Economy Resumes Growth but Offers Mixed Signals GDP increased 2.6% in the third quarter after declining in the first half of the year, as the trade balance boosted growth. But Americans cut spending on goods and slowed spending on services, while businesses pared investment in buildings.
(…) Trade contributed the most to the third quarter’s turnaround as the U.S. exported more oil and natural gas with the Ukraine war disrupting supplies in Europe. (…)
Economists don’t expect the third-quarter rise in exports to endure, given a stronger dollar and weakening global economy. Many point to final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, as a sign of a broader economic slowdown. That inched up at a 0.1% annual rate in the third quarter after it rose 0.5% in the second quarter and increased 2.1% in the first quarter. (…)
Axios explains that
In effect, the economic pain being wrought in order to reduce inflation is concentrated, to a remarkable degree, in a single sector.The sector contracted at a 26.4% annual rate in Q3, subtracting more from GDP than it has since 2007. Residential investment pulled more from total growth (1.37 percentage points) than consumption spending added (0.97 points). Yet residential investment is only about 4% of the total economy while personal consumption is 68%.
The 26.4% rate of contraction in the sector is nearly as bad as during the height of the pandemic (-27.4% in Q2 2020) and the global financial crisis (-33.6% in Q4 2008).
The grey and orange boxes are the most important:
Contributions to US quarterly annualised GDP growth
Source: Macrobond, ING
U.S. Durable Goods Orders Boosted by Transportation in September
Activity in the factory sector appears to be plateauing. New orders for durable goods increased 0.4% m/m (11.3% y/y) in September but this increase was more than accounted for by a 2.1% m/m increase in transportation orders. Excluding these, the remainder of durable goods orders fell 0.5% m/m (+5.1% y/y) after having been unchanged in August (revised down from a 0.3% monthly gain). Over the past three months, total orders have risen just 0.4% and excluding transportation, they have fallen 0.4%. The Action Economics Forecast Survey had looked for a 0.5% m/m increase in total orders in September. (…)
Business spending on equipment also sputtered in September. New orders for nondefense capital goods excluding aircraft fell 0.7% m/m (+7.9% y/y) in September after a downwardly revised 0.8% monthly gain in August (initially reported as +1.4%). This was the first monthly decline in seven months. An accurate coincident indicator of business spending on equipment is shipments of nondefense capital goods excluding aircraft.(…)
Quarterly orders (in nominal dollars) (blue) against PPI-Capex (red) QoQ:
Q3 looks better but the quarter ended poorly as September’s -0.74% decline completely erased August gain, particularly in real terms (-1.0% vs +0.4% MoM).
Another instance suggesting the economy hit a wall in recent weeks.
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Yesterday, Seagate Technology CEO said: “Global economic uncertainties and broad-based customer inventory corrections worsened in the latter stages of the September quarter, and these dynamics are reflected in both near-term industry demand and Seagate’s financial performance”.
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CEO Satya Nadella commented that corporate customers have moved to “optimize” their spending in response to a suddenly shaky economic outlook. During yesterday’s conference call, AMZN CFO said that cloud customers were in a cost cutting mode.
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Apple said yesterday that YoY sales growth in its December quarter will be lower than the 8% revenue increase in last quarter. BTW, “The average selling prices of the iPhone rose to $954 in the company’s June quarter, up from $783 [22%] in the 2019 September quarter, according to Consumer Intelligence Research Partners.”
Consumer expenditures for September are released at 8:30 this morning.
- Amazon’s Holiday Blues Come Early—and Hard Downbeat forecast sinks shares as both retail and cloud businesses feel pinch of slowing economy
The company’s third-quarter results included revenue that was slightly below analysts’ estimates and another sharp drop in operating income—the latter down 48% year-over-year. Adding insult to injury, growth in the company’s subscription service revenue fell into single-digit territory for the first time ever, despite the debut of its costly “Lord of the Rings” series for subscribers of its Prime streaming service.
More notably, Amazon projected revenue and operating income for the fourth quarter that was well below the consensus forecast, leading its shares to fall as much as 18% in after-hours trading.
