Wentz Weekly: Big Banks See Profits Surge, Overall S&P 500 Earnings Still Expected to Decline

Wentz Weekly Insights
Big Banks See Profits Surge, Overall S&P 500 Earnings Still Expected to Decline

Recent Economic Data

• Inflation cooled more than expected in March according to the monthly consumer price index. The index increased just 0.1% in the month, lower than the 0.3% expected and follows a 0.4% increase in February. The lower increase was due to a 3.5% decline in energy prices in the month as all energy components declined. Food was unchanged with food at home falling 0.3%. Excluding these two often volatile categories, the core index increased 0.4% as expected, following a 0.5% increase in February. Shelter once again drove a majority of the increase, rising 0.6% in the month, although the lowest monthly increase since November. Other categories increasing were new vehicles, apparel, medical care goods, and transportation services like airfares. The medical care services index has declined for the past several months, down another 0.5% in March due to a decline in medical insurance and this all has to do with changes in how it calculates medical premiums. This has subtracted from the headline index for some time, if this is excluded underlying inflation would be even higher. Prices over the past 12 months rose 5.0%, down from the 12-month increase of 6.0% in February (driven by a 6.4% y/y decline in energy prices), while core prices were up 5.6%, up from the 12-month increase of 5.5% in February. A decent report from the headline level but after digging deeper inflation is still high, and higher than what the headline suggests in this month’s report, especially in services which is where the Fed is acknowledging it has yet to see cost pressures come down in this area.

• With the producer price index comprised more of energy components, due to a 6.4% monthly decline in energy prices for final demand goods, the producer price index fell 0.5% in March, but lower than the expectation of no change. Excluding food and energy, the core PPI index rose 0.1%. Core prices for final demand goods rose 0.3% while core prices for final demand services rose 0.1%. Over the past 12 months the producer price index increased 2.7%, down from the 12-month increase of 4.9% in February. Core PPI was up 3.6% over the past 12 months, down from the 4.5% increase in February. It was another welcoming inflation report, with focus on the lower headline number, however excluding energy the core index rose more than expected.

• Prices on goods and services imported and exported from the U.S. continued to slide in March. The BLS data shows import prices decreased 0.6% in the month, following a 0.2% and 0.4% decline in the prior two months and a decline in eight of the past nine months. Compared to a year ago import prices are down 4.6% after record increases this time last year. Energy prices have driven a majority of the declines in recent months but March’s decline was more broad based. Export prices decreased 0.3%, after a small increase the prior two months, but that follows six consecutive monthly declines. The 12 month change is -4.8%, also coming off record highs from this time last year. Also with export prices the decline was broad based, seen across agriculture goods and non-agriculture.

• The NY Fed’s survey of consumer expectations showed mixed expectations on inflation, with the one-year ahead inflation expectation increasing 0.5% in the March survey to 4.7%, the three-year ahead expectation increasing 0.1% to 2.8%, while the five-year ahead expectation decreased 0.1% to 2.5%. Expectations on household income growth increased slightly, by 0.1%, to 3.3% over the next 12 months while the probability of unemployment increasing a year from now increased to 40.7%.

• The number of unemployment claims filed the week ended April 8 was 239,000, an increase of 11k from the prior week, with the four-week average up to 240,000, the highest since late 2021. Recall there was an adjustment in the way seasonal adjustments were calculated two weeks ago, which bumped up claims by about 30k. The number of continuing claims was 1.810 million, down 13k from the prior week, with the four-week average up 9.5k to 1.813 million. We will need a couple more weeks of data to confirm if the actual increase is a trend.

• Monthly retail sales in March fell 1.0%, which is more than double the expected decline, and follows a 0.2% decline from February (this follows a very large 3.2% increase in January) and are up 2.9% from March 2022. Retail sales in the first three months of the year were up 5.4% compared to the same period in 2022. Eight of the 13 major categories saw a decline in sales in the month, with gas sales -5.5%, merchandise store sales -3.0%, electronic/appliance and building materials -2.1%, apparel -1.7%, and vehicles -1.6% seeing the largest declines. E-commerce saw a boost in the month, rising 1.9%, along with small increases in healthcare, sporting goods, and bars/restaurants. Core retail sales, excluding vehicles and gas, declined 0.3%, still lower than expected. The latest data still matches the recent trend – there is still sales growth in services due to continued pent up demand, however this growth is slowing and will add to the recession talks.

