Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 16 FEBRUARY 2022

ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES, JANUARY 2022

Advance estimates of U.S. retail and food services sales for January 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $649.8 billion, an increase of 3.8 percent (±0.5 percent) from the previous month, and 13.0 percent (±0.9 percent) above January 2021. Total sales for the November 2021 through January 2022 period were up 16.1 percent (±0.7 percent) from the same period a year ago. The November 2021 to December 2021 percent change was revised from down 1.9 percent (±0.5 percent) to down 2.5 percent (±0.3 percent).

Retail trade sales were up 4.4 percent (±0.4 percent) from December 2021, and up 11.4 percent (±0.7 percent) above last year. Gasoline stations were up 33.4 percent (±1.8 percent) from January 2021, while food services and drinking places were up 27.0 percent (±4.4 percent) from last year.

Supplier Prices Jumped Last Month as U.S. Inflation Surged Latest figures seen as reinforcing case for the Fed to raise rates at March policy meeting

The Labor Department on Tuesday said the producer-price index, which generally reflects supply conditions in the economy, rose a seasonally adjusted 1% in January from the prior month, the sharpest rise since May 2021 and a pickup from December’s revised 0.4% rise. (…)

Producer prices rose 9.7% on a 12-month basis, nearly the same as the prior month. Stripping out pandemic-driven data distortions still showed that inflation was unusually elevated. Producer prices jumped at a 5.6% annualized rate from the same month two years ago, the fastest pace since records began in 2012 and well above the pre-pandemic peak of 2.9% in October 2018. (…)

Goods prices leapt 1.3% in January from the previous month, up from a 0.1% decline in December. Much of that was driven by a sharp increase in the prices of foods and energy. However, core goods still climbed 0.8% last month, accelerating from 0.4% in December. (…)

Energy prices rose 2.5% in January from December, pulled up by sharp increases in liquefied petroleum gas and diesel fuel. Residential electric power and natural gas ticked up just 0.5%. The price index for motor vehicles and equipment climbed 0.7%.

Prices for services rose 0.7% last month, holding at the same pace as in December. This was driven in part by a jump in prices for hospital outpatient care, portfolio management, legal services and traveler accommodation. Vehicle wholesalers and clothes retailers also raised prices. Prices for passenger transport and physician care fell. (…)

Haver Analytics phrased it differently but rather smartly: “Pricing power at the wholesale level strengthened last month.” Given that expectations were for a rather high 0.5% increase in the January PPI, a 1.0% jump means the inflation pipeline must be bulging.

fredgraph - 2022-02-16T060204.763

An optimistic eye would say that PPI inflation is cresting on a YoY basis. But Haver’s table below suggests continued strong pressures. Core Final Demand PPI is up 8.7% a.r. in the last 3 months while Core Goods PPI is up 8.2% a.r.. Services PPI, up 5.3% in 2021 and 7.7% in January 2022 is up 9.5% a.r. in the last 3 months.

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If the Fed is lucky, these cost increases will not fully find their ways into consumer prices, but that would mean that corporate officers and their investors will not be so lucky…

This is the first time since 2008 that PPI inflation substantially exceeds CPI inflation. The pressure on corporate margins is significant, right when demand seems to be waning. Quarterly S&P 500 revenues grew 17.5% on average in 2021, helping offset accelerating costs. Analysts currently expect quarterly revenues to grow 7.8% on average in 2022. PPI inflation reached 9.7% YoY in January and 9.5% annualized in the last 3 months.

Profits don’t grow out of thin air.

It happens that the NY Fed yesterday released its Empire State Manufacturing survey conducted February 2-9.

Manufacturing activity was little changed in New York State for a second consecutive month according to the February survey. After falling to around zero last month, the general business conditions index edged up four points to 3.1 [expectations was 12.0]. Thirty-four percent of respondents reported that conditions had improved over the month, while 30 percent reported that conditions had worsened.

