SERVICES PMIs
Eurozone economy grows for first time since June 2022
The S&P Global Eurozone Services PMI Business Activity Index signalled a return to growth in services output during January, rising to 50.8, from 49.8 in December. Overall, this marked the first reading above the crucial 50.0 mark that separates expansion from contraction for the first time since July 2022. That said, the increase in business activity was marginal.
The increase in total activity was mainly supported by companies’ efforts to clear their backlogs of work, which fell for the third month in succession. January survey data also signalled a broad stabilisation in new business volumes, however, ending a six-month sequence of decline.
Improvements to capacities were also highlighted by continued jobs growth. Service sector employment increased in January, extending the current sequence of jobs growth to two years. The rise in workforce numbers was moderate and the fastest since last October.
There was also an improvement in the growth outlook, with confidence strengthening to an eight-month high.
On the prices front, input cost inflation eased to a 13-month low but was historically sharp overall. Despite an alleviation in cost pressures, selling charges were raised to a greater extent than in December.
China: Service sector activity rebounds as pandemic restrictions recede
The seasonally adjusted headline Business Activity Index increased from 48.0 in December to above the neutral level of 50.0 at 52.9 in January. This signalled the first expansion of Chinese service sector activity for five months, and one that was solid overall. Companies frequently linked the increase in activity levels to the rollback of pandemic measures across the country and a recovery in customer demand.
As was the case for activity, overall new business increased for the first time in five months. The modest upturn in new work was supported by higher customer numbers, particularly with the relaxation of rules around travel, but also improved foreign demand. Though mild, the increase in new export business was the joint-quickest since April 2021.
There was evidence that the pandemic did continue to impact operations, however, as staff absences due to rising COVID-19 case numbers contributed to a reduction in staffing levels. There were also reports of companies trimming their workforce numbers due to efforts to control costs. That said, the rate at which employment fell was the slowest for three months and only marginal.
A combination of rising sales and pandemic-related disruptions, most notably staff absences, drove a further increase in backlogs of work during January. Though moderate, the pace of accumulation was the fastest seen since May 2022.
The rate of input cost inflation picked up for the first time in five months in January, with firms often commenting on higher raw material, staff and fuel expenses. That said, the upturn in cost burdens remained mild overall and weaker than the series average. Average prices charged by service providers meanwhile continued to rise only slightly. While some firms looked to pass on higher operating costs to clients by raising their fees, others mentioned that pricing power was constrained by efforts to attract new business.
Nonfarm Productivity and Unit Labor Costs
- Nonfarm productivity increased in Q4 (+3.0%, qoq ar), and the year-over-year rate decreased 0.4pp to -1.5%. Unit labor costs—compensation divided by output—increased in Q4 (+1.1%, qoq ar), and the year-on-year rate decreased 0.7pp to +4.5%.
- Compensation per hour increased at an annualized 4.1% pace in Q4, and the year-on-year pace declined by 1.0pp to +3.0%. Our wage tracker now stands at +5.2% (yoy) in Q4 (vs. +5.6% in Q3). (Goldman Sachs)
This the YoY chart, looking bad:
And the QoQ chart, looking better:
Vehicles Sales Increased to 15.74 million SAAR in January Wards Auto estimates sales of 15.74 million SAAR in January 2023, up 17.6% from the December sales rate, and up 4.2% from January 2022.
- Ford Sees US Car Prices Falling 5% This Year as Rebates Rise “Through the year, particularly in the second half, you’ll start to see prices come down through higher incentives.”
US Offices Reach 50% Occupancy for First Time Since Pandemic Hit
An index of building occupancies in 10 major metro areas increased 0.9 percentage points to 50.4% in the week ended Jan. 25, according to security firm Kastle Systems. All of the cities tracked by the company — including San Francisco, Chicago and Austin, Texas — reached return-to-office levels of 40% or above, which was also a post-pandemic first.
Most of the cities tracked saw their occupancy hold steady or rise, including New York, where it increased to 47.5% for the week, and San Francisco, which rose more than two percentage points to 45.9%. Austin had the highest level, at almost 68%, while the San Jose, California, area that includes much of Silicon Valley was the lowest, at 41%. (…)
Toronto’s Housing Market Enters Deep Freeze With Sales Falling
Just 3,100 homes were sold in Canada’s largest city in January, the lowest number since April 2020, shortly after the country went into its first Covid-19 lockdown. (…)
With so little action in Toronto’s market in January, the benchmark price for a home edged down 0.2% from December to roughly C$1.08 million ($810,000), the report showed.
The benchmark price was down 14% from a year earlier.
Despite the recent pullback, buyers are still facing a much more expensive market than a few years ago, with prices 28% higher than before the pandemic. (…)
Fewer sellers put homes on the market in January, with new listings falling 3.7% from a year earlier. But inventory still piled up: 9,299 properties were for sale, more than double last year’s total.
