The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Invest with smart knowledge and objective odds

THE DAILY EDGE: 8 May 2024: The S&P 500 Is Not The Economy

Profits Are Booming—and That’s Shielding the Economy CEOs are upbeat, and results are on the upswing. The somewhat slower job growth reported last week isn’t the same as a major downturn.

(…) The bulk of U.S. companies have now reported first-quarter results, and they show profit growth is picking up. Earnings per share for companies in the S&P 500 now look to be up 5.2% from a year earlier, according to FactSet, better than the 3.4% analysts expected at the end of March, and marking the strongest growth in nearly two years.

Company results coming in ahead of the estimates is a regular occurrence. More unusually, analysts also spent last month lifting their current-quarter estimates. They now expect second-quarter earnings per share to gain 9.8%, compared with 9% at the end of March. The last time analysts spent the first month of a quarter raising rather than lowering earnings estimates was during the fourth quarter of 2021, according to FactSet earnings analyst John Butters.

Corporate profits are important because they show the U.S. economic engine continues to purr. While some other economic indicators, such as consumer-sentiment readings, have been downbeat, and inflation has ticked up, a strong U.S. profit performance typically points toward continued expansion.

The drift higher in earnings estimates might be because companies, instead of feeling a need to temper analysts’ optimism and nudge estimates lower, are upbeat themselves. Among companies in the S&P 500, the term “recession” showed up in just 100 transcripts of earnings calls, investor events and conferences recorded in the first quarter, according to FactSet. That was down from 302 in the first quarter of 2023, and the fewest in two years.

Survey-based measures of corporate sentiment have picked up. The Business Roundtable’s index of chief executive officers’ economic outlook rose to the highest level in the first quarter since the second quarter of 2022. Indexes of CEOs’ hiring and capital-spending expectations have gained ground. A survey of chief financial officers conducted by Duke University’s Fuqua School of Business with the Federal Reserve banks of Atlanta and Richmond showed a similar increase in optimism.

“There is not a reason if profits are good to retrench,” said the Duke economist John Graham, who directs the CFO survey. Moreover, many CFOs say their companies are still struggling to attract workers.

For now, Graham thinks companies are in the mode of adding workers when the profit outlook is good, and holding employment steady if the outlook becomes shaky, rather than shedding the employees they put so much effort into hiring. So even if earnings do falter, companies might be slow to turn to layoffs. (…)

Initial claims for unemployment insurance—a leading indicator of layoff activity—have remained low. (…)

Thumbs up True for S&P 500 companies.

Thumbs down Not for mid and small caps where profits and margins are not rising as Ed Yardeni illustrates:

image

image

Thumbs down And not for very small biz:

 image image

  • NFIB Job openings are now back in line with levels reached before the pandemic (2017-2019).

image

  • Job creation plans are below what would be typical in a strong growth economy.

image

  • Labor cost reported as the single most important problem for business owners increased 1 point to 11 percent, only 2 points below the highest reading of 13 percent reached in December 2021.

image

Data: Goldman Sachs 10,000 Small Businesses Voices. Chart: Axios Visuals

Pointing up Employment reports indicate strong labor markets, but it is less clear where all these jobs are being created. Non-professional services spending is strong, but not strong enough to explain the reported job creation. GDP growth was weak in the first quarter, so where are all those job increases occurring? Small businesses are not reporting net gains in employment. Job reports have been puzzling for some time now, and with an election at hand may remain so until after the election. (NFIB)

Yes, large companies are doing very well, but they are not the economy.

Investors are totally cognizant of these trends (charts courtesy of Ed Yardeni):

  • S&P 500/S&P 600

image

  • S&P 100/S&P 500

image

  • S&P 500 equal-weighted/market cap-weighted

image

Perhaps the real shield to the economy is from the wealth effect from equities and housing.

