Wentz Weekly: The “Santa Claus Rally”

Wentz Weekly Insights
The “Santa Claus Rally”

Recent Economic Data

• Home builder sentiment was down another 2 points in December, with the index down to 31 for 12^th consecutive month of declines (anything below 60 reflects weaker conditions) and for the lowest reading since 2012. Positive news is sales expectations over the next 6 months improved slightly. Also, 62% of builders are noted to be incentivizing new purchases, for example with mortgage buydowns (buying points to reduce interest rate).

• The number of housing starts fell 0.5% in November to a seasonally adjusted annualized rate of 1.427 million homes. This is 16.4% below the November 2021 rate of 1.706 million. The number of permits filed in the month to build a new home fell 11.2% to an annualized rate of 1.342 million and is 22.4% below the rate from a year ago.

• The number of existing home sales in November was 4.09 million, on a seasonally adjusted annualized rate, falling 7.7% in the month for the 10^th consecutive months. Sales of existing homes are now down 35.4% from a year ago. Housing supply has been up and down, with 6.6% less homes on the market in November at 1.14 million units, but up 2.7% from a year earlier. The unsold inventory sits at 3.3 month supply at the current sales pace, improving from 2.1 months a year ago. Median prices continue to climb, up to $370,700 in the month, a 3.5% increase from last year. Properties are starting to be on the market longer, with the average listing up to 24 days, up from 18 days a year ago, with 61% of homes on the market less than one month.

• Sales of newly built single-family homes rose 5.8% in November to a seasonally adjusted annualized pace of 640,000 homes, much better than the 600,000 expected. This represents a 15.3% decline from the pace a year ago. The median sales price has been pretty volatile this year, just like actual sales, and declined 2.8% to $471,200, but is still up 9.5% from a year ago. New home sales tends to show more volatile results from month to month, but the overall trend is much lower sales than where the year started, although plateauing recently.

• The consumer confidence index, derived from a survey of consumers by the Conference Board, was at 108.3 for the December survey, better than 101 expected and represents a solid increase of about 7 points from November for the best level since April. The present situations index was 147.2, more than expected and 9 points above November, while the expectations index was 82.4, up from 76.7 in November. A level below 80 represents recession worries, however the 82.4 in December was the best level of the year. Confidence may have bounced back thanks to lower gasoline prices and the recent rise in asset prices like stocks.

• The number of unemployment claims filed last week was 216,000, relatively unchanged from the prior week, with the four-week average at 221,750. The number of continuing claims was 1.672 million, down slightly from the prior week with the four-week average up about 30k to 1.657 million.

• Third quarter GDP was revised up in the final estimate to a 3.2% annualized increase in the quarter, above the second estimate of 2.9%. The higher growth was due to upward revisions in consumer spending, nonresidential fixed investment (business investment), and government spending, offset by downward revisions in inventory investment and exports. In addition, the GDP price index was revised up again, to a 4.8% increase, up from 4.6% in the first estimate.

• The BEA’s personal income and outlays report showed another large increase in incomes, consumer spending that slowed, and inflationary pressures that continued in November:
• Personal income rose 0.4% in November, slightly more than expected but decelerating from a 0.7% increase in October. Compared to a year ago income is up 6.2%. The more important item, and something the Fed will focus more on, is wages and salaries which grew another 0.5% in the month and are now 7.1% higher from a year ago.
• Consumer spending via the personal consumption expenditure index rose 0.1% in the month, a sharp slowdown from the average 0.8% monthly increase seen over the past 24 months. Compared to a year ago spending was 9.0% higher. The shift to service spending continues, which rose 0.7% in the month while spending on goods fell 1.0%. Goods spending has slowed to a 5.1% increase from a year ago while services spending has grown to a 10.4% increase. The spending number was lower than expected but could be due to several factors such as people doing holiday shopping earlier in the holiday season (October) and Amazon holding its second prime day in October.
• The big item, the PCE price index, rose 0.1% in the month and up 5.5% from a year ago, down from a high of 7.0% in June. Core prices up 0.2% in the month and 4.7% from a year earlier, although slowing from 5.0% the previous month is still higher than expected.

