Private Wealth

Weekly Research Briefing: Peak Financial News Week

January 31, 2023

I can't recall a bigger financial news, data and decision release week than this one. Central bank decisions are coming from the Fed, European Central Bank, the Bank of England and Brazil. Data releases on U.S. jobs, U.S. ISM, Euro inflation, Euro GDP plus an OPEC meeting. And the biggest week of the earnings season will hit with over 30% of the S&P 500 Index reporting including the four tech mega-caps: Apple, Alphabet, Amazon and Facebook.

The FOMC should increase the Fed Funds rate by 0.25% on Wednesday. They know that they have tightened significantly and are still watching the economy for signs of future slowing (the lag effect). The Fed would prefer that the equity and credit markets were not on the move, as it will only provide fuel to the current economy's fire. But if the markets are rising while inflation is falling, will the Fed be less concerned and allow it to happen? Wednesday's release and Fed Chair Jerome Powell's press conference could tell us a lot.

It was an earnings smorgasbord last week. There was something for everyone. Most important to me was seeing the market react positively to mostly inline results and guidance. Sometimes, even lowered guidance was rewarded by the lack of a stock decline. Look at Microsoft and ServiceNow which lowered growth rates for their cloud businesses only to see their stocks recover losses and move higher. Or Capital One, which disappointed in their credit numbers and the stock charged +9%. Boeing missed and stock flew into the green. Tesla reported inline numbers and guidance and the stock zoomed up 9%. While Intel and IBM still had difficulties, it appears to me that the market was conditioned for a tough earnings period and investors were looking to buy stocks on most all pullbacks. And then there were the earnings reports from American Express, Visa and Mastercard. Tough to find evidence of a recession in seeing their revenue and customer spending trends.

Speaking of investors wanting to own stocks, it looks like the IPO gates are being unlocked. Hong Kong has so far listed 11 new companies with 100 IPOs on deck. And one of the world's largest private companies, Stripe, just hired Goldman Sachs and J.P. Morgan to advise them on going public. A re-open equity issuance window would be a strong sign of support for the global financial markets.

In disinflation news, U.S. natural gas prices have fallen from $10 to less than $3 on full Euro/U.S. storage, a warmer U.S./Europe and continued rising U.S. production. In the auto world on Monday, Ford cut the price of its Mustang EV which followed Tesla's 10-20% price cuts two weeks ago. On Friday, the U.S. Core PCE Inflation fell to a 4.4% pace as was expected. And in the world of protein, egg prices have finally broken as bird supplies recover from the recent episode of bird flu.

Have a great week and keep that bottle of Visine at arm’s reach.

Welcome to Fed decision week...

The FOMC is expected to hike the Fed Funds rate by +25 basis points this week and +25 bps at the March 22 FOMC meeting. After that is where the market divides its thoughts. For the May 3rd FOMC meeting, the odds of no hike are half and the odds of another +25 bps hike is 40%.

CME Group

Investors continue to see a big pivot in the future...

Looking out past May, the market is betting increasingly on a collapse in the Fed Funds rate back to 3% by the end of 2024. Is the market betting on a soft landing plus inflation collapse, or a hard landing? Stay tuned.


Did Canada just show us a key page from the Global Central Bank playbook?

As expected, the Bank of Canada hiked 25bps last Wednesday and said that it would now pause and watch the impact of its aggressive rate hike actions. As other global central banks watch their core inflation readings slide back toward their targets, will they follow Canada's lead in pivoting to a pause in rate hikes?

The Bank of Canada raised interest rates for an eighth consecutive and potentially final time, saying it expects to move to the sidelines and weigh the impact of its rapid tightening.

Policymakers led by Governor Tiff Macklem increased the benchmark overnight lending rate by 25 basis points to 4.5% on Wednesday, the highest level in 15 years. Bonds rallied and the loonie dropped.

While the quarter percentage point hike matched expectations of markets and economists, most analysts didn’t see the central bank explicitly declaring a potential end point...

The conditional pause — the first among Group of Seven central banks — suggests policymakers are convinced the current rate is restrictive enough to restore price stability.

Macklem and his officials “provided some unexpected guidance that this may be the peak” for rates, Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. He predicted that “the economy will indeed evolve in-line or even a little weaker than the bank suspects, and that today’s hike in interest rates will indeed mark the final one of this cycle.”