• The staff at the Federal Reserve believes the banking turmoil will lead to a mild recession late this year, according to the minutes from the recent FOMC meeting on March 22. It expects inflation to step down markedly this year and slow sharply next year. Whereas Fed officials, the voting Committee, saw the banking turmoil leading to tighter credit conditions, and weighing on growth, jobs, and inflation. The banking situation would affect policy if it led to a change in growth, jobs, and inflation. Some officials would have agreed to raise rates 50 bps at the meeting if it was not for the banking turmoil and some would have raised their projections on rates as well, while some wondered whether it would be appropriate to hold rates unchanged. Labor market still seen as very tight, wages slowing only gradually, and inflation was seen as unacceptably high.

• The preliminary read on consumer sentiment, based on the University of Michigan’s survey, for April was 63.5, better than the 62.0 expected and the best in two months, prior to the banking turmoil. The index on current conditions was 68.8, about a point above expected, while expectations was 60.3, only slightly better than expected. The one-year ahead inflation expectations was the disappointment; rising to 4.6% and a large increase from the 3.6% expected in the previous survey. Five to ten year ahead inflation expectations was unchanged at 2.9%.

• Freddie Mac’s mortgage survey showed prime mortgage rates fell for the fifth consecutive month, dropping barely last week to 6.27%, down from this year’s high of 6.73% at the beginning of March.

Company News

• The WSJ reported that Exxon Mobil has held preliminary talks about a potential acquisition of Pioneer Resources, the second largest oil producer in the Permian Basin. A combination of the two would generate 1.2 million barrels of oil per day from the region.

• Chip stocks, specifically memory chip makers like Micron got a boost after memory chip maker Samsung (who has nearly 50% market share in the DRAM market) said it plans to cut production of memory chips “by a meaningful level.” This comes after other competitors, SK Hynix and Kioxia, said recently they will reduce spending and cut chip production as well.

• The WSJ reported that IBM is exploring a sale of its weather business in effort to streamline its business. An auction of the business is in its early stages and could value the business at more than $1 billion. IBM acquired the business, which included the Weather Company’s business-to-business, mobile, and cloud based businesses, in 2015 for about $2 billion.

• Akron based, family owned business Gojo Industries, the maker of Purell hand sanitizer, is seeking a buyer and is seeing interest from large consumer product companies, according to the WSJ. The company generates about $1 billion in annual sales and could fetch a valuation of around $3 bllion. Gojo invented Purell in 1988, sold the brand in 2004, but acquired it back in 2010 from Johnson & Johnson.

• In an event to announce a new strategy for its streaming service in hopes to drive growth in the struggling segment, Warner Bros. Discovery said it would combine its HBO Max and Discovery+ services and drop the HBO name and instead will call it “Max.” The change is part of CEO’s strategy to rely on the company’s intellectual property after the 2022 merger between WarnerMedia and Discovery.

• With YouTube set to take over NFL Sunday Ticket for the first year, it released the pricing for this upcoming NFL season, charging more than what DirecTV did when it provided the service last year, as the costs for broadcasts rights have risen. YouTube will charge $349 for the season for the Sunday Ticket, which allows users to view all games, provided the user is signed up for the YouTube TV service. On a stand-alone basis (without YouTube TV subscription), the Sunday Ticket will cost $449 for the season.

Other News

• After a substantial 35% jump in 2021, and a 12.2% increase in 2020, digital ad revenue in 2022 rose 10.8% to $209.7 billion, according to data from the Interactive Advertising Bureau, as marketers continue to spend on online advertising despite rising economic uncertainty. The slower growth wasn’t just due to increased uncertainty, advertisers were hit with new privacy regulations that made it more difficult to target messages and measure ad efficiency. Social media ad revenue grew just 3.8% after a 39.3% increase in 2021. The top three digital publishers and platforms combined for over 60% of digital ad budgets, according to the data. The three firms were Google parent Alphabet, Facebook parent Meta, and Amazon.