(…) Amazon’s massive retail business, which now generates more than $350 billion in annual sales, is particularly exposed to consumers across the globe who are seeing their spending power crimped by rising inflation. And its typically strong cloud business isn’t immune either; Amazon Web Services segment revenue grew by a record-low 27% from a year earlier to about $20.5 billion in the quarter, as Chief Financial Officer Brian Olsavsky noted that the company saw a lot of its corporate customers “trying to cut back on their bills.” Archrival Microsoft also projected disappointing growth for its own cloud business, but AWS plays a more vital role in helping to offset Amazon’s thin margins on the retail side. AWS operating income rose only 11% year-over-year, well short of the 31% growth Wall Street had expected. (…)
The midpoint of Amazon’s fourth-quarter revenue forecast would represent growth of 5% year-over-year—record-low growth for a quarter that has historically accounted for nearly a third of the company’s annual revenue. Operating income is also projected to slide 42% year-over-year at the midpoint, as Amazon is still working to fully utilize an overbuild of fulfillment capacity put in place during the pandemic. (…)
The metaverse effect?
(Bespoke)
Bloomberg: “Naturally Meta’s numbers and predictions were disappointing, but its greatest problem was a sudden return by investors to the basics of cash flow and balance sheet analysis. The decline in Meta’s free cash flow drew an apology even from previously ardent backer Jim Cramer on CNBC.”
Interestingly, this is the first chart in AMZN’s presentation yesterday:
AMAZON FREE CASH FLOW
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Intel to Cut Jobs in Cost-Savings Drive The chip maker is trying to navigate a plunge in PC demand, with quarterly sales slumping 20%.
ECB Raises Rates by 0.75 Point to Highest in More Than a Decade
- ECB convinces markets it is about to turn more dovish
- ECB’s Villeroy: next ECB hikes will not necessarily be like this week’s ‘jumbo’ increase
EARNINGS WATCH
(Before yesterday’s reports) We now have 227 reports in, a 74% beat rate and a +2.5% surprise factor. These 227 companies have reported actual earnings down 2.0% on a 9.5% revenue gain.
By comparison, after 245 reports in Q2, the beat rate was 76%, the surprise factor +5.0% and those 245 companies had reported actual earnings up 4.6% on revenues up 11.3%.
Q3 earnings are now expected up 2.5% (+4.1% on October 7). Ex-Energy: -4.1% (-2.6%).
Q4 earnings are now expected up 3.1% (+5.2% on October 7). Ex-Energy: -1.1% (+1.3%), the first time Q4 ex-E are seen declining.
The FX headwind was strong during Q3.
For the first time in months, the dollar is stumbling
The U.S. dollar has been an increasing focus of investors who don’t usually pay attention to it. A surge of media articles and earnings call excuses will always help zero in investors’ attention.
After an incessant rise into October, the buck has started to oscillate and, for the first time in months, closed below its 50-day moving average. This is one of the first warning signs of a potential trend change for trend followers.
There were four times – including the last one in August – when the dollar managed to shrug off this tendency by rising and then and trigger a second signal within about six months. The table below shows its returns after these second-chance sell signals.
Every time, the dollar lost ground up to two months later. Within the next couple of months, the dollar declined at least 3.5% at some point every time, averaging more than a 6% loss.
Positioning in futures contracts is one input to the Dollar Optimism Index (Optix), which has been persistently high. The 100-day average is now above 70% for only the 3rd time since we have data. The other times, early 1997 and late 2014, preceded a long slog for the buck.
Anyone trying to use contrary analysis on the dollar has been nursing a bruised ego and brokerage account. Currencies are one of the rare markets that tend to be ruled more by forces other than sentiment. Even so, the uptrend has gone on so long that it’s being taken as a given, which is always dangerous. Now that there are nascent signs of a stumble, the risk of a long dollar position has increased substantially.