Come on Great Britain. Double-time it to a positive GDP and join the party...

GOLDMAN SACHS (Jan Hatzius): “All major economies (except the UK) now look likely to avoid recession this year.”

Goldman Sachs

Speaking of GDP, the U.S. figures surprised last week due to a solid inventory build...

Real GDP rose 2.9% annualized in the 4Q22, three tenths above consensus. The details were much softer however, as inventories contributed over half of the increase and could weigh on 1Q23 growth if the inventory rebuild was not a simple reaction to long-bottlenecked supply chains but rather a miscalculation of end market demand in December. To the miscalculation end, both consumption and business fixed investment growth slowed by more than we expected in 4Q22.

Goldman Sachs

The Daily Shot

Durable goods blasted higher last month led by transportation/aerospace...

@LizAnnSonders: December durable goods orders popped higher, +5.6% m/m vs. +2.5% est. & -1.7% prior (rev up from -2.1%) … however, ex-transportation orders -0.1% vs. -0.2% est. & +0.1% prior

One of the Fed's favorite measures of inflation fell on Friday as expected...

PCE Goods Inflation fell to 1.4% year-over-year while Services Inflation fell to 5.2%. Let's see if the FOMC makes a comment about the two series.

The Daily Shot

It's no coincidence that both bond and stock volatility peaked when inflation peaked...

And falling volatility should be good for both asset prices. Now will the Fed allow the U.S. financial conditions indexes to improve if higher prices are being caused by lower inflation?


Difficult for me to see the market betting on a hard landing plus a financial crisis in looking at these two charts...

U.S. financials +20% from their October low and European financials +45% from their low. I will worry when these two series decide to head back to their lows.

Walter Deemer Chart List

Financial market stability is coming at a perfect time for fully funded corporate pension plans who are now de-risking into more fixed-income securities...

For some of America’s biggest bond buyers, the soft-versus-hard-landing debate on Wall Street might be a sideshow. They’re getting ready to swoop in with as much as $1 trillion, no matter what happens.

One of the pillars of the trillion-dollar pension fund complex is now awash in cash after struggling under deficits for two decades. This rare surplus at corporate defined-benefit plans, thanks to surging interest rates, means they can reallocate to bonds that are less volatile than stocks — “derisking” in industry parlance.

Strategists at Wall Street banks including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. say the impact will be far-reaching in what’s already being coined “the year of the bond.” Judging from the cash flooding into fixed income, they’re just getting started.

“The pensions are in good shape. They can now essentially immunize — take out the equities, move into bonds and try to have assets match liabilities,” Mike Schumacher, head of macro strategy at Wells Fargo, said in an interview. “That explains some of the rallying of the bond market over the last three or four weeks.”


Pension de-risking might help explain one of the strongest 5-year Treasury auctions on record last week...

Another super-strong Treasury auction yesterday, as the $43B sale of 5 Yr. notes went off at the lowest yield since August (3.53%). Despite that, demand was so strong that primary dealers only took down 8.8% of the sale (lowest percentage on record per Bloomberg) as the indirect award (75.7%) was also an all-time high.

Vital Knowledge

The updated University of Michigan consumer sentiment index confirmed a bounce in confidence this month...

The Daily Shot

Better consumer sentiment and falling mortgage rates are now leading to a resumption of bidding wars in the residential housing sector...

The housing market has begun to recover after hitting a low point in the second week of November. We’re not out of the woods yet, but homebuyers are coming off the sidelines: The number of Redfin customers requesting first tours has improved 17 percentage points from the November trough, and the number of people contacting Redfin agents to start the homebuying process has improved 13 points. Compared with a year ago, home tours and requests for service are down 23% and 27% respectively, but that’s an improvement from the November trough, when both were down 40%.

This is already translating into more home sales. Redfin agents report that bidding wars are back in some markets, including Seattle, central Florida and Richmond, VA. Homebuyer demand remains down from its early 2022 highs, but the market has shifted into a new phase and well-priced listings are selling quickly.


A reminder that U.S. housing inventory remains very subdued right now...

It is going to take much effort to get homeowners to move from their 2-3% mortgage interest rates.


Goldman Sachs even sees a bottom in U.S. housing and thinks the most negative impacts to U.S. GDP are now behind us...