The economy looks pretty great for Americans who own their own homes — that’s nearly 66% of the population! A record $11 trillion of home equity is “tappable,” meaning homeowners can borrow against it while maintaining at least 20% equity in the house, per the report, which looks at data from March. About 48 million folks have access to tappable equity, with an average of $206,000 per mortgage holder.

image

Data: ICE; Chart: Axios Visuals

As to employment, so far, so good but recall these charts from recent posts:

Cumulative pandemic-era excess savings

image

image

imageimage

This is helping:

The price of a barrel of West Texas Intermediate crude is falling again today, and at least as of the time I’m typing this it’s right around $77. Just a month ago, it was above $85. (Bloomberg)

Rents Set to Be Last Domino to Fall in Global Inflation Battle

Surging rents across many developed economies are proving to be a stubborn hurdle for central banks as they struggle to nail down inflation once and for all this tightening cycle.

In the US, UK, Canada and Australia, rapidly rising housing costs — which have a hefty weighting in consumer price index baskets — are preventing inflation from declining closer to central banks’ targeted levels. The danger is that workers will demand even fatter pay checks to deal with the cost-of-living squeeze, undermining the inflation fight even further. (…)

“I am confident that as long as market rents remain low, this is going to show up in measured inflation,” Powell told reporters last week after the Fed’s two-day policy meeting. The central bank held rates at a more than two-decade high, while signaling a desire to cut when confident that inflation is under control. Traders are currently betting on at least one 25-basis-point rate cut this year.

Still, Powell may have to wait. Household expectations about the change in the cost of rent have risen sharply from last year, with rental costs expected to increase by 1.5 percentage points to 9.7% for the next year, according to a survey by the New York Fed released Monday. (…)

“Housing is a real problem in the United States due to a huge shortage of affordable housing, and in part because of high interest rates,” Treasury Secretary Janet Yellen told Bloomberg News. “That said, I strongly believe — I think it is highly likely — that shelter costs, which have been pushing up inflation, will come down.” (…)

Mrs. Yellen surely meant shelter inflation because shelter costs never come down. As a labor expert, she should know the tight relationship between wages and rents. People generally chose their abode based on what they can afford, whether they buy of they rent.

image

image

image

ACCURACY MEASURED

Data: UmpScorecards; Chart: Will Chase/Axios

  • The Forecasting Record of the Fed and the Market (Apollo)

The Fed started publishing the dot plot in 2012, and comparing the Fed’s forecasts with the forecasts from Fed funds futures yields three important conclusions, see charts below:

1) The Fed’s and the market’s forecasts about the future path of the Fed funds rate are almost always wrong.

2) The forecasts are very similar, and the Fed has managed to anchor market expectations about where it thinks the Fed funds rate is going.

3) The direction of the forecasting mistake is always identical, suggesting that the market is taking its cue about the future path of interest rates from the Fed’s dot plot.

The good news is that the Fed is able to anchor market expectations, and thereby reduce volatility in financial markets.

The bad news is that when the Fed’s forecast is wrong and the FOMC has to move from three cuts in 2024 to say, one cut, it will hurt Fed credibility.

The US economy’s lower interest-rate sensitivity, combined with strong structural and cyclical tailwinds to growth, brings us to the conclusion that the Fed will not cut interest rates in 2024.

image

image

Source: FOMC, Bloomberg, Apollo Chief Economist

THE DAILY EDGE: 7 May 2024

Pandemic Savings Are Gone: What’s Next for U.S. Consumers?

From the San Fran Fed:

The latest estimates of overall pandemic excess savings remaining in the U.S. economy have turned negative, suggesting that American households fully spent their pandemic-era savings as of March 2024. However, consumer spending has remained strong in recent months, which raises an important question: What’s next? (…)

Cumulative pandemic-era excess savings

Note: Excess savings calculated as the accumulated difference in actual de-annualized personal savings and the trend implied by data for the 48 months leading up to the first month of the 2020 recession as defined by the National Bureau of Economic Research.
Source: Bureau of Economic Analysis and authors’ calculations.

