Wentz Weekly Insights
Pivotal Week Ahead – Inflation Data & the December FOMC Meeting
Recent Economic Data
- Consumer’s credit balances grew by $21.6 billion, an 8.2% increase from a year ago to a new high of $4.706 trillion, according to data by the Federal Reserve. An acceleration in credit could be a troubling sign, with balances growing faster than wages and consumers dealing with higher prices as balances on revolving credit like credit cards climbs at a faster pace. Over half of the increase came from revolving credit, like credit cards, which increased $11.1 billion in the month and is 15.6% higher from a year ago. In fact, credit card balances were up 15% in the third quarter, the fastest increase in 20 years. Nonrevolving credit, like mortgages and student loans, rose $10.4 billion, or 0.2% from a year ago.
- The ISM services index, similar to the ISM manufacturing index but this looks purely at the services sector, was 56.5, improving from 54.4 in October and 3 points higher than expected. The business activity index saw a significant increase, rising 9 points to 64.7 while new orders were relatively unchanged at 56. The report noted services businesses continue to struggle to replenish their stocks, with inventories contracting for the sixth consecutive month, leading to a 70 reading on the price index, still very high. Overall a very strong report.
- October trade data shows the trade deficit was $78.2 billion in the month, making the deficit about $4 billion larger than in September. The higher deficit was due to exports of $256.6 billion declining by 0.7% while imports of $334.8 billion increased 0.6%. Remember, a larger trade deficit will contract from GDP.
- Worker productivity was revised higher to a 0.8% increase (annualized), up from the first estimate of 0.3%, for the third quarter. Output was better than estimated in the first release, increasing 3.3% up from 2.8% while hours worked increased 2.5%, unchanged from the first estimate. Worker productivity is one of the big variables when it comes to longer-term economic growth, so an upward revision is welcoming. Also welcoming was unit labor costs rising 2.4% while was a downward revision from +3.5% in the first estimate.
- The number of jobless claims for the week ended December 3 remained relatively unchanged at 230,000 with the four-week average up only 1k to 230,000. The number of continuing claims was 1.671 million, another large increase of 62k in the week, up from a recent low of 1.346 million in mid-September. The four-week average has been moving higher and stands at 1.582 million. This will be something to keep an eye on for cracks in the labor market as these numbers are the closest we have to real-time data on the labor market. For comparison purposes, continuing claims averaged around 1.800 million before the pandemic.
- Producer price index rose more than expected with a 0.3% monthly increase in November, slightly ahead of the 0.2% increase expected. The report included an upward revision to October, with a 0.3% monthly increase, revised up from 0.2%. Producer prices have advanced 7.4% from a year ago, decelerating from the 8.0% rate in October, but still above the expected 7.2% increase. Energy prices fell 3.3% as oil continues to decline, but that was offset by a 3.3% increase in food. Core prices showed a larger increase as well, with the index excluding food and energy prices rising 0.4% in November, doubling expectations, and rising 6.2% from a year earlier, above the 5.9% expected. About one-third of the increase came from a large increase in securities brokerage, dealing, investment advice/related services, but was largely offset by a 0.9% decline in transportation/warehousing.
- The consumer sentiment survey by the University of Michigan showed consumer’s expectation on inflation moved to a 15-month low, with the one-year ahead inflation expectation falling to 4.6% from 4.9% last month while five-year inflation expectation remained at 3.0% (still above the Fed’s 2% long-run goal). The headline consumer sentiment index rose to 59.1 in the latest survey, up from 56.8 in November. Current conditions improved slightly, to 60.2 from 58.8 while expectations rose to 58.4 from 55.6. There could be a number of reasons for the improvement, including the recent bounce in asset prices, like stocks and bonds, along with the lower price of oil and gasoline. However, the index still remains close to the lowest levels ever.
- Large corporate layoffs are beginning to hit more than just tech companies. Last week PepsiCo said it will begin laying off hundreds of workers in its North America snacks and beverages divisions HQ. The company said the layoffs were to “simplify the organization” so it can operate more efficiently. The layoffs will be small compared to the roughly 130k employees it has in the U.S.
- ExxonMobil said it will expand its stock buyback program to $50 billion through 2024, which includes $15 billion for 2022. Along with the news release, it said it expects to double its earnings and cash flow potential by 2027, compared to 2019 levels, and remains on track to deliver $9 billion in cost savings by the end of 2023 compared to 2019 levels. It also increased its capital spending projections to the high end of its $20-$25 billion target.
- Southwest Airlines reinstated its dividend, with a yield of approximately 1.8%, reflecting its confidence going forward and the airline travel industry returning to a more normal operating and demand environment. It added that leisure and business revenue trends remain strong.
- Walmart CEO said the US consumer is still stressed as they continue to deal with much higher prices, with sustained price pressures in some categories forcing consumers to prioritize purchases. It was also said that inflation is most “stubborn” in dry grocery business, including processed foods, which includes double-digit inflation that looks like it is “going to be with us for a while.”
