Wentz Weekly Insights
Growing Divergence At the Fed Leads to Best Month For Bonds Since 1980s While Stocks Hit New YTD Highs
Recent Economic Data
- New home sales in October fell 5.6% to a seasonally adjusted annual rate of 679,000 homes. New home sales have trended around pre-pandemic levels for much of the year, after having bottomed in July 2022 from all sorts of shortages, and are up 17.7% from the pace in October a year earlier. The number of new homes on the market for sale seems to have found a bottom around the 430,000 range for much of the year, down from 2022, with October’s supply of 439,000. The median sales price of a new home was a big topic for this report, with a median sales price of $409,300 that is down 17.6% from a year ago, the largest 12-month decline in history. A contributing factor of this could be due to sales mix – we are seeing more home sales at the lower end of the market versus more expensive homes.
- The pending home sales index fell 1.5% in October for the lowest level on record going back to when the data began in 2001. This index measures signed contracts of existing homes, so it measured contracts signed in October when the average rate shot over 8%. Sales were down 8.5% from last year with lenders saying its more due to the lack of supply than the rise in rates.
- The S&P Case Shiller home price index shows home prices on average increased 0.7% in September for the eight consecutive monthly increase, coming after seven straight months of declines to end 2022. The index of home prices is now 6.6% higher than the lows reached in January and pushed new record highs, while up 6.1% from 12 months ago. While higher mortgage rates have suppressed the number of homes sold, prices have been supported by a substantial lack of inventory. Only five of the 20 major cities tracked saw a decline in prices in the month with only three seeing a decline compred to a year ago, led by Las Vegas, Phoenix, and Portland. Seeing the largest 12-month gains were Detroit (+6.7%), San Diego (+6.5%), and New York (+6.3%). Cleveland remains near the top at +5.0%.
- The second estimate of third quarter GDP, based on more complete source data, shows growth was a little stronger than initially estimated. GDP grew at an annual rate of 5.2% in the quarter, up from 4.9% in the first estimate last month. The increase reflects an upward revision to business investments, government spending, and net exports, partially offset by a downward revision to consumer spending. The growth in consumer spending was revised down to 3.6% from 4.0%, government spending was revised to a 5.5% increase from 4.6%, business investment was revised to 1.3% growth from 0.8%.
- The PMI manufacturing index was 49.4 for November, remaining below 50 for 12 of the past 13 months. The report noted a “renewed deterioration in operating conditions” in November, with lower new orders and a slower expansion in production while employment fell and input prices rose at a slower pace due to lower energy prices.
- The ISM manufacturing index was 46.7 in November, unchanged from October, slightly below expectations, and remaining under 50 which is considered contracting conditions. The ISM indicates manufacturing conditions have contracted for 11 of the past 12 months. New orders declined in the month but at a slower pace than October while production decreased further, price pressures built slightly, and employment declined further.
- Construction spending in October increased 0.6% for the tenth consecutive month of increases, and up a total of 10.7% from a year earlier. The increase was driven mainly by residential spending which includes new home builds, which was up 1.2% in the month and to a lesser degree nonresidential spending which was up 0.1% in the month. Spending is up 0.9% from a year ago in the residential space, but up a very strong 20% over the same period on nonresidential construction.
- The number of unemployment claims file the week ended November 25 was 218,000, an increase of 7,000 from the prior week with the four-week average at 220,000, relatively unchanged. No surprises here, new claims have been trending in the low 200,000’s range. The number of continuing claims increased another 86,000 to 1.927 million, now at the highest level since November 2021. Something worth keeping an eye on – claims are one of the best leading indicators on the labor market.
- The personal income and outlays data, which includes PCE inflation, confirmed what the consumer price index showed us two weeks earlier in that inflation cooled further in October. The data:
- Personal income rose 0.2% in October, matching consensus estimates and slowing from the 0.4% increase seen in September. Incomes are up 4.3% from a year ago, a larger slowdown from the 5.0% 12-month increase a month prior. The important wages and salaries component rose 0.1% in the month (after a stronger 0.5% increase in September) and slowed to a 4.1% y/y rate.
- After taxes, disposable income rose 0.3% in the month and is still up a strong 7.3% over the past 12 months, although lower than September’s increase.