But new orders were a very low 1.4 in February, from -5.0 in January and +27.1 in December while inventories kept rising.

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The prices paid index was little changed at 76.6, while the prices received index rose a steep seventeen points to a record high of 54.1, signaling ongoing substantial
increases in both input prices and selling prices. The index of expected business conditions in six months eased to 28.2 in February from 35.1 in January. It had been as high as 52.0 in October.

Another survey says:

The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council declined for the third consecutive quarter in Q1 2022. The measure now stands at 57, down from 65 in Q4 2021. While still in positive territory, the Measure is now down 25 points from the all-time high of 82 recorded in Q2 2021. (A reading above 50 points reflects more positive than negative responses.)

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(…) only one-third of CEOs now report current economic conditions are better than six months ago—down dramatically from over 60 percent in Q4 2021. Expectations for future conditions also softened, though 50 percent of CEOs still expect the economy to improve over the next six months—roughly double the proportion expecting conditions to worsen.” (…)

Notably, nearly 3 out of 4 do not expect projected interest-rate increases from the Federal Reserve to quickly tame rising prices in the months ahead.

“CEOs are preparing for supply constraints and wage inflation to persist well into this year and potentially beyond,” said Roger W. Ferguson, Jr., Vice Chairman of The Business Council and Trustee of The Conference Board. “While interest-rate hikes should help dampen inflation, few are expecting prices to stabilize rapidly. As a result, a vast majority of CEOs still foresee a need to pass along rising costs to consumers over the next 12 months.” (…)

  • 40% of CEOs reported that conditions in their industries were better compared to six months ago, down from 58%.
  • 22% said conditions in their own industries were worse, up from 18%.
  • 58% of CEOs expected conditions in their own industry to improve over the next six months, down from 61%.
  • 13% expected conditions to worsen, up from 8%.
  • 85% of CEOs expect to increase wages by 3% or more over the next year, up from 79% in Q4.
  • 48% of CEOs expect to increase their capital budgets in the year ahead, down from 57% in Q4.

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Mug Heineken chief warns cost inflation is ‘off the charts’

Heineken NV warned it’s facing the worst inflation in a decade and said consumers may cut back on beer, threatening the industry’s recovery from the pandemic. (…)

Heineken delayed updating its guidance for 2023 until later in the year amid the increased uncertainty about economic growth and inflation. It’s the latest consumer goods company to warn of the impact of rising prices. Earlier this month, Danish rival Carlsberg A/S set a bearish tone for the industry, saying it’s possible that earnings might not grow this year. (…)

Chief Financial Officer Harold van den Broek said the company aims to raise prices for its beer by “courageous” amounts across the world to offset soaring expenses related to aluminum, which has risen 50% from January 2021, barley, which has doubled in cost, and freight from China to the U.S., which has “been going absolutely crazy.” (…)

CEO van den Brink said the brewer isn’t seeing consumers trading down to cheaper brands. (…)

Heineken said it’s continuing to target a 17% operating margin in 2023, though signaled that may become more difficult.

Chinese inflation data also shows a growing corporate squeeze:

  • The producer-price index rose 9.1% YoY in January, down from December’s 10.3%.
  • The Consumer Price Index edged up by 0.9%, compared with 1.5% in December. Core consumer inflation rose 1.2% in January, unchanged from December.

Consumer and producer price rises both moderate

The mid-terms are coming!:

The Fed Missed Inflation. Can Jay Powell Tame It Without Causing a Recession? Chairman engineered an economic rescue but now has tricky task of cooling prices without hampering growth

(…) “We’re pretty far behind the curve. That’s not where we wanted to be,” said Eric Rosengren, who as president of the Boston Fed until last September had a hand in designing those policies. (..)

