Good Life Advisors – Talking Points – Week 16
It was a fairly uneventful week of trading despite a number of moving pieces. Markets were fairly resilient amid another slight rise in yields, with the 2Y back near 4.20% and 10Y near 3.60%. The volatility index also fell to the lowest levels since Nov-21 this week. The Federal Reserve and rates remain the key downside risk, with officials this week continuing to message tighter-for-longer policy given persistent inflation, little ongoing impact from last month’s bank turmoil, and data including Friday’s flash PMI that showed resilient labor market trends and a reacceleration of prices. The hawkish Fed dynamic also puts increased scrutiny on the divergence between the market and Fed on pivot expectations, while other pieces to the bearish narrative include bond market recession signaling, elevated bond market volatility, downside earnings risk, a looming liquidity headwind, and a pickup in debt ceiling concerns.
However, there were some bullish narratives, including easing bank stresses, tight corporate bond spreads, easing financial conditions, and a potential Fed pause. FactSet’s latest Earnings Insight also showed an improvement in the blended earnings decline for Q1, up 0.5pp w/w to -6.2%, while JPMorgan analysts said they maintain a tactically bullish view as the consensus bearish view has pushed earnings expectations to such a low bar, while consumer resilience removes imminent recession overhang.
This week’s batch of economic data offered mixed signals. Friday’s Markit flash manufacturing PMI rose into expansion territory for the first time in six months, while services PMI was the best in a year. However, prices in both rose at the fastest pace since 2H-22. The April Empire Manufacturing Index posted a surprise expansion for the first positive print after four-straight negative prints and highest since July. However, the April Philadelphia Fed manufacturing index missed, falling to the lowest since May-20, though prices paid/received hit the lowest levels since mid-2020. Thursday’s initial claims report came in above consensus, while Deutsche Bank analysts noted it was a fourth-straight weekly miss, the longest streak since July. Continuing claims were also highest since Nov-21. Economists broadly noted that the latest economic data report on the net helped support the Fed’s higher-for-longer stance, though market pricing around the Fed rate path was little changed w/w, with a ~90% chance of a 25 bp hike at the 3-May FOMC meeting and a year-end median fed funds rate of ~4.66%.
The coming week is big with data and key earnings. Monday is the Dallas Fed Index; Tuesday, we see Consumer Confidence, New Home Sales, and Richmond Fed Index; Wednesday is Durable Goods; Thursday is the 1st estimate of Q1 GDP, pending home sales; and Friday is PCE, which we all know by now is the Fed’s preferred inflation gauge. It will be an important week for big tech earnings, notably Alphabet, Microsoft, META, and AMZN. The focus will include AI updates, cloud momentum, and ad sales. While the group has significantly outperformed the broader market YTD, valuations across the FANMAGs have become very rich, with some of the best-case outcomes already priced into shares.
The major US averages were slightly lower last week as the S&P changed by less than 1% for a third-straight week, the longest streak since Aug-21. Underperformers included mega-cap tech, media and entertainment, telecom, industrial metals, chemicals, oilfield services, and E&Ps. Banks were little changed for the week with some mixed regionals earnings takeaways. Cyclicals were mixed with autos, semis, and machinery weaker, but transports, building materials, electricals/multis, and credit cards were better. Outperformers included defensives and flight-to-safety groups like grocers, food and beverage, discount retailers, HPC, bond proxy REITs and utilities, hospitals, and medical devices. Homebuilders also saw solid gains on the latest economic reports and key earnings takeaways. Treasuries were a bit weaker with a touch of curve flattening. The dollar index was up 0.2%. Gold finished the week down 1.3%, below $2K/oz. Bitcoin futures were down 10.4%, ending the week near $27K. WTI crude was down 5.6% after four-straight weekly gains.
Foreign Exchange Market
The Baker Hughes rig count was up by 5 this week. There are 748 oil and gas rigs operating in the US – Up 53 over last year.
Weekly Unemployment Claims – Released Thursday 4/20/2023 – The week ending April 15th observed an increase of 5k in initial claims increasing to 245k. The four-week moving average of initial jobless claims was down by 500 to 239.75.
March Jobs Report – BLS Summary – Released 4/7/2023 – The US Economy added 236k nonfarm jobs in March and the Unemployment rate was little changed at 3.5%. Average hourly earnings increased 9 cents to $33.18. Hiring highlights include +72k Leisure and Hospitality, +65k Education and Health Services, +47 Government, and +39k Professional and Business Services.
- Average hourly earnings increased 9 cents/0.3% to $33.18.
- U3 unemployment rate was little changed at 3.5%. U6 unemployment rate decreased 0.1% to 6.7%.
- The labor force participation rate was little changed at 62.6%.
- Average work week decreased by 0.1 to 34.4 hours.
Job Openings & Labor Turnover Survey JOLTS – Released 4/4/2023 – The number of job openings decreased to 9.9 million on the last business day of February, the U.S. Bureau of Labor Statistics reported. Over the month, the number of hires and total separations changed little at 6.2 million and 5.8 million, respectively. Within separations, quits (4.0 million) increased, and layoffs and discharges (1.5 million) decreased.
Employment Cost Index – Released 1/31/2023 – Compensation costs for civilian workers increased 1.0% for the 3-month period ending in December 2022. The 12-month period ending on December 2022 saw compensation costs increase by 5.1%. The 12-month period ending December 2021 increased 4.0%. Wages and salaries increased 5.1 percent over the year and increased 4.5 percent for the 12-month period ending in December 2021. Benefit costs increased 4.9 percent over the year and increased 2.8 percent for the 12-month period ending in December 2021. This report is published quarterly.