January is often one of the slowest months for the real estate market broadly, as many people wait until spring to do deals. Even on a seasonally adjusted basis, sales were down 49% from a year ago. (…)
ECB Raises Interest Rate by Half Percentage Point
The European Central Bank on Thursday raised its key rate to 2.5%, its fifth large increase in a row, and signaled it would enact another half-point rate increase in March. That leaves the ECB some way behind the Fed, which raised rates to 4.5% to 4.75% on Wednesday, and the Bank of England, which increased rates by a half percentage point to 4% earlier Thursday. (…)
“We know that there is an element of catch-up…we know that we have ground to cover,” Ms. Lagarde said. The ECB intends to raise rates by another half percentage point in March, to 3%, and could continue to raise rates after that, she added. (…)
In contrast, the Bank of England signaled Thursday that it might soon pause increases as the U.K. economy falters. The BOE said further rate rises are possible, but only if inflation threatens to be high for longer than it currently expects it to be. (…)
EARNINGS WATCH
Apple, Other Tech Giants Pressured as Demand Cools The iPhone maker reported disappointing quarterly results that ended its three-year streak of sales and profit records, capping an earnings season in which the world’s biggest tech companies mostly struggled to shake off a broad slowdown.
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Alphabet Posts Drop in Ad Revenue Net income fell 34% to $13.6 billion in the quarter
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Amazon Warns of Slower Growth Sales at the company’s online-stores segment, which includes product sales primarily on its flagship site and digital media content, fell by 2% [marking four out of five quarters of year-over-year declines].
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Starbucks Reports Record Quarterly Revenue The coffee giant missed profit expectations and noted inflationary challenges.
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Ford Posts $1.3 Billion Quarterly Profit, Misses Full-Year Guidance Supply-chain disruptions slowed production at the car maker and caused it to miss its annual goal.
Big Tech Didn’t Quite Clear the Bar Apple, Amazon and Google results disappoint and show tough year is still ahead
Apple, Amazon.com and Google parent Alphabet Inc. all reported December quarter results Thursday afternoon that showed the effects of the weakening global economy across most of the companies’ diverse business lines. These include online advertising, cloud-computing services, e-commerce and tech gadgets such as smartphones, laptops and smartwatches. These are big businesses, totaling nearly $1.2 trillion in revenue for the three companies in 2022 [and 13.7% of the S&P 500].
That combined revenue grew by just 7% for the year compared with 28% in 2021 and 21% for the prior year. But the weakness wasn’t just on the top line. Operating margins for the three averaged a decline of 3 percentage points in 2022. Microsoft showed a similar pattern, reflected in its own December quarter results. (…)
Thursday’s results all showed weakness in key areas, none of which seem likely to turn around quickly. Apple’s iPhone revenue fell 8% year over year to about $65.8 billion, which was about 3% below Wall Street’s targets. The smartphone still accounts for more than half of the company’s business, and supply of the high-end Pro models was severely constrained by problems in China during the quarter. The company also saw significant revenue declines in the Mac and wearables businesses. As a result, Apple’s total revenue missed Wall Street’s consensus forecast by 4%, the widest such margin in at least five years, according to FactSet.
Amazon managed to beat Wall Street’s targets for revenue and operating income for the fourth quarter. But its forecasts for both lines in the March period were below expectations, while its AWS cloud business followed a similar track to Microsoft’s with a notable deceleration in growth and profits during the fourth quarter. AWS revenue of $21.4 billion missed analysts’ targets by 2%, while the segment’s operating margin of 24% was its lowest in more than five years.
Google, meanwhile, posted a rare drop in advertising revenue on a year-over-year basis, while growth in its burgeoning cloud business missed analysts’ targets. (…) The operating margin for Google’s Services segment, which reflects its ad business, was 31% for the fourth quarter—down 6 percentage points from the previous year’s fourth quarter.
All three voiced some guarded optimism for 2023 on their respective calls, but none offered a forecast for the year ahead—and Apple and Google won’t even project for the quarter now under way. (…)
Constant Currency (The Information)
If revenues are measured excluding the impact of foreign exchange changes, they don’t look quite so bad. Apple execs, for example, said on the earnings call that revenue would have grown if not for foreign exchange rates. And that lines up with the rest of big tech’s results. Take a look:
- Amazon’s revenue would have risen 12% instead of 9%.
- Alphabet’s revenue would have risen 7% rather than 1%.
- Microsoft’s revenue would have risen 7% rather than 2%.
- Meta Platforms’ revenue would have grown 2% rather than dropping 4%.