No Fed chairman since Paul Volcker in the early 1980s has had to grapple with inflation this high. (…) Historically, the Fed hasn’t been able to push down inflation without a recession. (…)

Fed officials warn they can’t provide that same predictability this time. For markets “it could be a bumpy time,” said Esther George, president of the Kansas City Fed. (…)

“Ambiguity has its uses, but mostly in noncooperative games like poker,” Mr. Bernanke told colleagues in 2003, according to transcripts of a Fed policy meeting that year. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.” (…)

If Mr. Powell and his colleagues deliver such a move [+50 points], they could be criticized for panicking. If he opts for the smaller increase, he could be criticized for not taking inflation seriously enough. (…)

Mr. Rosengren said the prospect of a soft landing for the economy has diminished over the past six months because of more persistent supply shocks and workers winning higher wages to offset higher prices.

Rapidly raising rates to address the inflation problem increases the risks of a recession, he said. “If you’re raising rates rapidly, you don’t have time to see how the rate increases you’ve already done have slowed down the economy,” he said. (…)

LIQUIDITY MATTERS!

John Authers:

(…) Rather than attempt to follow every twist and turn of the geopolitical drama, or all the excitement in Washington, it might be best to focus on the most vital commodity market — liquidity.

Mike Howell of Crossborder Capital Ltd. in London is the doyen of liquidity analysts. By his measure, the liquidity created by central banks has stopped growing and is now in a significant decline. It is the second derivative of the change in the speed with which liquidity is flowing that has the greatest impact on markets:

As he shows, provision of liquidity and the creation of wealth through higher asset prices are intimately connected over time. Falling liquidity, while obviously necessary now that the emergency has passed and inflation is rising, could well signal problems ahead:

(…) Over time, Howell shows in this chart that a flatter yield curve tends to be followed quite swiftly by rising credit spreads. While there is no great issue with solvency at present, this suggests that credit may already be causing problems by the end of this year: (…)

The latest BofA Fund Manager Survey reveals that managers have increased their own liquidity in recent months…

…selling a lot of tech stocks:unnamed - 2022-02-16T072219.642

Will the retail mob challenge them?

The rare case of a dual pullback in stock and bond total returns

(…) This sell-everything mentality has created an unusual situation where both stocks and bonds are losing ground simultaneously. (…)

Investors have endured a dual pullback only a handful of times in the past 46 years.

These dual pullbacks were a good sign that whatever macro concerns were driving the selling was mostly overdone. The S&P did suffer some losses in the months ahead, especially in 2008 as the final bout of panic hit markets. But over the next year, there was only a single small loss, which was quickly and dramatically reversed.

The Risk/Reward Table shows that except for 2008, the “risk” side of the equation was relatively limited, while “reward” was especially impressive after a year and beyond.

It’s been mostly a tailwind for the bond market over the past 40+ years, so it’s not a big surprise that the total return on the Bloomberg U.S. Bond Aggregate was mouth-watering. From 9 months and beyond, the Bloomberg Aggregate showed gains every time, well above random returns. (…)

Nato says Russian troop numbers still rising near Ukraine border ‘We have not seen any de-escalation,’ says Stoltenberg despite Moscow insisting it is withdrawing forces
Confused smile He Was Going to Win Olympic Gold. Then He Skied the Wrong Way.

Apparently, Yogi Berra, giving Joe Garagiola directions to his house, once said “When you come to a fork in the road, take it.”

Norway’s Jarl Magnus Riiber, “probably going to go down as the best Nordic combined skier ever”, seems to know:

As he entered the first of four 2.5-kilometer loops of the unfamiliar course, Riiber came to a fork. To the left was the cross-country circuit. To the right was the path to the finish line. Riiber, who hadn’t had a chance to practice on the Olympic track, sped toward the snow-covered lanes separated only by some low cones and a small sign. He picked the lane on the right.

He picked wrong. (…)

It would have gone down as a once-in-a-lifetime error for a star of his caliber except for one tiny detail: Riiber has done this before.

