Wentz Weekly Insights
Big Tech Highlights Earnings, But Also Is Driving All the S&P 500 Gains
Recent Economic Data
- Home prices, according to the S&P Case-Shiller home price index, experienced a 0.2% increase in the month of February, snapping a streak of seeing month over month declines for seven consecutive months. Home prices are now down 4.9% from their peak in June 2022. Over the last 12 months the index shows home prices are up just 2.0% after record increases this time last year. S&P says the February results were interesting because of the “stark regional differences.” Miami and Tampa continue to see home prices rise at the fastest pace, up 10.8% and 7.7% respectively over the past 12 months, while results from west coast cities are seeing sharp year-over-year declines. San Francisco home prices are down 10.0% and Seattle down 9.3% over the same period. Cleveland prices remain in the middle, rising 3.9%.
- Sales of newly constructed homes unexpectedly rose 9.6% in March to a seasonally adjusted annualized rate of 683,000 homes. It was a large jump in new home sales, which is typically more volatile month to month versus sales of existing homes. Sales of new homes are still down 3.4% over the past year and down sharply from the post-pandemic high of 1.036 million in late 2020. The median sales price rose again as the number of new homes for sale remains at very low levels. The median sales price was $449,800, rising 3% in the month and from a year ago. The supply of new homes was unchanged in the month and up 5% from last year.
- Orders of durable goods increased 3.2% in March, much higher than the 0.9% expected, suggesting a solid month of new orders for factory hard goods. However, the details of the data show orders may not be as strong as the headline number suggests. Most of the increase came from transportation equipment, more specifically commercial airplanes, which rose 78% in the month (this tends to be a very volatile category due to the high costs of airplanes – it was down over 60% the first two months of the year). The more important figure, and the one that goes into the calculation of GDP is shipments of non-defense capital goods excluding aircraft, which excludes transportation and other categories, declined by 0.4% in the month.
- The number of unemployment claims filed the week ended April 22 fell 16k to 230,000. The four-week average fell slightly to 236,000. The number of continuing claims was 1.858 million, down slightly from the prior week with the four-week average up 10k to 1.836 million.
- The national compensation survey, also known as the employment cost index, showed labor costs increased 1.2% in the first quarter, slightly higher than the 1.0% increase expected and accelerating from the 1.0% increase in Q4. Both wages/salaries and benefits increased 1.2%. Over the last 12 months labor costs have increased 4.8% driven mostly by a 5.0% increase in wages/salaries along with a 4.5% increase in benefits.
- Bureau of Economic Analysis data shows the US economy grew at just a 1.1% annualized pace in the first quarter of 2023, lower than most economists’ estimates of around 2.0%. Of the categories that make up GDP, the increase was driven by consumer spending, exports, government spending, and nonresidential fixed investments while detractors from growth included inventory growth, residential spending and imports. Consumer spending remained resilient in the first quarter, rising 3.7% and contributing 2.5% to GDP. Spending was driven by a large increase in goods, specifically a 45% increase in vehicles and parts, and to a lesser extent services. With the housing market in a recession, residential investment fell another 4.2% for the eighth consecutive quarter of declines, although a slower decline than previous quarters, while nonresidential investment (businesses) rose 0.7%. Government spending increased 4.7% and contributed 0.8% to GDP. A 4.8% increase in exports and a 2.9% increase in imports resulted in net exports contributing 0.1% to GDP. A decline in inventory growth contributed -2.3% to GDP as businesses see less need to restock shelves as things slow. The 1.1% growth is positive but may be the best growth we see in 2023. Also important, the GDP price index increased 4.2%, accelerating from the 3.7% increase in the fourth quarter, while the core index excluding food and energy prices rose 4.9%, up from 4.4% in Q4.
- The Bureau of Economic Analysis data on personal income and outlays shows income growth slowed while consumer spending was flat in March.
- Personal income in March grew 0.3%, slightly higher than the 0.2% expected, with the wages/salaries category growing 0.3%, both matching February’s increase. Compared to a year earlier, wages/salaries are up 6.3% which is now growing at a faster pace than inflation meaning workers are now seeing real wage growth.
- After starting the year strong, consumer spending has slowed over the past two months and in March was unchanged as expected. Spending on goods declined 0.6% while spending on services is still strong after increasing another 0.4% in March. Over the past 12 months consumer spending has increased 8.2% with goods spending up 3.4% and services spending up 9.5%. An interesting note, personal interest payments (which excludes mortgage payments) are up 61% over the past 12 months as interest rates have soared and consumer borrowing has increased. The personal savings rate increased slightly to 5.1%, up from 4.8% in February and the low of 3.0% last September, but is still below the historical average of about 7.5%.
- The PCE index, the Fed’s preferred measure of inflation, rose 0.1% in March as expected, with core prices that exclude food and energy up 0.3%. Compared to a year earlier the index is up 4.2%, a sharp slowdown from 5.1% in February, but core prices remain sticky with the index up 4.6%, higher than the 4.5% expected. We think the Fed will keep its focus on this number, and with it remaining over double its target, see another rate increase this week as on the table.
- The Conference Board Consumer Confidence Index suggest consumers feelings about the economy deteriorated in April, with the index falling 3 points to 101.3. Thoughts on the current environment remain solid with the present situations index up 2 points to 151.1 while expectations continue to decline with the index falling another 6 points to 68.1. The expectations index has remained below 80, a level typically associated with recessions, for 14 of the past 15 months. The survey was taken about three weeks after the bank failures in March.