- Consumer spending rose 0.2% in October, matching estimates but a big slowdown from the 0.7% increase in September. Spending was driven by services which increased 0.4%, and offset by a 0.2% decline in spending on goods. Compared to a year ago spending was 7.0% higher, still a strong rate; driven by services up 7.5% and to a lesser degree goods up 3.2%.
- Given this information, the personal savings rate remained below long-term average at 3.8%, the second lowest reading of the year and compared to the pre-pandemic 10-year average of 7.5%. This continues to suggest consumers are spending their way through savings accumulated through the pandemic.
- The PCE price index, which is the Fed’s favorite inflation reading, was unchanged in October, the same as the consumer price index, and increased 3.0% over the past 12 months, a deceleration from the 3.4% y/y rate in September. Core prices, which exclude food and energy categories, rose 0.2% as expected and are still up 3.5% from a year ago, decelerating from 3.7% a month ago, and both matching estimates.
- Money supply declined in October by 0.1% for the third consecutive monthly decline, and is now down 12 of the past 15 months. M2 money supply, a broad measure of the total amount of money circulating throughout the US economy, was $20.725.6 trillion which was down 0.1% in the month, down 3.3% from a year ago and down 4.5% from the record highs July 2022. It may not sound like much but that is a nearly $1 trillion decline in money supply. Also to note, M1 money supply, which measures just liquid money like cash on hand and cash in checking/savings accounts, is down 12.5%, or $2.6 trillion, from the highs March 2022. Money supply (M2) is still up 34.1% from pre-pandemic levels, which is why we are dealing with inflation, but a 4.5% decline is the largest on record and signals a slowdown in economic activity.
- Twilio shares got a boost last week after asset manager Anson Funds had reportedly taken a stake in Twilio and subsequently sent a letter to the board pushing the company to explore a sale of the entire company or divest assets such as its data and application units.
- CNBC reported US Steel has said final bids for the company were due Friday and the report says five separate parties are expected to submit proposals. The companies reportedly include Cleveland-Cliffs and Arcelor Mittal, who are both expected to submit bids for the whole company, while others like Nucor, Stelco, and Argentina based Techint have previously shown interest in pursuing some form of a transaction, possibly as a partner.
- Disney CEO Bob Iger said to his staff that next year will be about building a more modern version of the company. Then, when speaking on the possibility of asset sales where it has been speculated that Disney may sell off its non-core media assets (basically everything except ESPN, ABC, Freeform), Iger said no decisions were made and he downplayed that possibility. He added the major priority for Disney right now is the launch of the direct-to-consumer ESPN service, expected to launch in 2025. In addition, CEO Bob Iger said “I’m definitely going to step down” in 2026 and that the company is “aggressively” pursuing a succession plan. In his latest comments he said the media networks are not for sales because they are running more efficiently than they were in July when he made the comments that the company was evaluation whether it made sense to divest some of its media networks.
- Disney’s announced its board has approved reinstating its dividend and declared a $0.30 dividend per share (which will be a semi-annual dividend equaling a yield of 0.6%) for the second half of the year that will be payable on January 10. In comparison, prior to suspending its dividend during the pandemic was $0.88/share last issued in December 2019, which would be equivalent to a 1.9% yield as of last week’s price.
- GM said it is updating its 2023 guidance, increasing its dividend, and announcing an accelerated share buyback program now that the UAW strike is over. GM reinstated its earnings guidance of $7.20-$7.70 EPS versus the $7.35 consensus, which was previously withdrawn due to the union strike, while lowering its capital spending plans slightly. It will increase its dividend to 33% (now about a 1.5% yield) and begin a new $10 billion accelerated share repurchase program that is expected to conclude Q4 2024.
- One day after GM’s updated guidance and surprise share buyback program, Ford said it is updating its full year guidance for EBIT of $10B-$10.5B which includes a $1.7 billion impact from the auto workers union strike from lost production. The company added the new contract with the union will impact the cost per vehicle by about $900 by 2028 and Ford said it will work to offset this higher costs with higher productivity and lower expenses.