- The Pentagon has awarded Amazon, Google, Microsoft, and Oracle with a cloud computing contract worth as much as $9 billion through 2028.
- In a WSJ interview, Apple’s Senior VP of software engineering said the company is working on a new data-encryption system that it says would significantly expand its practices to prevent hackers and better protect iCloud data. the new encryption system would protect data if there was a data breach and also would not be accessible to law enforcement, even with a warrant, possibly creating further tensions between the company and law enforcement. Per the WSJ, the company said the initiatives are designed to protect Apple customers from the most sophisticated attackers.
- The Federal Trade Commission filed a suit to block Microsoft’s planned acquisition of videogame developer Activision Blizzard. The FTC is seeking to block the deal saying that it “would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.” Microsoft Vice Chair and President traveled to Washington in attempt to save the deal, while offering competitors Nintendo and Sony a 10-year guarantee for same-day release of its games.
- There were several notable remarks at a banking conference last week from banking execs. Citi CEO gave us a preview of its quarter by saying trading revenue is expected to rise 10% in Q4 due to the volatile markets, which drove strong trading activity in October and November. Offsetting the better than expected trading results is the expectation investment banking revenue will fall 60% as M&A slows significantly from the same reason along with higher rates. CEO Fraser added she expects the US to enter a recession in the second half of 2023, adding Europe is already seeing a downturn. But it was earlier in the week on Tuesday that BAC CEO said consumer spending growth is starting to slow and consumer deposit balances were starting to come down. Wells Fargo CEO said discretionary spending is slowing and there are more signs of stress in lower-income consumers. JP Morgan CEO noted consumers still have about $1.5 trillion more in their accounts, but the spend down is slowing and it may run out by mid-2023. If there is anyone that knows consumers’ financial trends it is the banks, and overall spending growth is slowing, deposits are declining, while credit balances are growing.
- A recent survey by the Conference Board (who organizes the monthly consumer confidence survey and index) showed 98% of CEOs expect a recession in the U.S. within the next 12-18 months. The survey shows they think a recession will be short and shallow. The Board’s chief economist said consumers are starting to worry about personal finances and job prospects and household will be first to experience the impact followed by the services sector.
- Talks are ongoing in Congress that would attach Senator Joe Manchin’s (D-WV) recent bill to fast-track energy projects, which recently stalled in Congress, to a must pass defense bill.
- Democrat Raphael Warnock beat Herschel Walker in the Georgia runoff election for the last Senate seat (estimated votes 51.4% to 48.6%). This gives Democrats a 51-49 majority in the Senate.
- Arizona Senator Kyrsten Sinema says she is leaving the Democratic party and will register as an independent.
- After days of protests against its zero-Covid policy, the National Health Commission of China said last week it will ease several Covid restrictions that were in place, including changing mandatory quarantines for high-risk buildings rather than large urban areas, easing testing requirements, and allowing those infected but with mild symptoms to quarantine at home (rather than hospitals/quarantine facilities).
- Oil moved to a new low of the year over recession/growth concerns, uncertainty on the Russian oil price cap, and the EIA increasing 2023 production forecast to a new record high. Early reports suggest the price cap on Russian oil may have little impact on crude oil supply, with a report from the Financial Times saying Russia is taking steps to dodge sanctions by concealing the origin of its oil.
- Global Central Bank news:
- The Bank of Australia raised its cash rate by 25 basis points to 3.10% as was expected.
- European Central Bank Chief Economist said there is high confidence inflation may be nearing a peak, while saying additional rate hikes are still needed. Separately, while more rate hikes are needed, some policymakers have said its policy rate is “very close” to the neutral rate. In addition, Bloomberg is reporting the ECB is likely to raise rates two more times before quantitative tightening (reduction of its balance sheet, i.e., decreasing liquidity) begins.
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The Week Ahead
The next couple days will be important in determining the markets next direction for the upcoming weeks. The first test will be the consumer price index on Tuesday morning. Thanks to a drop in the price of oil, the index is expected to haven risen 0.3% in November but 0.4% excluding food and energy prices. Then on Wednesday, the FOMC concludes its policy meeting and is widely expected to raise rates 50 basis points (0.50%), but investors will focus on the updated summary of economic projections, the first since September, which will show how high policymakers see rates going, and for how long. Retail sales come out the next day, and will show if consumers maintained their strong level of spending in November. Elsewhere on the economic calendar is import and export prices on Wednesday, weekly jobless claims, the Philly Fed and Empire State Manufacturing survey indexes, and industrial production on Thursday. Friday is quadruple witching day – when four major stock futures expire – which comes with a surge in volume toward the close. The earnings calendar is light with Oshkosh and Oracle on Monday, Adobe on Thursday, and Accenture and Darden Restaurants on Friday.