Back in 2016, an 18-year-old Riiber was racing at a World Cup in Lahti, Finland and already showing signs that he could dominate the sport. He’d owned the jumping portion, just as he would in Beijing, and flown out to an early lead in the cross-country race. But once he hit the stadium, the directionally challenged Nordic combined legend took a wrong turn and never had a chance to correct his mistake. (…)

THE DAILY EDGE: 15 FEBRUARY 2022: Prescient Consumers?

U.S. Inflation Outlook Falls for First Time Since October 2020 U.S. consumers don’t expect red-hot inflation levels to last in the long term.

(…) The authors drew in part from the January consumer survey from Federal Reserve Bank of New York, which showed that the median one-year-ahead inflation expectations fell for the first time since October 2020, to 5.8%. The outlook over three years dropped even more sharply, and the decline was broad-based across age, education and income.

Combined with data from the University of Michigan’s sentiment index, this indicates that consumers seem to recognize the unusual nature of the current bout of high inflation, the economists said in the blog post Monday. (…)

In their analysis, Williams and his five co-authors found that medium-term expectations have exhibited lower sensitivity to inflation surprises during the pandemic than before it. They also found that the five-year inflation outlook has remained “remarkably stable” since last summer.

Taken together, this suggests that consumers “do not view the current elevated inflation as very long-lasting,” they wrote.

All products and services surveyed by the New York Fed declined in January, including the year-ahead price changes for food, rent, gas, medical care, college education and gold. The survey also showed that the median households is expecting one-year-ahead earnings growth to rise by 3%, the same as last month. Last year, an average gain of 2.6% was expected.

The median three-year ahead inflation expectations decreased by 0.5 percentage point to 3.5%. (…)

The New York Fed President John Williams was a co-author of this analysis which will surely find its way to the next FOMC meeting, reassuring the doves, surely happy and secured seeing how the prescient American consumer shares their disinflationary views.

I suppose this next chart will not get inserted in the presentation package, however. Even though it reveals how non-economist Americans arrive at their three-year forecasts for “food, rent, gas, medical care, college education and gold” simply watching how prices fluctuate at their corner gas station.

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More interesting from the survey, however, were these findings:

  • The median expected growth in household income fell by 0.1 percentage point to 3.3% in January, but remains above its trailing 12-month average of 2.9%.
  • Median year-ahead household spending growth expectations remained unchanged at 5.5%, substantially above its pre-pandemic level.

Since the median one-year-ahead inflation expectations from the survey is 5.8%, Americans seem willing to dip into their savings just to keep pace with inflation. They might be helped by lower gas prices but I bet they can’t forecast that.

CEOs are probably better placed to see what’s ahead: The WSJ tallies corporate conf. calls. CEOs trying to protect profit margins and stock valuations.

What CEOs Are Saying: ‘We See Inflation Going Up Everywhere’

  • “We do have a view that we have to have brands that earn the right to take pricing, and secondly, we very much are not looking to just pass through in price, but to do it intelligently because whilst it’s easy to respond to inflation by putting up the prices, there is clearly, as there is broad-based inflation, going to be a squeeze on real incomes in a number of countries.” (Feb. 10) (Coca-Cola)
  • “We see inflation going up everywhere. We have the brands, and we have again the capabilities to price. That’s what we’re doing in the majority of the markets…I’m a bit more cautious on emerging markets. I want to see a few more months to understand how the consumer is kind of absorbing all these high costs in multiple parts of their budget, household budget. But we’re feeling good about how our consumers are staying loyal to our brands in spite of some of our pricing decisions.” (Feb. 10) PepsiCo)
  • We do have the pricing coming into play, but it still remains a challenging environment, we think, in 2022.” (Feb. 7) (Hasbro)
  • “We have seen a lot of inflation…Labor costs have been up 20%, cattle costs are up—have been—they’re up 22%. Grain has been up 29%. This year in freight, I mentioned earlier, is up 32%. We’re not asking customers or the consumer ultimately to pay for our inefficiencies. We’re asking them to pay for inflation.” (Feb. 7) (Tyson Foods)
  • “You should think about the pricing pass-through as inflation or cost recovery mechanisms. Our primary driver for growth is new account wins, new customers and increasing participation. So we’re not trying to build margin by pricing pass-through. We’re trying to recover our costs.” (Feb. 8) (Aramark)
  • So we are expecting double-digit inflation in 2022, and the bulk of it is market-driven…We’re seeing inflation in ingredients and packaging, oil, corn, wheat, and on the packaging side, cans, cartons. So we’re seeing broad-based inflation across our ingredients.” (Feb. 10) (Kellogg)
  • “We plan that raw material inflation stays where it’s at for the full year. So that’s an assumption that we have in our planning. So again, we’ve got to continue to get the price to cover the logistics and any other raw inflation that we see.” (Feb. 8) (DuPont)
  • “We feel confident that we’re going to be able to offset raw material costs with price/mix. The real challenge in terms of 2022 earnings is going to be addressing inflation in other costs, so nonmaterial costs. And, obviously, we think price and mix can help with that. (Goodyear)
  • “We also do the analytical side of things where after we take pricing, we really do analyze what happens to transactions, and the good news is, we have so much data now with our loyalty database that we’re able to understand…any behavioral impacts from what we’re seeing, and we see very little resistance there.” (Feb. 8) (Chipotle) (…)