• The preliminary read on Durable goods orders for November, which gets revised in the factory orders data release, showed orders were down 2.1% in the month, the largest decline since April 2020 when it declined by a record amount. Transportation was the issue, orders excluding the volatile category were up 0.2%, while nondefense ex-aircraft orders, a better picture of capital spending, were up 0.2% and better than expected.

• The final read on the December consumer sentiment index, based on a survey of consumers feelings and expectations on the economy, was 59.7, up from 59.4 in the mid-month reading, but still a depressed reading. The current conditions index was 59.4, down from 60.2, while the expectations index was 59.9, up from 58.4. More importantly, inflation expectations improved, but remain elevated, with the one-year ahead inflation expectation at 4.4%, down from 4.6% last month, and the five-year ahead expectation at 2.9%, down from 3.0%.

• The average 30 year prime mortgage rate was 6.31% last week, down from 6.33% the prior week and down from 7.08% just a month and a half ago.

Company News

• The Wall Street Journal reported Delta is looking to be the first airline to offer free WiFi on its flights next year. It is testing WiFi infrastructure and plans to initially offer the free service on a significant portion of its planes before the service rolls out to more of its fleet next year.

• After multiple reports throughout the week, it was confirmed by the NFL and Alphabet that YouTube, owned by Alphabet (parent company of Google), secured the rights to the NFL’s Sunday Ticket. The NY Times reported Google has discussed paying $2.5 billion per year for the package, up from the $1.5 billion AT&T (DirecTV) is currently paying.

• Shares of Cleveland Cliff’s moved higher last week after saying it will see higher fixed prices for steel in 2023, with an average selling price 7.7% higher than 2022, and says its costs will be “significantly lower” in 2023 than they were this year.

• Wells Fargo agreed in a settlement with the Consumer Financial Protection Bureau to pay a civil penalty of $1.7 billion over matters related to fees/interest charges on loans and consumer deposit accounts. The bank is still dealing with legal challenges over its previous sales practices and will still have a $1.95 trillion asset cap in place by the Federal Reserve until it can prove it has systems in place to prevent sales abuse practices.

• In its latest quarterly earnings report, memory chip maker Micron reported lower sales and earnings than expected due to an oversupply of its chips after a global shortage for much of the past 18 months, said it would take “decisive action to cut” supply and expenses including cutting 10% of its staff, and suspends its share buyback program. It did however say it expects “gradually improving demand trends” over the upcoming months but it will remain a challenging environment.

• An Axios report says Michael Bloomberg is said to, due to his belief the merger deal between News Corp and Fox will fail, be interesting in purchasing Dow Jones or the Washington Post. News Corp is the parent company of Dow Jones, which owns papers such as Wall Street Journal, Barron’s, and MarketWatch.

Other News

• Congress passed a $1.7 trillion government spending package that averts a government shutdown, sending it to the President to sign. The package includes another $45 billion for Ukraine in its war against Russia, legislation on retirement savings, among other items such as banning TikTok from government devices and removing the vaccine mandate for the military.

• One of the more dovish central banks around the globe, and the last central bank from a developed nation to still have not raised short term interest rates, the Bank of Japan, got a little hawkish and said after its policy meeting it will keep short-term rates at -0.1% but it will widen its yield curve tolerance range to ease the cost of prolonged monetary stimulus. It has been since 2016 that the BoJ has pegged its 10-year government bond yield to as close to 0% as possible with a range of +/- 25 basis points but it will now let the yield float +/- 50 basis points (it will allow the 10-yr government bond yield to rise to a max of 0.50%). The yield has been at 0.25% for some time and after the announcement immediately moved to 0.40% while the yen spiked close to 4%, and stocks fell 2.5% in Japan. In the BoJ’s statement on the decision it did not mentioned inflation, rather the move was due to the discrepancies between the 10-year bond and yield on other maturity bonds and suggested it did not want the move to be taken as a step toward monetary tightening.

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