Wentz Weekly Insights
Q4 Earnings Has Been All About AI
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Recent Economic Data
- The government came out with updates to its seasonal factors, which resulted in revisions to seasonally adjusted consumer price index data, one of the more popular measures of inflation (the 12 month changes are unchanged as those are not seasonally adjusted). This is something they do annually in February to update the index for seasonal factors. This past update resulted in the seasonally adjusted index for December (the most recent inflation report) to increase 0.2% in the month, down from the 0.3% increase prior to the revision. If you recall, the updates last year resulted in an upward revision that created more inflation worries and resulted in higher bond yields and sent stocks lower. This year it sent bond yields lower and stocks higher.
- The ISM non-manufacturing index (survey on conditions in the services sector) was 53.4 for January, about 1 point above expectations and improving 3 points from December’s level which was right around breakeven (a level of 50 indicates breakeven – over 50 reflects growing/expanding conditions). The survey noted a majority of respondents indicated business is steady, while the survey saw a pickup in the price index at 64, up 7 points in the month and the highest in 11 months with firms remaining cautious on the environment due to inflation.
- Trade data for December shows the U.S. trade deficit was $62.2 billion, only a small change from November’s deficit. The December numbers were due to a $3.9 billion increase in exports (to $258.2 billion) and a $4.2 billion increase in imports (to $320.4 billion). Remember, the trade deficit subtracts from GDP, a smaller trade deficit will improve GDP numbers slightly. The other way to look at the trade data is to analyze the volume of trade which sometimes suggests international/domestic demand trends. Final 2023 numbers show the annual trade deficit decreased 19%, or $178 billion due to a $35 billion increase in exports but offset by a $142.7 billion decrease in imports. It was interesting to see the import activity decline to that degree but economic growth remain so strong.
- The number of unemployment claims for the week ended February 3 was 218,000, a decline of 9k from the prior week with the four-week average at 212,250. The number of continuing claims was 1.871 million, down 23k from the prior week with the four-week average at 1.850 million.
- Looking for a used car? They are becoming cheaper according to the Manheim used car index. Used car prices are down 22% from the pandemic high in late 2021, however keep in mind prices were up about 75% from pre-pandemic levels at that time. The index shows used car prices have declined 9% from a year ago.
Company News
- Reuters reported that DocuSign acquisition talks between the company and private equity groups Hellman & Friedman and Bain Capital have stall over a disagreement on the purchase price. After the news, DocuSign announced a restructuring plan designed to strengthen its financial position and efficiency, while reducing its headcount by 6% and saying it is expected to meet or exceed its fourth quarter guidance that it provided in December.
- Kohl’s shares moved higher last week after a report that activist investor Vision One Management Partners has acquired a stake in the company and is pushing the company to sell itself. Recall the company received a $64/share takeout offer in 2022.
- Disney, Fox, and Warner Bros. Discovery are starting a joint venture to create a new streaming platform that provides all their sports content and assets in one. The service will be available through a new app and also available by bundle with existing Hulu, ESPN+, and Max subscribers and is scheduled to be launch in the fall 2024. Each company will own one-third of the joint venture.
- Nvidia said it would create a new business unit focused on designing chips specially made for specific customers for its cloud computing firms and others that use advanced AI processors, according to a Reuters report. It sees additional opportunity for growth with this business unit for customers, such as Meta, Amazon, Microsoft, and Google, that are looking for custom AI chips, which is an exploding market. The report also said this will help protect it from the growing number of companies interested in finding alternatives to Nvidia products. For reference, Nvidia controls about 80% of the market for advanced AI chips.
- A WSJ report said Sam Altman, CEO of OpenAI, the company partnering with Microsoft on its AI initiatives, is looking to raise $5 to $7 trillion for a tech initiative that would boost the world’s chip making capacity to improve its ability to power AI. The report says Altman has been in contact with potential investors like the United Arab Emirates government fund , SoftBank CEO Masayoshi Son, and representatives from Taiwan Semiconductor. For comparison purposes, the $5 to $7 trillion compares with the size of the US economy of $27.9 trillion, as measured by the latest GDP.
Other News
- The New York Fed released its household debt and credit report that flashed warning signs on credit card debt – the percentage of people with credit cards that are more than 90 days delinquent has risen to about 6.4%, up from 4% 12 months ago, double the level from the pandemic lows, about 1% higher than pre-pandemic levels, and the highest since the Financial Crisis recovery in 2011. All delinquencies are rising, but it has been seen most in credit cards and auto loans. Auto loan delinquencies (over 90 days) is about 2.5%, also the highest since 2011. For the fourth quarter, household debt grew $212 billion, with mortgage balances growing $112 billion, home equity line of credit balances growing $11 billion, credit card balances growing $50 billion (up 14.5% from a year ago), and auto loan balances growing $12 billion.
- Recent Fed speak:
- Minneapolis Fed Kashkari said the economy is seeing a higher neutral rate and that means the Fed has more time to assess data before making any rate cuts and there is less risk that these higher rates will send economy into a downturn. He later said in a separate speech we are “not all the way there yet” when it comes to bringing inflation back to the 2% target. Due to the strong labor market he said the Fed is not “actually slamming our feet on the brakes as hard as we thought” in terms of slowing the economy with higher interest rates.
- Cleveland’s Fed President Loretta Mester said the continued strength in the labor market and strong consumer spending “give us the opportunity to keep the nominal funds rate at its current level” while it assesses more data to increase its confidence inflation is on a “sustainable and timely path back to 2 percent.” She went on to say cutting rates too soon or quickly would be a mistake without having clear evidence that inflation is in fact moving lower, and reiterated policy is currently in a good place.
- Governor Kugler said inflation has come down but the Fed’s work is not done, particularly on services inflation, but warned of risks including spending momentum if consumer surprise again this year and tensions in the Middle East and in Eastern Europe.
- Boston’s Susan Collins agreed the Fed could start cutting rates later this year but this will be dependent on incoming data, and if they do it should be done in a gradual process. She mentioned there is a “more balanced risk environment.” Reiterated recent comments that more data is needed to gain additional confidence inflation is moving lower, specifically on housing and non-housing service inflation.
- Richmond’s Tom Barkin said the recent data has been “remarkable” with lower inflation, healthy demand, and tight labor market. He sees potential inflationary pressures such as in wages, the confidence firms have in pricing power, and housing, and as such is “supportive of being patient.”
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The Week Ahead
This week we will see the next round of inflation data starting with the consumer price index on Tuesday, followed by producer prices and import/export prices on Friday. The current consensus estimate sees prices rising 0.2% in January but core prices up 0.3%. Other reports on the economic calendar include retail sales on Thursday, which after a hot streak are expected to show a 0.1% decline in January due to lower gasoline sales (core index, excludes gas and auto sales, expected to rise 0.3%). Also on Thursday is jobless claims, the Philly Fed and Empire State manufacturing indexes, industrial production, and housing market index, and finishing the week with housing starts for January and the latest consumer sentiment reading. On the earnings side, we are over halfway through earnings season but still many companies left to report, mostly smaller sized companies. This week will include about another 10% of S&P 500 companies reporting with notable releases from Coca-Cola, Shopify, Molson Coors, Hasbro, Airbnb, Lyft on Tuesday, Kraft Heinz, Cisco, Twilio, Sony on Wednesday, Deere, DoorDash, Roku, and Coinbase on Thursday. Elsewhere on the corporate calendar, there will be several analyst day events and brokerage conferences. Finally, as was the case last week, there will be a handful of Fed policymakers making public appearances.