Good Life Advisors – Talking Points – Week 47
US equities rose for the week with value slightly outperforming growth. Overall, a relatively quiet Thanksgiving week with few changes to the broader narrative. Latest upside driven by factors including peak-Fed narrative after November FOMC minutes showed officials seeing a slower pace of rate hikes as appropriate (see below) given risks to overtightening, and allowing Fed time to assess impact of already-implemented tightening. Deeply depressed sentiment and positioning remain a support despite recent bounce with some noting CTA momentum has flipped positive, while Deutsche Bank among the latest to comment on bullish positioning. China offered some mixed takeaways with more policy actions by PBoC and Beijing, though Covid case numbers hit record Thursday, adding to risks around further supply chain disruptions. A number of press articles noted rising tensions around latest lockdowns and movement restrictions from both citizens and business groups. Not much new around other ongoing headwinds, including Fed-induced US growth slowdown, Fed’s raise-and-hold messaging, softening consumer demand trends, geopolitical uncertainty, and 2023 earning risks.
Consumer resilience, retail margins in focus as Black Friday kicked off peak holiday shopping season. Bloomberg noted that seasonal sales are expected to fall 1.2% y/y on an inflation-adjusted basis, which would be the first decline since 2009. Adobe also estimated that overall spending (in nominal terms) expected to rise 2.5% y/y, though down from 8.6% in 2021 and 32% in 2020. Reuters also noted that only 7% of consumers say they will spend more this year, while the biggest pullbacks likely to come from lower-income households that have been pinched by inflation and higher energy prices. However, it was also noted that consumers are willing to spend on marked down merchandise, which could hit retailer profits, though at the same time help draw down bloated inventories. (FT). Retail sales and retailer margins in focus from a Fed perspective, with Fed Vice Chair Brainard recently saying that lower retail profitability could meaningfully help reduce inflationary pressures in some consumer goods, while others including St. Louis Bullard have suggested less buoyant consumer spending could be one of the real economy impacts of the Fed’s tightening cycle (FT).
The minutes from the FOMC’s 1-2 November meeting included a general acknowledgement that inflation risks remained skewed to the upside while risks to the economic outlook are weighted to the downside. However, official also noted tentative signs that the labor market is coming into better balance and observed inflation expectations remained well anchored. The minutes also noted a high degree of uncertainty due to lagged effects of policy actions, which participants felt a slower pace of hikes would better allow them to assess progress in the fight against inflation. Several officials also argued that overtightening could raise economic risks, adding support to two-sided risk narrative. However, some officials also said that the ultimate level of rates may be higher than previously thought, in line with Chair Powell’s hawkish-leaning post-meeting press conference comments.
FOMC Minutes excerpts (direct quotes in italics):
Officials said they could soon slow the pace of hikes:
- “A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition. a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.”
Though some still advocating for higher-for-longer strategy:
- “A few other participants noted that, before slowing the pace of policy rate increases, it could be advantageous to wait until the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly.”
Upside inflation risks means policy might peak higher than previously expected:
- “With inflation remaining stubbornly high, the staff continued to view the risks to the inflation projection as skewed to the upside.”
- “Various participants noted that, with inflations showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting, their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee’s goals was somewhat higher than they had previously expected.”
Inflation expectations remain stable:
- “Participants remarked that, overall, measures of medium- and longer-term inflation expectations obtained from surveys of households and businesses as well as from financial markets quotes appeared to have remained well anchored.”
Softer growth in the near-term:
- “Although real GDP rebounded in the third quarter, recent data suggested that economic activity in the near term appeared likely to expand at a pace below its trend growth rate.”
Fed policy increasingly impacting the real economy:
- “Participants noted a softening in consumer and business spending growth, and some participants remarked that there had been a notable slowing in interest rate-sensitive sectors, particularly housing, in response to the tightening of financial conditions associated with the Committee’s policy actions.”
