THE DAILY EDGE: 17 October 2023

Note: I am travelling this month. Posting will be sporadic and shorter due to limited time and equipment.

CONSUMER WATCH

Amazon Prime Day Flashes Warning for Retailers Lower sales for rivals suggest consumers are skittish heading into the holiday season.

(…) Amazon brought in an estimated $144.53 in average spending per customer for the retailer, amounting to a 2% increase from last year’s tally, according to Facteus. But for other retailers running competing discounts this week, sales fell by an estimated 1% compared with last year, according to Salesforce.

Those are sales losses Amazon competitors can’t afford. Retailers entered the fourth quarter under a lot of pressure. A slowdown in consumer spending on nice-to-have goods has dealt a blow to top-line growth. Best Buy Co. Inc., Dollar Tree Inc. and Target Corp. all have narrowed their guidance for the rest of the year, saying inflation has put a crimp in consumers’ shopping habits.

Gap Inc.’s Old Navy brand said demand over the summer was noticeably weaker among its lower-income customers. Home-improvement rivals Lowe’s Cos. Inc. and Home Depot Inc. both saw sales declines and shoppers foregoing large DIY projects for smaller ones. Macy’s said its shoppers have become more intentional about how they use their disposable income, leading to slower sales growth. (…)

Three in five consumers who plan to shop this winter say they want to spend the least amount of money possible, according to market research firm Mintel. (…)

Restaurant spending is one of the most discretionary expenditure item. This Placer.ai chart suggests an increasingly cautious consumer:

Food inflation was +3.7% year-over-year, with food-at-home up +2.4% and away-from-home up +6.0%. The high rate of away-from-home is destroying demand, and anecdotally, we’ve seen evidence of restaurants lowering prices to try and stimulate business.

As such, we think this segment is correcting itself. Promotional rates are also picking up for packaged food, leading to some price declines (for example soup was down -2.3% month-over-month), and the companies themselves are under assault by investors for “over earning by raising prices excessively.” The category is also losing substantial share-of-stomach to private brand and fresh produce. As such, we still expect to see a bigger break in prices by early next year.

Also:

As shown in the figure below, Carmax is suffering a buyers’ strike. Unfortunately, the high prices of cars is now feeding into auto insurance (+19% year-over-year) and insurance has a similar weighting in the CPI index as used cars. And so, while the used vehicle piece of the inflation puzzle may have been solved, other downstream derivatives of vehicle prices have not. This also applies to auto repair (+15%).

• “Continued deceleration in spending indicates an increasingly cautious consumer.” (Jane Fraser, Citigroup CEO, Friday, October 13th.)

More on last week’s CPI from Ed Yardeni:

The problematic number, however, is the Powell “supercore” index (core services less rents and OER), which came in at +0.6% MoM (from 0.4% in August) with the year-over-year number at 3.8% (from 4.0% in August). Adjusting to match the weightings in the PCE index (the Fed’s official target), “supercore” still comes in at 0.5% MoM.

The Fed pays close attention to “supercore” as a signal of “stickiness” in core service prices as an indication of labor market tightness. Chairman Powell uses the index to mark the Fed’s progress on squeezing out the final leg of disinflation toward target. So a spike in the index to a 12-month high and a virtual stall in the year-over-year number will be taken seriously by the Committee.

Outside of “supercore,” shelter was the other big sticking point, rising 0.6% MoM (from 0.3% MoM in August) and 7.2% YoY (down from 7.3% YoY in August, and the sixth straight decline). Here we have confidence that the CPI methodology is simply slow to capture underlying adjustments, but its heavy weight of rents in the index (~35% of headline, ~44% of core) is impeding overall normalization.

Leading indicators point convincingly to a sustained deflation in rental costs. The Zillow observed rent index is at 0.1% MoM and averaged 0.0% in Q3. The Apartment List median rental paid measure has been negative in annual terms for the whole of Q3.

The U.S. apartment vacancy rate is at 6.4%, back to pre-COVID-19 levels. And the surge in multifamily construction means the market is set to loosen further. Replacing rent and OER with the Apartment List data would bring the headline to 1.0% and core to 1.9%.

Group thinking at its best. Maybe they will all prove right but …

• the BLS methodology may be “slow to capture underlying adjustments” but the last 2 months are not what everybody is expecting, is it?

• The so-called “leading indicators” cover new leases, less that 10% of all leases.
• The 6.4% vacancy rate was for Q1. It’s now 6.3% and still historically very low, while housing affordability is 35% below normal, assuming one finds an available house.

Business Inflation Expectations Remain Relatively Unchanged at 2.4 Percent

Firms’ inflation expectations for the coming year were relatively unchanged at 2.4 percent. Sales levels and profit margins compared to “normal times” decreased, according to the Atlanta Fed’s latest Business Inflation Expectations survey.

The Atlanta Fed also asked:

• How do your current sales levels compare with sales levels during what you consider to be “normal” times?