Consumers could use their non-pandemic-related savings as another source of funding for their household consumption. Many households saw notable gains in their equity and other asset holdings over the past year (Abdelrahman, Oliveria, and Shapiro 2024). Also, households across the income distribution now own notably more nonfinancial assets, such as real estate holdings and vehicles, relative to pre-pandemic levels, according to Distributional Financial Accounts data from the Federal Reserve Board. To the extent that households are able to access funding from these less liquid assets, consumer spending could continue at a robust pace going forward. Finally, consumers could use debt—such as credit cards and personal loans—to further support their current spending habits, although the current elevated interest rate environment means that the cost of using credit is higher than in the decade preceding the pandemic recession. (…)

Recall that retail sales have been choppy this year. January was very weak, bad weather. February bounced back, good weather, but really only made up for January. March? Did the early Easter and the Amazon sale create the illusion of strength?

Bank of America’s data confirm my contention that March retail demand was not as strong as generally thought after March’s release (Roaring Lion???). It also looks like services were also on the weak side in March.

In fact, on a seasonally adjusted (SA) basis, total card spending per household fell 0.7% month-over-month (MoM) in March, following the 0.4% rise in February.

Spending on services fell 1.1% MoM SA in March, with weakness in both lodging and restaurant spending, while retail spending (excluding restaurants) decreased by 0.3% MoM.

Employment growth needs to be sustained.

U.S. Jobs Growth Set to Slow, Conference Board Says Conference Board’s employment trends index fell to 111.25 in April

U.S. jobs growth could stall in the second half of 2024, with signs of a slowing labor market, according to monthly gauge of employment trends

The Conference Board’s employment trends index fell to 111.25 in April from a downwardly revised 112.16 in March, the private-research group said Monday.

“The labor market is beginning to show signs of cooling following a period of very strong growth since the pandemic recession,” said Will Baltrus, associate economist at The Conference Board.

However, substantial job losses are unlikely to occur over the coming months, as employers are still facing labor shortages, Baltrus said. (…)

The eight leading indicators of employment aggregated into the Employment Trends Index include:

  • Percentage of Respondents Who Say They Find “Jobs Hard to Get” (The Conference Board Consumer Confidence Survey®)
  • Initial Claims for Unemployment Insurance (U.S. Department of Labor)
  • Percentage of Firms with Positions Not Able to Fill Right Now (© National Federation of Independent Business Research Foundation)
  • Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)
  • Ratio of Involuntarily Part-time to All Part-time Workers (BLS)
  • Job Openings (BLS)*
  • Industrial Production (Federal Reserve Board)
  • Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)**
    *Statistical imputation for the recent month
    **Statistical imputation for two most recent months

In red are the indicators that declined in April. Orange is more appropriate for Job Openings because Indeed Job Postings are down again in April and for Industrial Production, up in February and March but going downward since September 2023. Manufacturing and trade sales also seem to have peaked in December.

I find it very odd that 2 of the 8 indicators are “goods” sensitive and none measures service providers which procure 86% of all jobs in the U.S.. The Conf. Board should modernize its ETI and LEI indicators.

As shown yesterday, April’s PMIs revealed a rare drop in services employment.

That said, we may be defying gravity:

image

US banks report weaker loan demand, Fed survey says

U.S. banks reported renewed weakening in demand for industrial loans and a decline in household demand for credit in the first quarter of the year, according to a Federal Reserve survey of senior loan officers published on Monday.

The net share of large and medium-sized banks reporting tightening standards for commercial and industrial loans ticked up to 15.6%, from 14.5%, the survey showed. A rising share of banks reported weaker demand for C&I loans.

For commercial real estate loans of all types, however, the share of banks tightening standards shrank to the lowest in two years. A declining share reported weaker demand for CRE loans; foreign banks reported an overall rise in demand for CRE loans.

For households, a rising share of banks reported tightening standards for auto loans, while a shrinking share of banks did so for credit cards and other types of consumer loans, the survey showed.

Household loan demand deteriorated across all categories, the survey showed, with demand for auto loans at its weakest in a year.

CPI-New vehicles is up 20% since 2019, Sales are down 5% and flat since June 2023.

image

China Offers Cash for Urban Revamp, Testing New Ways to Boost Growth

China will hand out billions of yuan to help cities renovate run-down public buildings and upgrade infrastructure, as policymakers seek ways to inject life into an economy weighed down by a housing slump.