Yet, companies with international sales exposure continue to outperform as the US dollar softens. (The Daily Shot)
(…) Across markets, this looks like a classic “short squeeze” as the stocks that had taken the biggest hit have seen the biggest rebound. For one nice illustration, this chart shows the performance of S&P 500 members for the year so far, on the vertical axis, and from August’s brief high to 2022’s year-end on the horizontal axis. The biggest fallers in the last downdraft of 2022 are the biggest gainers in this rally, with Tesla Inc. in the vanguard:
(…) And indeed, if this isn’t a short squeeze it looks an awful lot like one. John Roque of 22V Research points to a series of startling successes during this rally, which have all the hallmarks of an indiscriminate liquidity-driven rally. Non-profitable tech stocks are up 17% in the last five days, he says, and 27.5% in 2023. Meanwhile, high beta momentum is also up 17% for the week, and 28% for the year to date, while the most heavily shorted stocks have done better still, up 15% in five days and 29% for the year.
It’s dangerous, as ever, to try to get in the way of a wall of liquidity. But unless that liquidity succeeds in keeping the economy afloat, the risk is that asset prices will sink.
Unbowed by losses of more than 50% in their favorite stocks last year, individual traders are storming back to stocks like Carvana Co. and crypto-related products as the market staged a rebound that added almost $2 trillion to equity values in January alone.
With professional investors mostly staying on the sidelines, the foray is boosting retail’s market presence. Trading orders from the retail army in stocks and exchange-traded funds accounted for 23% of the market’s total volume in late January, above the previous high of 22% reached during the 2021 meme mania, according to JPMorgan Chase & Co. estimates derived from public data on exchanges. (…)
Familiar retail-trading favorites, like Bed Bath & Beyond Inc., AMC Entertainment Holdings Inc., and DraftKings Inc., are once again being hyped on social media platforms. (…)
The Roundhill MEME ETF (ticker MEME), debuted in 2021, has advanced roughly 40% this year, compared with a nearly 9% gain in the S&P 500. (…)
- Call volume is acting similarly:
@danny_kirsch
- YTD performance (The Market Ear): MEME +40%, most shorted +32%, NASDAQ +16%, SPX +8%. Pain is huge as people must buy back low quality shorts.
Refinitiv
S&P 500 Large Cap Index – 13/34–Week EMA Trend (CMG Wealth)
The Unusual Crew Behind Tether, Crypto’s Pre-Eminent Stablecoin The stablecoin has become a lucrative business at center of crypto economy
Tether Holdings Ltd. operates a $68 billion stablecoin at the heart of crypto’s alternative financial universe. Far more tether trades each day than bitcoin.
Yet the company’s founders and owners are an unusual bunch with scant experience at that scale of finance. One founder was a child actor turned early crypto investor. Another founder and top shareholder practiced plastic surgery before turning to electronics importing and then crypto. One newer owner has gone deep into British politics.
A group of four men has controlled 86% of Tether Holdings, according to a cache of documents reviewed by The Wall Street Journal. (…)
The firm releases little information about itself, much like the rest of the crypto industry. It has never disclosed its ownership structure, the details of how its assets are managed and how it would prevent a wave of redemptions from toppling the cryptocurrency. When questions were raised by investors about its lending programs, it refused to disclose the borrowers or the collateral they posted. Secrecy, lack of experience and little regulation have emerged as risks for investors at other crypto companies. (…)
Tether appears to have become a lucrative investment, due largely to rising interest rates. If Tether’s nearly $68 billion asset portfolio is paying 4.5% a year, roughly what short-term Treasurys are yielding, the company is taking in about $3 billion a year. Tether coins pay no interest. (…)
ABCD…ESG!
Ariel Investments Raises $1.45 Billion for Debut Private-Equity Fund The Chicago asset manager plans to acquire or establish minority-led suppliers for major U.S. corporations
(…) The vehicle’s strategy is an unusual twist on the typical private-equity playbook of buying companies, improving them financially and reselling them. Project Black aims to buy midmarket companies that aren’t minority owned, convert them into certified minority-led businesses and position them as suppliers to large corporations. The fund will also invest in companies with Black and Latino management and work to secure contracts with big firms.
U.S. companies have in recent years pledged to increase the amount of money they spend with minority-owned vendors and suppliers, in part to help alleviate the nation’s racial wealth gap. Between the beginning of 2020 and March 2022, U.S. businesses committed to spend at least $50 billion with minority- and women-owned suppliers over the next decade, according to a report last year from consulting firm McKinsey & Co.
Those pledges have often proven difficult to carry out. A paucity of minority-owned vendors and logistics companies presents a major challenge, said Les Brun, chairman and chief executive of Ariel Alternatives, who leads Project Black.
“The problem was that diverse firms didn’t exist at a scale that could take advantage of the opportunity,” he said. (…)
US accuses China of flying spy balloon over sensitive military sites