Global headwinds also adding to growth risks:
- “A number of participants judged that the risks regarding the outlook for economic activity were weighted tot eh downside, with various global headwinds being prominently cited. These global headwinds included a slowdown in economic activity occurring in China and the ongoing international economic implications of Russia’s war against Ukraine.”
September FOMC Statement July Fed Minutes Balance Sheet Reduction Plan Credit, Liquidity and Balance Sheet Federal Reserve Dot Plots Treasury.gov yields FOMC Policy Normalization Statement Longer- Run Goals Jan 2022
Foreign Exchange Market
The Baker Hughes rig count increased by 2 this week. There are 784 oil and gas rigs operating in the US – Up 215 over last year.
Weekly Unemployment Claims – Released Thursday 11/23/2022 – The week ending November 19th observed an increase of 17k in initial claims increased to 240k. The four-week moving average of initial jobless claims increased 5.5k to 226.75k.
October Jobs Report – BLS Summary – Released 11/4/2022 – The US Economy added 261k nonfarm jobs in October and the Unemployment rate increased 0.2% to 3.7%. Average hourly earnings increased 12 to $32.58. Hiring highlights include +79k Education and Health Services, +35k Leisure and Hospitality, and +39kk Professional and Business Services.
- Average hourly earnings increased 12 cents to $32.58.
- U3 unemployment rate remained increased 0.2% to 3.7%. U6 unemployment rate increased 0.1% to 6.8%.
- The labor force participation rate was little changed at 62.2%.
- Average work week was unchanged at 34.5 hours.
Job Openings & Labor Turnover Survey – JOLTS – Released 11/1/2022 – The US Bureau of Labor Statistics reported the number and rate of job openings increased to 10.7 million on the last business day of September. Over the month, hires declined to 6.1 million and separations declined to 5.7 million. Within separations, quits were little changed at 4.1 million. The layoffs and discharges rates declined to 1.3 million.
Employment Cost Index – Released 10/28/2022 – Compensation costs for civilian workers increased 1.2% for the 3-month period ending in September 2022. The 12-month period ending in September 2022 saw compensation costs increased by 5%. The 12-month period ending September 2021 increased 3.7%. Wages and salaries increased 5.1% over the year and increased 4.2% for the 12-month period ending in September 2021. Benefit costs increased 4.9% over the year and increased 2.5% for the 12-month period ending in September 2021. This report is published quarterly.
This Week’s Economic Data
Links take you to the data source
Durable Goods – Released 11/23/2022 – New orders for manufactured durable goods in October increased $2.8 million or 1% to $277.4 billion. Transportation equipment led the increase up $2 billion or 2.1% to $97.8 billion.
New Residential Sales – Released 11/23/2022 – Sales of new single-family homes increased 7.5% to 632k, seasonally adjusted, in October. The median sales price of new homes sold in October was $493,000 with an average sales price of $544,000. At the end of October, the seasonally adjusted estimate of new homes for sale was 470k. This represents a supply of 8.9 months at the current sales rate.
Recent Economic Date
Links take you to the data source
Existing Home Sales – Released 11/18/2022 – Existing home sales decreased in October marking nine consecutive months of declines. Sales declined 5.9% to a seasonally adjusted rate of 4.43 million in October. Sales decreased 28.4% year-over-year. Housing inventory sits at 1.22 million units. Down 0.8% from September’s inventory. Down 0.8% over last year. Unsold inventory sits at a 3.3-month supply. The median existing home price for all housing types was $379,100 which is up 6.6% from October 2021. This marks 128 consecutive months of year-over-year increases, the longest running streak on record.
Housing Starts – Released 11/17/2022 – New home starts in October were at a seasonally adjusted annual rate of 1.425 million; down 4.2% below September, and 8.8% below last October’s rate. Building Permits were at a seasonally adjusted annual rate of 1.526 million. down 2.4% compared to September, and down 10.1% over last year.