This Week’s Economic Data
Links take you to the data source
Existing Home Sales – Released 4/20/2023 – Existing home sales decreased in March. Sales decreased 2.4% to a seasonally adjusted rate of 4.44 million in March. Sales decreased 22.0% year-over-year. Housing inventory sits at 980k units. Up 1.0% over February. Up 5.4% over last year. Unsold inventory sits at a 2.6-month supply. The median existing home price for all housing types was $375,700 which is down 0.9% from March 2022.
Housing Starts – Released 4/18/2023 – New home starts in March were at a seasonally adjusted annual rate of 1.420 million; down 0.8% below February, and 17.2% below last March’s rate. Building Permits were at a seasonally adjusted annual rate of 1.413 million, down 8.8% compared to February, and down 24.8% over last year.
Recent Economic Date
Links take you to the data source
Industrial Production and Capacity Utilization – Released 4/14/2023 – In March, Industrial production increased 0.4%. Manufacturing decreased 0.5%. Utilities output increased 8.4%. Mining output declined 0.5%. Total industrial production was 0.5% higher in March than a year ago. Total capacity utilization increased in March to 79.8% which is 0.1% above its long-run average.
Retail Sales – Released 4/14/2023 – U.S. retail sales for March decreased 1.0% to $691.7 billion but retail sales are 2.9% above March 2022. U.S. retail sales for the January 2022 through March 2023 period were up 5.4% from the same period a year ago.
Producer Price Index – Released 4/13/2023 – The PPI for final demand decreased 0.5 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported. Final demand prices were unchanged in February and increased 0.4 percent in January. On an unadjusted basis, the index for final demand increased 2.7 percent year over year.
Consumer Price Index – Released 4/12/2023 – Consumer prices increased 0.1% m/m in March, following a 0.4% increase in February. Consumer prices are up 5.0% for the 12-month period ending in March. Core consumer prices increased 0.4% m/m in March.
Consumer Credit – Released 4/7/2023 – In February, consumer credit increased at a seasonally adjusted annual rate of 3.8 percent. Revolving credit increased at an annual rate of 5.0 percent, while nonrevolving credit increased at an annual rate of 3.4 percent.
U.S. Trade Balance – Released 4/5/2023 – The U.S. monthly international trade deficit increased in February 2023, according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $68.7 billion in January (revised) to $70.5 billion in February. February exports were $251.2 billion, $6.9 billion less than January exports. February imports were $321.7 billion, $5.0 billion less than January imports. Year-to-date, the goods and services deficit decreased $35.5 billion, or 20.3 percent, from the same period in 2022. Exports increased $49.5 billion or 10.8 percent. Imports increased $14.0 billion or 2.2 percent.
PMI Non-Manufacturing Index – Released 4/5/2023 – Economic activity remained in expansionary territory in March. The Services PMI® registered 51.2 percent, 3.9 percentage points lower than February. In February, the Services PMI® registered 55.1 percent.
PMI Manufacturing Index – Released 4/3/2023 – The March Manufacturing PMI® registered 46.3 percent, 1.4 percentage point lower than the 47.7 percent recorded in February. Regarding the overall economy, this figure indicates four months of contraction following 30 months of expansion. The New Orders Index remained in contraction territory at 44.3 percent, 2.7 percentage points lower than the 47.0 percent recorded in February. The production index increased 0.5 percentage points to 47.8.
U.S. Construction Spending – Released 4/3/2023 – Construction spending during February 2023 was estimated at a seasonally adjusted annual rate of $1,844.4 billion, 0.1 percent below the revised January estimate of $1,845.4 billion. The February figure is 5.2 percent above the February 2022 estimate of $1,753.1 billion.
US Light Vehicle Sales – Released 3/31/2023 – U.S. light vehicle sales were at a seasonally adjusted annual rate (SAAR) of 14.896 million units in February.
Chicago PMI – Released 3/31/2023 – Chicago PMI remained in contraction territory but increased in March to 43.8 points up from 43.6 points in February. This marks seven months in contractionary territory.
Personal Income – Released 3/31/2023 – Personal income increased $72.9 billion, or 0.3 percent in February. Disposable Personal Income increased $89.9 billion or 0.5 percent. Personal Consumption Expenditure increased $27.9 billion or 10.2 percent.
Third Estimate of 4th Quarter 2022 GDP – Released 3/30/2023 – Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the fourth quarter of 2022 according to the third estimate released by the Bureau of Economic Analysis, following an increase of 3.2 percent in the third quarter of 2022. The second estimate saw real GDP increase 2.7% and the advance estimate saw real GDP increase by 2.9%. The GDP estimate released today is based on source data that are more complete than the advance and second estimate. The increase in real GDP reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and exports. Imports, which are a subtraction in the calculation of GDP, decreased. The revision primarily reflected downward revisions to exports and consumer spending. Imports, which are a subtraction in the calculation of GDP, were revised down.
Consumer Confidence – Released 3/28/2023 – The Conference Board Consumer Confidence Index® increased in March. The Index now stands at 104.2 (1985=100), up from 103.4 in February.
Durable Goods – Released 3/24/2023 – New orders for manufactured durable goods in February decreased $2.6 billion or 1.0% to $268.4 billion. Transportation equipment led the decrease down $2.6 billion or 2.8% to $89.4 billion.
New Residential Sales – Released 3/23/2023 – Sales of new single-family homes increased 1.1% to 640k, seasonally adjusted, in February. The median sales price of new homes sold in February was $438,200 with an average sales price of $498,700. At the end of February, the seasonally adjusted estimate of new homes for sale was 436k. This represents a supply of 8.2 months at the current sales rate.
Next week we get data on New Residential Sales, Durable Goods, Consumer Confidence, the Advance Estimate of 1st Quarter 2023 GDP, Personal Income, Chicago PMI, and the Employment Cost Index.