the wake of US House Speaker Nancy Pelosi’s visit to Taipei in August, China said it would suspend imports of some fish and fruit from the island.

US Says Scientists Make Breakthrough in Nuclear Fusion Energy The team produced more energy than consumed in a reaction for the first time.