Fifteen qualified cities can get as much as 1.2 billion yuan ($166 million) each, the Ministry of Finance said in a statement late Monday. The money will go to improve pipelines, power networks or drainage systems, and to overhaul public buildings and ensure they’re accessible for children and older people, it said. The program is due to last for three years.

Urban renovation, along with affordable housing and multi-functional infrastructure, is one of Beijing’s “three major projects” seen as key to offsetting a property slump that has dragged consumer confidence down. The People’s Bank of China said last year it’s ready to back them with 500 billion yuan in loans.

The Ministry’s statement offers rare details about the magnitude of direct government funding for the projects, which will likely start on a trial basis and then potentially get rolled out more broadly. (…)

The statement also suggests China will increase the role of fiscal policy, in coordination with monetary easing, to help finance the three major projects in a more sustainable way, Pang said.

China’s Thrifty Travelers Show Consumer Confidence Is Weak

Travelers made 28.2% more trips but spending only rose 13.5% from the 2019 break, the Ministry of Culture and Tourism said in a statement Monday. This translates to a 11.5% drop in spending for each traveler over the holiday ending Sunday, according to banks including Societe Generale, Goldman Sachs Group Inc. and Citigroup Inc.

“Spending per head softened and was again below the pre-pandemic level, owing partly to more tourist flows towards lower-tier cities, and suggesting continued consumption downgrading,” said Goldman economists including Lisheng Wang in a note late Monday, adding that more policy support is needed to sustain the recovery of the services sector. The 2019 holiday was one day shorter. (…)

Less than one in four residents wanted to spend more while an growing share of the urban population wanted to save in the first quarter, according to a survey by the People’s Bank of China. (…)

Image

While big cities like Beijing and Shanghai remained popular, many more opted for cheaper destinations and small towns, online travel agency Trip.com Group said in a Sunday statement. (…)

Bookings for hotels and tourist spots in tier-3 or lower-ranked cities in the country’s northwest and west more than doubled during the break from the same period a year earlier, according to data released by Tongcheng Travel Holdings, another tourism agency. (…)

Global Bond Rally Faces Supply Test as US Refunding Kicks Off

The global bond rally ignited by hopes of lower interest rates in the US will face its first big test on Tuesday, with the Treasury starting sales that will total $125 billion this week.

Investors who have been piling into bonds since Federal Reserve Chair Jerome Powell struck a less-hawkish-than-feared tone last week will have to absorb $58 billion in three-year Treasuries on Tuesday as part of the so-called quarterly refunding auctions. A combined $67 billion of 10- and 30-year Treasury securities will come later this week. (…)

The continuation of the rally hinges on upcoming economic data and next week’s US inflation report for April is the most important market driver. While there are signs of deceleration in some areas of the US economy, inflation remains sticky — a reality that may limit what the central bank can do and means bond yields are likely stuck in their recent ranges. (…)

Amundi, Pictet Lead Contrarian Wave to US Stock Exceptionalism

To some investors, the US exceptionalism that’s fueled the record-breaking rally on Wall Street has run its course.

Despite resilient consumption and artificial intelligence optimism, US economic growth slid to an almost two-year low last quarter while inflation stayed high. Confidence is starting to waver, with the S&P 500 Index ending a five-month winning streak in April following a series of major earnings misses.

These are signs that playbooks founded on expectations that the world’s No. 1 economy and its companies will outdo others even with higher rates are flawed, according to contrarians including Pictet Asset Management and Amundi SA. Instead, there are better opportunities in Europe and Asia, given more benign valuations and inflation outlooks, they said.

US exceptionalism “is overrated,” said Luca Paolini, chief strategist at Pictet. “There’s probably too much optimism about the US in terms of growth and too much pessimism about the rest of the world.” (…)

Last week, BofA’s Michael Hartnett also called the coming end of U.S. exceptionalism. I discussed that on February 21: American Exceptionalism: Don’t Extrapolate