• Staying up with the latest on money market flows, for the eighth of the past nine weeks there were net inflows into money market funds last week, totaling $27.8 billion the week ended April 12. This was after seeing inflows of $27.8 billion, $61 billion, and $115 billion in the prior three weeks. For all of March there was a record $393 billion going into money market funds, per Morningstar.

• President Biden signed a bill to terminate the national emergency related to the Covid pandemic, however the public health emergency remains in place until May 11.

• The US government spent $378 billion more than what it collected in revenue in March alone, an increase from a deficit of $262 billion in February and higher than $196 billion from March 2022. So far this fiscal year, the sixth month in the year, the deficit is $1.1 trillion. In addition, the government said it expects interest payments on its debt to be nearly $1 trillion this fiscal year. For comparison, the total US debt is almost $32 trillion and US GDP as of Q4 was $26.1 trillion.

• The International Energy Agency said it expects global demand of oil to climb 2 million barrels/day (bbl/day) to 101.9 bbl/day reflecting a resurgence in China accounting for 90% of the growth. However, the imbalance will worsen as supply is expected to decline after the recent OPEC+ decision to cut output. It said global supply will come down 400k bbl/day by the end of the year as a 1 million bbl/day increase in non-OPEC+ production will offset a 1 million bbl/day decline in OPEC+ production. This has increased the risks of higher oil and energy prices, as has been the case with many economists raising their forecasts for oil prices over the increasing imbalance of supply and demand, despite the increasing worries about an economic slowdown.

• The International Monetary Fund (IMF) reduced its outlook for global growth, now expecting global growth to bottom at 2.8% this year, versus 2.9% in its previous forecast, before rising modestly to 3% in 2024. The fund said there is rising concern monetary policy tightening in the past year is starting to have serious side effects for the financial sector.

• Global Central Bank/Fed updates:
• The Bank of Canada kept its policy rate unchanged at 4.5% for the second straight meeting, while continuing with its quantitative tightening (reducing its balance sheet). It said the quantitative tightening will continue to complement its restrictive stance regarding its policy rate. It said US growth is expected to slow “considerably” in the months ahead, particularly in sectors that are important for Canadian exports.
• New York Fed president Williams said policymakers still have more work to do to bring inflation down and suggested it wouldn’t change course amid the banking developments as core services inflation ex housing hasn’t budged yet. He downplayed the recent banking developments, saying there are no signs of a negative shock. He said the future path of Fed policy will be depend on incoming economic data, but one more rate increase followed by a pause is a “reasonable starting place.”
• Meanwhile, Chicago Fed president Austan Goolsbee said the Fed should exercise “prudence and patience” when they determine the next policy move citing uncertainty with financial headwinds and the need to be more cautious. He added additional data is needed before raising rates too aggressively. He is the first to publicly support a pause and is a voting member this year.
• Richmond Fed president Barkin said the Fed still has more work to do to bring price pressures lower, admitting we are past “peak inflation” but saying he is waiting for inflation to “crack.” He acknowledged he sees signs that demand is cooling but is cautious on declaring victory too soon as inflation in core services remains too high. Barkin spoke shortly after the CPI report was released, saying it was “pretty much as expected.”
• San Francisco’s Mary Daly said she believes there are good reasons to believe policy will need to tighten further. She believes there will be a significant slowdown in the economy but stopped short of expecting a recession. She noted the Fed district is watching declines in lending activity, but reaffirms recent comments the banking system is sound and resilient.

Did You Know…?

Office Space Availability at Record High

The office space is looking more like a thing of the past as remote work become more common, a shift that dramatically accelerated after the pandemic. Despite many companies having already brought employees back to work in the office, office space available for lease in the U.S. is at a record high, according to the latest data from CoStar. This data from the commercial real estate information company differs from vacancy data because it tracks offices available for lease instead of vacancies because vacancies look at just empty offices whereas availability looks at currently occupied offices that will soon be available as the tenant has made the decision it will not be renewing its lease. The percentage of office space available for lease was 16.4% as of the first quarter 2023, up from about 12% prior to the pandemic hitting, and above the previous record high of 16% shortly after the Great Recession in 2010.

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