• By roughly what percent are your firm’s unit sales levels above/below “normal,” if at all?

• How do your current profit margins compare with “normal” times?

Bank of Canada’s Tiff Macklem says surging bond yields may not be a substitute for further rate hikes

(…) “To the extent that financial conditions are tighter, that is something that we would take into account in our own monetary policy decisions,” Mr. Macklem said.

But he added that “to the extent that higher long-term rates reflect expectations of future monetary policy, they’re not a substitute for doing what needs to be done to get inflation to come back to our target.” (…)

“We’re not really seeing downward momentum in underlying inflation and that is a concern,” Mr. Macklem said. He noted that on a three-month moving basis, core inflation measures have been stuck in the 3.5-per-cent to 4-per-cent range for the past six or eight months. Statistics Canada will publish September inflation numbers on Tuesday.

Because interest-rate changes work with a lag, the Bank of Canada doesn’t set monetary policy based on today’s inflation. It tries to forecast where price pressures will be in the future, based on various economic telltales. Right now, Mr. Macklem and his team are focused on four: the speed of economic growth compared with the economy’s potential, inflation expectations, labour costs and corporate price-setting behaviour.

On the first metric, which central bankers call “excess demand,” things are generally moving in the right direction. Canada’s gross domestic product contracted slightly in the second quarter, and economic activity flatlined through July.

But the other metrics aren’t co-operating as much. Short-term inflation expectations remain high, companies continue raise prices more frequently than normal and wage growth is running at between 4 and 5 per cent. “Unless we get a big pickup in productivity growth, that’s not consistent with our 2-per-cent inflation target,” Mr. Macklem said. (…)

China’s Economy Remains Shaky After Challenging Summer Consumer prices are flirting with deflation again, as the country’s exports and imports continue to fall

(…) On Friday, official data from China’s National Bureau of Statistics showed consumer inflation staying flat in September compared with a year earlier, after inching up 0.1% in year-over-year terms in August. (…)

A gauge of core inflation, which strips out volatile energy and food prices, held at a six-month high of 0.8% in September.

Prices charged by manufacturers fell 2.5% in September from a year earlier, easing from August’s year-over-year decline of 3%. The difference was partly attributable to higher crude oil prices, Goldman Sachs economists wrote. Unlike consumer prices, factory-gate deflation has persisted for nearly a year as Chinese demand for metals, chemicals and energy has been undercut by the continuing real-estate downturn.

Monthly trade figures released on Friday, meanwhile, offered some evidence that China’s economy may be starting to bottom out.

Outbound goods shipments from China to the rest of the world fell by 6.2% in September from a year earlier, narrowing from the 8.8% contraction in August, according to data from China’s customs bureau. Imports also dropped 6.2% year-over-year in September, less than August’s 7.5% decline. (…)

The International Monetary Fund this week lowered its forecast for Chinese growth this year and next to 5% and 4.2%, respectively, from earlier predictions in July of 5.2% and 4.4% growth. The cut in expectations for China also prompted the IMF to lower its global growth forecast to 2.9% for 2024, from 3%. (…)

EARNINGS WATCH

32 companies in the S&P 500 Index have reported earnings for Q3 2023. Of these companies, 87.5% reported earnings above analyst expectations and 9.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting earnings that are 11.0% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 4.8%.

Of these companies, 62.5% reported revenue above analyst expectations and 37.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 69% of companies beat the estimates and 31% missed estimates.

In aggregate, companies are reporting revenues that are 1.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.9%.

The estimated earnings growth rate for the S&P 500 for 23Q3 is 2.2%. If the energy sector is excluded, the growth rate improves to 7.2%.

The estimated earnings growth rate for the S&P 500 for 23Q4 is 10.6%. If the energy sector is excluded, the growth rate improves to 14.0%.

The estimated revenue growth rate for the S&P 500 for 23Q3 is 1.0%. If the energy sector is excluded, the growth rate improves to 3.4%.

• Kicking off earnings season, three of Wall Street’s biggest banks—Chase, Wells Fargo and Citi—notched a record third-quarter haul. Combined, profit soared 34% to $22.5 billion, bolstered in part by net interest income. The banks also issued a slew of warnings on everything from higher capital requirements and rising loan losses to the fallout from war.

VALUATION MATTERS

• The Worst Bond Bear Market in History
  

Source: A Wealth of Common Sense

• Stocks vs Bonds — Relative Value:  Not just price, (and this one by the way is looking at total returns for stocks and *treasuries* on the black line) value is also looking stretched. Stocks are the most expensive vs bonds since the dot com bubble. You would need a repeat of dot-com for stocks to get more expensive vs bonds from here. But not only are stocks (S&P500 — larger caps, and especially tech) expensive vs bonds, they’re also expensive vs history, and meanwhile bonds are outright cheap. (Callum Thomas)

Source:  Chart of the Week – Stocks vs Bonds Topdown Charts