Miami, Tampa Post Largest Jump in Rents as Sun Belt Prices Soar

Among the 50 largest metropolitan areas, Tampa ranked No. 1 with a 27% surge in rent in the 12 months through January, according to the Zillow Observed Rent Index. Rents also rose 27% in the Miami area, while they were up 26% in No. 3 Phoenix, the data show.

The other metros in the top 10 include Austin, Texas; Las Vegas and two other Florida cities: Jacksonville and Orlando. (…)

According to LinkedIn data, Sun Belt cities such as Nashville, Tennessee; Austin and Tampa are among the largest per-capita recipients of net job migration. Miami didn’t make LinkedIn’s top 10 overall, but it has proved a popular destination for the emerging crypto economy, and has attracted some high-profile new finance and tech firms. (…)

FIBER: Industrial Commodity Price Strength Continues

The improvement in factory sector activity has given life to industrial commodity prices. The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) strengthened 1.2% during the four weeks ended February 11 and increased 17.6% during the last year. The level of the price index stands at a record high for the series which dates back to January 1985. (…)

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  • Cass Inferred Freight Rates rose 3.0% m/m on a seasonally adjusted basis in January, to a new record. The freight rates accelerated to a 35% y/y increase in January from 33% in December.Cass Freight Index Rates January 2022
  • Inflation is growing on the farm. American farmers are paying significantly higher prices for herbicides, seed, fertilizer, equipment repairs and seasonal labor, eroding some of 2021’s windfall from rising crop prices. Higher farm costs could help further push up grocery bills in 2022, analysts say, following a year in which global food prices rose to decade highs.
EARNINGS WATCH

Roughly half of the 153 S&P 500 companies providing FY1 guidance this quarter guided below consensus. The median stock providing below-consensus guidance underperformed by 199 bps during the day following guidance, compared with 187 bps of outperformance for the median stock guiding more than 5% above consensus. (…)

At the sector level, Energy 2022 EPS estimates have experienced the largest positive revisions during the reporting season, while Industrials estimates have been cut most. In aggregate, the bottom-up consensus S&P 500 2022 EPS estimate has been lifted by just +0.6% despite 4Q results coming in 5% above expectations. (Goldman Sachs)

Goldman Sees a Big Change Coming to the Bond Market And it could be bad news for stocks.

(…) In one view, low yields are an ominous signal for future economic growth. In another, they reflect a change in the market’s ownership, with a greater proportion of U.S. government debt locked up by the Fed or by price-insensitive banks in general.
Whatever the reason, you can see just how ‘resilient’ yields have been in the below chart from Goldman Sachs Group Inc. economists led by Jan Hatzius.

