Weekly Research Briefing: Hard Landing or Soft Landing?

@Schuldensuehner: Feb JOLTs report bullish for stocks, w/number of job openings dropping 630k to 9.93mln, lowest since May 21, a figure Fed is likely going to be pleased with. Largest decreases in job openings in professional & business services (-278k); health care (-150k). (via @knowledge_vital)

@LizYoungStrat: Mar ISM Services came in at 51.2 (neutral = 50), below the est of 54.4. All components weakened, but New Orders were particularly weak (and are the fwd looking component)--down from 62.6 in Feb to 52.2 in Mar.

A survey of 71 banks in the Dallas Fed district done after SVB went under shows a dramatic reversal in loan volumes, see chart below. This Fed survey was carried out from March 21 to 29.

"And while this is nothing like 2008, it is not clear when this current crisis will end. It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative…We are seeing people reduce lending a little bit, cut back a little bit, pull back a little bit. It won’t necessarily force a recession, but it is recessionary." - JPMorgan Chase CEO Jamie Dimon

@AtlantaFed: On April 10, the #GDPNow model nowcast of real GDP growth in Q1 2023 is 2.2%. https://bit.ly/32EYojR #ATLFedResearch

@bespokeinvest: If it wasn't for that one month period from early February to early March, it would be looking like a pretty steady downtrend for the 2-year yield.

“I am pleased to report that we have now made it through most of the price increase related disruptions and the prospects for revenue growth in the back half of the fiscal year are looking optimistic. I am happy to report that it’s looking like the month of March, though not yet fully finalized from an accounting perspective, will be a new record sales month for the company”.

Conagra Brands posted lukewarm results on Wednesday that should nonetheless be reassuring to investors in it and other packaged food companies.

The maker of Marie Callender’s pies and Orville Redenbacher’s popcorn said Wednesday that organic sales in its fiscal third quarter rose 6.1% from a year earlier. That was a significant slowdown from 8.6% in the second quarter, and a tad less than the 6.3% growth that analysts had penciled in, according to consensus estimates from Visible Alpha...

But the bigger story for Conagra and the broader food sector is probably the recovery in margins, as price increases have finally caught up with inflation in the cost of inputs. In Conagra’s quarter, adjusted gross margins were up more than 4 percentage points from a year earlier to 28.1%. This margin inflection began last quarter, but its continuation is a hopeful sign that the profit recovery is here to stay.

The company also tweaked its guidance for the full fiscal year, implying slightly weaker sales growth but stronger profitability. It now expects organic sales to grow 7% to 7.5%, compared with the 7% to 8% it forecast last quarter. But it also expects adjusted earnings per share of $2.70 to $2.75 for the fiscal year, up from its prior guidance of $2.60 to $2.70.

[UAL] Notes sharp increase in 'unprecedented' demand for travel outside US; March International bookings +15% y/y; Its capacity across the Pacific will exceed 2019 levels by more than 15% this summer

• United Airlines will fly to 114 different international cities this summer and has expanded its flying by 25% versus last year to meet the sharp increase in demand for travel outside of the U.S. The airline is already the largest carrier across both the Atlantic and Pacific and this summer's schedule includes nearly 25 new routes. According to United booking data, international bookings are already 15% higher than the same period in 2022.
• This summer, United will also be the largest airline across the Pacific, serving 27 unique destinations. Excluding Mainland China and Hong Kong, United's capacity across the Pacific will exceed 2019 levels by more than 15% this summer.
• Exec: "With unprecedented demand for travel overseas, we'll have more service to popular cities while also adding new and unique destinations for customers to explore."

"Consistent with our last business update, we remain on an upward trajectory as we further closed the gap to 2019. We are still experiencing a record wave season, which started early, gained strength and has extended later into the year..Booking volumes for our North American brands have been running in excess of record 2019 levels for the last 6 months and booking lead times are now back to peak levels…Demand trends are improving across all regions as we exit the winter period and home heating concerns fade." - Carnival Corp and Carnival PLC CEO Josh Weinsten

The construction industry has become a pillar of strength in the U.S. economy, helping contractors offset rising expenses as they deal with labor shortages.

A building boom in industrial plants, infrastructure and other nonresidential projects is offsetting home construction in the U.S. that has been weakening under the weight of higher interest rates. Contractors said spending on nonresidential projects has stayed strong as borrowing costs rise, which usually drives up the cost of financing construction work.

Spending on nonresidential construction for February, the most recent month available, totaled $982 billion, nearly 17% higher than a year earlier and steady with January, according to the U.S. Census Bureau.

“I’ve got more work to look at and bid on than I could possibly handle,” said Jeff Harper, president of Harper Construction Co. in San Diego. “I’ve said ‘no’ to 10 jobs in the last four months.”