- Consumer sentiment was unchanged in April compared to the beginning of the month, according to a survey of consumers in the University of Michigan’s consumer sentiment survey. The index was unchanged at 63.5 while the current conditions index fell slightly from 68.6 to 68.2 and the expectations index relatively unchanged at 60.5, all low levels reflecting a recessionary environment. The expectation on one year inflation was 4.6%, a jump from 3.6% in the March survey (though unchanged from the beginning of April survey), and the highest in several months. The five year ahead inflation expectation was 3.0%, a slight uptick from 2.9% last month and back at 3.0% for the first time since November.
- Money supply in the US economy declined by 1.2% in March, which sounds like a small decline but is a massive drop in a short period. The money supply is down 4.0% from a year ago and 4.1% from its peak in June 2022. Money supply is important because it saw a massive and record breaking 40% increase during the pandemic years and is what triggered 40-year highs in inflation. A declining money supply should mean inflation will be coming down, but that will take a while to work through the economy and will have consequences for economic growth.
- 3M announced in conjunction with its earnings report it would restructure its business that would include the elimination of 6,000 additional jobs. It said the plan would reduce the “size of the corporate center of the company, simplify supply chain, streamline 3M’s geographic footprint, reduce layers of management, and further align go-to-market models to customers.” It expects pre-tax savings of $800 million.
- Disney said it has filed a lawsuit against Florida’s Governor Ron DeSantis accusing him of using his political position to hurt the company in a “targeted campaign of government retaliation.” Disney and DeSantis have been in a battle over Disney’s special treatment of its own taxing district.
- UK antitrust regulators, the Competition and Markets Authority (CMA), said it will block Microsoft’s proposed acquisition of Activision Blizzard. CMA said Microsoft’s proposed solution to satisfy regulators failed to effectively address the concerns in the cloud gaming sector, with Microsoft already having strong advantages in cloud gaming with market share between 60%-70%. CMA says the combination would “harm current and emerging cloud gaming competitors by withholding Activision games from them.”
- San Francisco based Frist Republic Bank, which faced similar issues as Silicon Valley Bank and Signature Bank, had its assets seized by US regulators early Monday morning in the second largest bank failure in US history, even larger than March’s Silicon Valley Bank collapse. Regulators agreed to sell the operations of First Republic to JPMorgan shortly after. JPMorgan will receive all of First Republic’s $92 billion in deposits and most of its assets which includes over $170 billion in loans and $30 billion in securities. First Republic reported last week in its earnings report that it lost 41% of its deposits in the first quarter, with deposits falling to $104 billion from $176 billion, with a majority happening in a short period after the two bank failures in March.
- The Federal Reserve released its report on the collapse of Silicon Valley Bank which it called a textbook case of mismanagement. It said the Fed’s supervisors failed to take forceful action to address the growing issues at the bank from not seeing the extent of the vulnerabilities as the bank grew and not taking sufficient steps to ensure it fixed those problems quick enough, working too deliberatively to build evidence before forcing action. It said it should toughen the rules on the industry to prevent these problems in the future. Regarding the bank itself, the report said the bank and its management team failed to manage basic risks of interest rates and liquidity.
- In a video titled “Freedom” President Biden announced his reelection campaign. Meanwhile, Arkansas Governor Asa Hutchinson announced he will run for the Republican candidacy.
- The debate on the issue around the debt ceiling is heating up. House majority Leader Kevin McCarthy agreed last week to make changes to the House Republicans bill to increase the debt ceiling (and reduce spending) by making changes around biofuel subsidies and work requirements to win support of several Republican holdouts. Mid-week the House took up and passed the bill, putting pressure on Democrats with business groups and some in Democrats in Congress calling on Biden to negotiate with House Speaker McCarthy. Over the weekend, Senate Majority leader Schumer announced the Senate committees plan to hold hearings regarding the debt ceiling and the bill passed by the House. The so called “X day” is coming closer and the Treasury is expected to announce at any time a more specific day in which the US government will run out of money to cover its bills.
The Week Ahead
It will be another busy week, full of earnings reports, more important economic data, and a FOMC meeting. The headline for the week will be the Federal Reserve’s third Federal Open Market Committee meeting of the year with the policy announcement coming Wednesday at 2:00, which will be followed by Chairman Powell’s press conference. There is a wide expectation the Fed will raise rates by 25 basis points to a new range of 5.00% to 5.25%. The bigger question is what is in store for the remainder of the year and investors will hope to get answers at the presser. We will receive several more data reports on the labor market including job openings on Tuesday, ADP’s employment report Wednesday, jobless claims Thursday, and the DOL’s employment report on Friday. The current expectation is 180,000 jobs were added in April, continuing the recent streak of job gains and wages consistent with a 0.3% monthly increase. Elsewhere, we will see manufacturing data with the PMI and ISM manufacturing survey results as well as construction spending for March on Monday. Tuesday will include factory orders for March and April vehicle sales. Thursday will see trade data along with the first estimates on first quarter productivity and labor costs. The earnings calendar remains crowded with another 24% of S&P 500 companies set to report Q1 results. Notable results will come from Sofi on Monday; AMD, Pfizer, Starbucks, Ford, Uber, BP on Tuesday; CVS, Qualcomm on Wednesday; Apple, DraftKings, Shopify, Shell, Expedia, Anheuser-Busch on Thursday; and Warner Bros. Discovery, Dominion, and FuboTV on Friday. On Wednesday investors will also be focused on the Treasury’s refunding announcement where it will announce its funding needs for the next two quarters and upcoming Treasury offerings. Investors will be looking for the “X date” or when the Treasury will run out of money.