They note that in 2021, the average move in the benchmark 10-year U.S. Treasury security has been just 24% of its long-term average, citing the standard-deviation measure during data surprises. In other words, bond yields haven’t been reacting very much to big shifts in U.S. economic data. (…)

relates to Goldman Sees a Big Change Coming to the Bond Market

“These lower-than-warranted sensitivities may be one reason financial conditions haven’t tightened very much in response to this year’s inflation and policy surprises.”

But they argue, that could all be about to change.

The bond market’s sensitivity to growth surprises should increase as we move into an era of higher inflation and interest rates, they say. That would eventually feed into financial conditions and potentially impact growth. “We see scope for increased data sensitivity that could in turn catalyze additional Financial Conditions Index tightening — particularly if inflation remains stronger-than-expected or if growth concerns return,” they write. (…)

It’s worth noting here that last week’s higher-than-expected inflation numbers already kicked off some big moves in bond yields, with the 10-year rising above 2% for the first time since 2019 and the two-year jumping more than 20 basis points in its biggest intraday move since 2009. (…)

Per Goldman:

“Some risk assets appear to be “having their cake and eating it too”: discounting a benign economic environment but not the funds rate adjustments needed to arrive there. After all, if some of the flatter yield curve reflects rising growth risks, then equities should embed a larger risk premium—and a lower expected value of earnings. Our equity strategists have lowered their price targets, and our credit strategists continue to forecast rising risk premia.”

Per J.P. Morgan:

“We believe risky asset markets have mostly adjusted to monetary policy shifts by now,” the JPMorgan analysts wrote in a note to clients Monday. “Short-term rates markets have likely moved too far vs. what CBs will ultimately deliver in hikes this year.” (…)

Kolanovic and his colleagues are steadfast equity bulls who favor cheap, economically sensitive stocks. Last month, the team urged investors to buy beaten-down stocks such as small caps after those companies priced in an economic recession — spurred by a Fed hawkish policy mistake — that’s unlikely to come true. (…)

Chinese Developers’ Sales Tumble in January Real-estate firms struggle to rekindle interest, despite Beijing’s recent attempts to ease restrictions

January contracted sales reports released in recent days by more than a dozen Chinese developers showed year-over-year declines ranging from about 10% to more than 80% for some companies. They also reflected price reductions by industry heavyweights such as Country Garden Holdings Co. Ltd. and Sunac China Holdings Ltd.

In all, total contracted sales of the country’s 100 largest developers saw a year-over-year drop of nearly 40% in January, according to earlier data from Chinese data provider CRIC. (…)

Financially weaker developers such as China Aoyuan Group Ltd. , Modern Land (China) Co. Ltd. and Fantasia Holdings Group Co. Ltd. suffered a sales drop of more than 70% last month compared with a year ago, according to their stock-exchange filings. Meanwhile, some stronger developers also didn’t manage to escape the slowdown in sales. Sales of China Vanke Co. Ltd. fell more than 50% to the equivalent of $5.6 billion. (…)

Land purchases by private developers have also slowed sharply, as their borrowing has been sharply curtailed. “The main source of internal funding for developers is still sales proceeds,” Mr. Tsang added. (…)

Buyers are currently hesitant to buy houses from developers with funding uncertainties. Meanwhile, many also have reservations about the real-estate market as a whole since Beijing is seemingly determined to try to slow down price increases, Mr. Macgregor said. (…)

China’s Approval of Pfizer Pill Opens Door to Ending Covid Zero

China’s surprise decision to clear Pfizer Inc.’s coronavirus pill for use offers rare insight into how Beijing may be planning to move beyond the Covid Zero strategy that’s leaving it increasingly isolated.

Paxlovid’s conditional approval over the weekend makes it the first foreign pharmaceutical product China has endorsed for Covid-19, with the country until now sticking steadfastly to domestically developed vaccines and therapeutics, even withholding approval for the highly potent mRNA shot co-produced by Pfizer and BioNTech SE. (…)