Industrial Production and Capacity Utilization – Released 11/16/2022 – In October Industrial production decreased 0.1%. Manufacturing increased 0.1%. Utilities output decreased 1.5%. Mining output decreased 0.4%. Total industrial production was 3.3% higher in October than a year ago. Total capacity utilization decreased 0.2% in October to 79.9% which is 0.3% above its long run average.
Retail Sales – Released 11/16/2022 – US retail sales for October increased 1.3% to $694.5 billion and retail sales are 8.3% above October 2021. US retail sales for the August 2022 through October 2022 period were up 8.9% from the same period a year ago.
Producer Price Index – Released 11/15/2022 – The Producer Price Index for final demand increased 0.2% in October. PPI less food and energy declined 0.1%. The change in PPI for final demand has increased 8% year-y.
Consumer Price Index – Released 11/10/2022 – Consumer prices increased less than expected rising 0.4% m/m in October following a 0.4% increase in September. Consumer prices are up 7.7% for the 12-month period ending in October. Core consumer prices increased 0.3% m/m in October.
Consumer Credit – Released 11/7/2022 – Consumer credit increased at a seasonally adjusted annual rate of 6.8% in the third quarter of 2022. Revolving credit increased at an annual rate of 12.9%, while nonrevolving credit increased at an annual rate of 4.9%. In September, consumer credit increased at an annual rate of 6.4%.
US Light Vehicle Sales – Released 11/4/2022 – US light vehicle sales were at a seasonally adjusted annual rate of 14.897 million units in October.
U.S. Trade Balance – Released 11/3/2022 – According to the US Census Bureau of Economic Analysis, the goods and services deficit increased in September by $7.6 billion to $73.3 billion. September exports were $258 billion, $2.8 billion less than August exports. September imports were $331.3 billion, $4.8 billion more than August imports. Year to date, the goods and services deficit increased $125.6 billion, or 20.2%, from the same period in 2021. Exports increased $378.1 billion or 20.2%. Imports increased $503.6 billion, or 20.2%.
PMI Non-Manufacturing Index – Released 11/3/2022 – Economic activity in the non-manufacturing sector grew in October for the 29th consecutive month. ISM Non-Manufacturing registered 54.4%, which is 2.3 percentage points below the September reading of 56.7%.
PMI Manufacturing Index – Released 11/1/2022 – October PMI declined 0.7% registering 50.2%. The New Orders Index remained in contractionary territory at 49.2% up 2.1%. The Production Index registered 52.3%, up 1.7%.
U.S. Construction Spending – Released 11/1/2022 – Construction spending increased 0.2% in September measuring at a seasonally adjusted annual rate of $1,811.1 billion. The September figure is 10.9% above the September 2021 estimate. Private construction spending increased 0.4% from the revised August estimate at $1,450.3 billion. Public construction spending was 0.4% below the revised August estimate at $360.9 billion.
Chicago PMI – Released 10/31/2022 – Chicago PMI remained in contraction territory and declined slightly in October from 45.7 to 45.2. This marks the lowest reading since June 2020.
Personal Income – Released 10/28/2022 – Personal income increased $78.9 billion or 0.4% in September according to estimates released today by the Bureau of Economic Analysis. Disposable personal income increased $71.3 billion or 0.4% and personal consumption expenditures increased $113 billion or 0.6%.
Advance Estimate of 3rd Quarter 2022 GDP – Released 10/27/2022 – Real Gross Domestic Product (GDP) increased at an annual rate of 2.6% in the third quarter of 2022, according to the advance estimate released by the Bureau of Economic Analysis. GDP decreased 0.6% in the second quarter of 2022. The GDP estimate released today is based on source data that are incomplete or subject to further revision. The increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
Consumer Confidence – Released 10/25/2022 – The Consumer confidence index decreased in October following an increase in September. The Index now stands at 102.5, down from 107.8 in September.
Next week we get data on Consumer Confidence, the 2nd Estimate of 3rd Quarter GDP, Personal Income, Chicago PMI, US Construction Spending, Manufacturing PMI, JOLTS, and the November Jobs Report.