- Pfizer said it will discontinue developing its twice-daily version of its weight loss drug for obese people after it saw high rates of adverse side effects in one of its trials. The results met its primary endpoints in its Phase 2 clinical trials, but the company said it will stop development as patients had trouble tolerating the drug. The pill was developed to be a more convenient alternative to the very popular weight loss injections where the market has exploded with growth.
- Jack Ma, co-founder of Alibaba, sent an internal memo to executives of the company asking it to correct course and called for fundamental changes at the company. It seems the memo was triggered after Ma observed its competitor PDD (Pinduoduo – an e-commerce platform in China) has taken significant market share in recent quarters. In the memo, Ma praised the decisions PDD has made to grow over the past several years.
- The WSJ reported health insurers Humana and Cigna were in talks to merge in a stock and cash deal that could be completed by the end of the year if talks don’t fall apart. Using today’s market values, the merger of the health insurers would make the combined company worth nearly $145 billion, second in size only to UnitedHealth. The merger would combine Cigna’s massive pharmacy benefit business with the second largest Medicare insurer in Humana. It is worth noting both companies were acquired previously but both were blocked by US regulators on antitrust concerns.
- Over the weekend Alaska Air agreed to acquire Hawaiian Airlines in a $1.9 billion deal, including its debt. It will be an all-cash deal for $18/share, almost a 4x premium to where shares traded prior to the announcement. The deal is expected to result in significant synergies and would make it the fifth largest US airline.
- In an effort to further support crude oil prices, Saudi Arabia has been seeking other OPEC members to reduce their oil output, however some members are resisting. Reports say Iraq, Russia, and Kazakhstan have recently been producing above their quotas while other African members have lost so much production capacity that they are unable to cut production further. On Thursday, in OPEC’s Ministerial meeting, in addition to the existing 1.3 million barrels per day production cut (led by Saudi Arabia), the group agreed to voluntarily cut oil production by an additional 1 million barrels/day, including UAE volunteering to cut 163k bbl/day. Despite the announcement for additional supply cuts, oil moved lower for the sixth consecutive week. There were some concerns and investors are unconvinced the voluntary cuts will be followed through, especially after seeing the incoordination between OPEC members and the way the supply cuts were announced.
- It is becoming more apparent there seems to be growing differences in opinions among Fed members. That was more apparent last week after two Federal Reserve Governors spoke on Tuesday. Governor Waller said he is “increasing confident that policy is currently well positioned to slow the economy and get inflation back to 2%,” adding he is encouraged by what we have seen in the past few weeks because “something appears to be giving” and it’s the pace of the economy. On the other hand, Governor Bowman was more hawkish, saying her baseline outlook continues to expect additional rate hikes will be needed to keep policy “sufficiently restrictive” adding that it is important to remember “historical lessons and risks associated with prematurely declaring victory” on inflation.
- The Investors Intelligence index, a level of sentiment between bulls/bears, showed that the bulls jumped to 55.7% in the latest survey, which was up another 3.5% from the previous week for the highest level since July, which coincides with when the market hit a high for the year. The spread between bulls and bears increased to +34.8%, up from 29.8% in the previous week, the largest one-week change since 2009, with a level of over 30% indicating cautious levels.
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The Week Ahead
The focus this week for market participants will likely be on the number of labor market indicators. The highlight will be the Department of Labor’s employment report on Friday where economists’ consensus estimates see 180,000 new jobs added with 0.3% wage growth in November. The other data releases include job openings on Tuesday, the ADP payroll report on Wednesday, and jobless claims on Thursday. Also on the economic calendar is data on November vehicle sales along with factory orders on Monday, the ISM services index on Tuesday, trade and productivity data on Wednesday, and the consumer sentiment index on Friday. The earnings calendar is lighter than usual, but notable companies reporting quarterly results include AutoZone, Toll Brother, MongoDB, JM Smucker on Tuesday, Campbell Soup, Chewy, GameStop, C3.ai, Veeva on Wednesday, and Broadcom, DocuSign, Lululemon, and Dollar General on Thursday. Several investor events from large companies will take place this week as well, including McDonald’s, Johnson & Johnson, CVS, Exxon Mobil, and Shopify, and appearances from Intel, AMD, Appian, Microsoft, among others, at the Barclays Tech and Media conference. It will be quiet week from the Federal Reserve perspective as policymakers head into a quiet period ahead of next week’s FOMC meeting.