@DanGreenhaus: Worrying about bank commercial real estate exposure is all the rage. So probably worth observing that on either a nominal or a % basis, we've now seen the largest two-week drop in CRE loans by banks on record (nearly 20 years). It’s "only" $30B on a nearly $3T loan book but still.

Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?

“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.”

The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.

Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers. The wall of debt is set to get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the MS note. Banks also own more than half of the agency commercial mortgage-backed securities — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector.

Perhaps the most interesting point that Jim made in our conversation about commercial real estate distress is that the people who are licking their chops and sensing an opportunity are the people who know how to get their hands dirty and reposition a piece of real estate. If you know what you're doing to get a mall rezoned or can navigate turning an office building into apartments, you might be able to make a lot of money right now. But this takes local knowledge. It takes specialized knowledge.

After the Great Financial Crisis, some of the players who made a fortune were big, institutional asset managers that bought up a bunch of single family homes that had been foreclosed upon. And the main knowledge you needed to do that trade was familiarity with a spreadsheet and an understanding of finance.

This time around, spreadsheet knowledge isn't gonna cut it. And so to some extent, the story in commercial real estate is a specific instance of a more general story that the 2020s are all about the physical world. Whether it's energy, infrastructure, semiconductors, or distressed commercial real estate, the winners are likely to be the people that know how to operate something well, rather than those who just have access to cash and the ability to buy up financial assets.

@NewsLambert: After 6 straight month-over-month declines, U.S. home price growth as measured by the seasonally adjusted Zillow Home Value Index turned positive in March.

According to the latest report from AQR, EM stocks are now expected to generate about a 3 percent premium over developed market stocks, one of the highest levels in the past 25 years. AQR says that the rising premium is driven in part by improving fundamentals across emerging markets for decades. Between 1980 and 2020, GDP per capita in emerging markets, expressed as a share of developed markets, surged from 20 percent to over 50 percent. That means the gap between the economic output of emerging and developed markets has narrowed significantly.

The findings come at a time when many active managers have deemphasized emerging market stocks, given their relative underperformance since the global financial crisis. According to eVestment, actively managed equity funds have an average of 8.8 percent in emerging market stocks. The MSCI All Country World Index has 12.2 percent in emerging markets stocks...

“Emerging risks aren’t what they used to be,” Michele Aghassi and Dan Villalon, principals at AQR, wrote in the report. The volatility of EM stocks has come down significantly from the peak levels of the global financial crisis. The trailing five-year volatility of EM stocks now hovers around 20 percent, roughly the same volatility experienced by developed market stocks.

Furthermore, the correlation between EM stocks and developed market equities has decreased from 0.87 in 1999 to 0.77 in 2022, meaning EM stocks now offer better diversification benefits than they have in the past. “This evolution suggests that from the standpoint of portfolio risk, the case for emerging markets potentially even increased over the past decade, compared to history,” the report said.

Tesla Inc assures its millions of electric car owners that their privacy “is and will always be enormously important to us.” The cameras it builds into vehicles to assist driving, it notes on its website, are “designed from the ground up to protect your privacy.”

But between 2019 and 2022, groups of Tesla employees privately shared via an internal messaging system sometimes highly invasive videos and images recorded by customers’ car cameras, according to interviews by Reuters with nine former employees.

Some of the recordings caught Tesla customers in embarrassing situations. One ex-employee described a video of a man approaching a vehicle completely naked.

Also shared: crashes and road-rage incidents. One crash video in 2021 showed a Tesla driving at high speed in a residential area hitting a child riding a bike, according to another ex-employee. The child flew in one direction, the bike in another. The video spread around a Tesla office in San Mateo, California, via private one-on-one chats, “like wildfire,” the ex-employee said.

Other images were more mundane, such as pictures of dogs and funny road signs that employees made into memes by embellishing them with amusing captions or commentary, before posting them in private group chats. While some postings were only shared between two employees, others could be seen by scores of them, according to several ex-employees.

People who are overweight are flocking to the drug Ozempic to slim down. Looming is an even more powerful weight-loss treatment.

The drug Mounjaro helped a typical person with obesity who weighed 230 pounds lose up to 50 pounds during a test period of nearly 17 months.

No anti-obesity drug has ever safely made such a difference. In the coming months, it is widely expected to get the go-ahead from U.S. health regulators to be prescribed for losing weight and keeping it off, and some patients are already using it unapproved for that purpose.

AThe advance of Mounjaro, which is already on the market to treat Type 2 diabetes, has excited doctors and patients who have been waiting decades for effective treatments, while helping turn its maker, Eli Lilly & Co., into the most valuable standalone pharmaceutical company in the U.S. with a market value of more than $300 billion.