LIQUIDITY RISKS
This is from Jonathan Ruffer, Chairman, Ruffer LLP which says about itself: “Our preoccupation is with not losing money, rather than charging headlong for growth. It’s by putting safety first that we have made good money for our clients. Through boom and bust. Successfully navigating three major market corrections – the dot.com bust, global financial crisis and covid-19.” (A 27 year track record, 8.9% net annualised returns)
In the forty-five years I have been an investor, I cannot recall a more dangerous period than today. It sometimes happens that markets are about to fall sharply, and we are no stranger to navigating them – my first as a stand-alone fund manager was in 1987. But each of these falls, so far, has been partial, in that there were asset-classes which did not participate in the decline, or – as has more recently been the case – there have been insurances which had been overlooked or disdained, and offered a good risk/reward. In 1987, for instance, the real-yield on index-linked stocks approached 5% – it was hard, really, to own anything else; today, those yields are negative, meaning that you are bound to lose money in them (in real terms) if you hold them to maturity.
This chronic sense that investments are dangerous is now accompanied by an acute sense of specific danger to the markets – the rumblings of a liquidity crisis, perhaps the first in a series in the years ahead. What is liquidity? When money’s a-plenty, the question to ask is: ‘do I want to buy it?’ When there’s no money, then the question is more fundamental: ‘can I buy it?’ (…)
Over the last generation, there have been several liquidity crises, but central banks (the Federal Reserve, in practice) have always created the necessary money. This is not magic – banks, both commercial and central, create money routinely – the granting of a loan by either one of them is itself a creative act: it is, in accounting terms, merely the creation of a liability, matching the loan to a customer/counterparty, which is a corresponding asset in its books. (…)
The Federal Reserve is the ultimate source of money-creation. It has expanded its supply of money to the point where its credibility is coming into question, and so must contract it. But the Fed needs to tread carefully, and indeed it is being careful, notwithstanding its need to rein in that money because of inflationary pressures. (…) As well as battling to keep the quantity of money in check, the Fed is simultaneously straining to make sure the transmission of its interest rates to the real economy is working.
As interest rates go up, savers expect to see that paid to them – but the commercial banks aren’t passing it on. One of the big savings vehicles in the US are Money-Market Funds – roughly 90% of which only invest in government quality instruments. There aren’t enough of these bonds, so the Fed is providing interest at its desired level to these funds, and now has tied up $2.36 trillion of money-market cash, in this service to the community.
The key is that, unlike regular bank deposits, this $2.36 trillion cannot be injected into the US financial system if it’s needed. The Fed’s inflation-busting rhetoric means too, that it is shrinking its balance sheet. Commercial banks can, in theory, create money as easily and effectively as the Fed, except they, too, had whoopsies in 2008, and are now so regulated that they can’t create money in necessary size either. Indeed, their commercial imperative is to keep existing businesses supplied with liquidity, at a time when inflation is driving up the latter’s cash requirements – and, anyhow, the commercial banks make good margins on these loans, so why not divert more of their balance sheets to these activities, and away from lower-margin financial market funding activities?
We see danger ahead. Markets are still too high, and protection is expensive in an increasingly nervous world; common sense suggests one should invest conservatively, and in safe assets. In a world where people find themselves without the ability to pay commitments as they arise, forced selling drives prices.
Among risky assets like equities, one of the counter-intuitive things in a liquidity crisis is that securities perceived as safest and most liquid go down sharply, because investors are forced to sell what they can, not what they want to. We therefore regard plentiful liquidity in the portfolio as overwhelmingly attractive; it allows us to make the most of the opportunities that arise in the aftermath of a crisis. But first we have to get through the storm.
If the Philadelphia Phillies Win the World Series, Prepare for an Economic Crisis It happens every time a team from the city succeeds
(…) It started with the old Philadelphia Athletics (before they left town). Their 1929 championship preceded the stock crash and Great Depression. In 1980, the Phillies won their first World Series, and a recession raged right through 1983, when the team again got to the final round and lost. The Phils won the World Series a second time in 2008, and boom: a home-run financial crisis. (…)
Sam Stovall, chief equity strategist at investment-research firm CFRA Research in New York, notes there is a reverse correlation here. Phillies pain might mean stock gains. The markets did well, rising 14.6%, in 1964—that awful baseball year for Philadelphia when the team blew an almost-sure berth in the World Series, scarring a generation of fans. (…)