Following an almost 20% contraction in residential fixed investment in 2022, the sharpest declines for the US housing market are now behind us. Since reaching 20-year highs of over 7% in October, mortgage rates have fallen by a percentage point, causing our housing affordability index to recover very slightly.

Home sales appear set to turn higher. Mortgage purchase applications have averaged 9% above their October trough so far in January and survey-based measures of purchasing intentions have rebounded sharply. We suspect that existing home sales could decline slightly further but will likely bottom in Q1 before rebounding modestly by year-end...

Higher rates and lower home prices will increase the drag on GDP growth from negative wealth effects and declining mortgage equity withdrawal, but we believe that the aggregate drag on GDP growth from the housing sector peaked in 2022Q4 at 1.1pp and will moderate to just 0.25pp by 2023Q4.

Goldman Sachs

It was a big week for earnings last week and forward analyst earnings revisions continue to slide lower...

Earnings Scout

But even with falling sales, earnings and guidance rates, investors want to buy stocks which is a positive sign...

@bespokeinvest: We’ve seen EPS and revenue beat rates dip this season relative to the last few years, and the # of companies raising guidance are down. But the average stock that reports is averaging strong 1-day gains so far.

And now for the biggest earnings week of the season...


Microsoft's earnings left much to be desired, but the stock ended the week higher than where it began...

The macro tone was a bit more somber than before. They saw enterprise/commercial customers “exercise caution”, and results weakened in the month of December (this weakness included a moderation at Azure – the Azure business saw FXN growth of 37% for the whole quarter, but it exited the quarter at a ~35% run-rate).

Vital Knowledge

And where Intel disappointed their investors, ASML rewarded theirs...

@TheTranscript_: $ASML CEO: "...our customers indicate that they expect the market to rebound in H2 23. Considering our order lead times and the strategic nature of lithography investments, demand for our systems, therefore, remains strong...For 2023, ASML expects...a net sales increase of >25%"

Aerospace has the wind at its back and Hexcel proved it along with a 10% pop in its stock price…

“We delivered the strongest sales quarter of the year as we managed to drive higher production levels to support the continuing robust recovery in the commercial aerospace market and as our business benefits from broad global strength in our space and defense markets. Based on our growth outlook, we have re-commenced construction to complete a new carbon fiber line at our Decatur, Alabama facility, which we paused at the beginning of 2020”.

Vital Knowledge

United Rentals is an important economic bellwether...

This industrial/construction rental equipment company raised sales and EBITDA margin guidance. This is not a sign of US economic weakness.

Major steel producer also breaks out to all-time highs on better-than-expected sales and earnings...

Record numbers at American Airlines with positive demand guidance...

[AAL] CEO: Post holiday bookings are off to a strong start and is expected to continue throughout 2023

  • Doubling down on efforts to run a reliable operation in 2023, including investing in our team, our fleet & technology to support ops
  • Q1 bookings at record level
  • We are on track to hire over 2K mainline pilots in 2023
  • Expect delivery of only 17 Boeing 737 Max 8's this year; Boeing had previously committed to 27 deliveries in 2023
  • On Business travel demand, we are not seeing significant impact due to layoffs; Contract business sales to stay about 75% of 19 levels


Not just airlines, but cruise ships also seeing record demand...

[CCL] Holland America Line sees third week of Jan booking >20% v Jan'19; the highest on record

  • In an early sign of a successful Wave season, Holland America Line bookings in the third week of January were the highest on record for any January week for the premium cruise line. The week ending January 20 also exceeded bookings during the same week in 2019 by more than 20%.
  • The rise was especially notable for summer cruises and Cruisetours to Alaska, where Holland America Line offers more cruises to Glacier Bay than any other line and is the only cruise line with owned land operations in both Denali and Yukon. For the week ending Jan. 20, Alaska bookings were 25% higher than in the strongest week in January 2019.
  • On Jan. 17 alone, Holland America Line reached its highest single-day bookings for any January day on record. Guests are also booking cruises further into the future. More than 25% of the bookings for the high-volume day on Jan. 17 were for voyages embarking in 2024.


The results and outlook for American Express were the best in many years...

"We aren't seeing recessionary signals...the consumer is really strong, travel bookings are up over 50% vs pre-pandemic….T&E spending is still really strong with the consumer….We're feeling good" - American Express CEO Stephen Squeri

The Transcript


American Express shareholders were heavily rewarded with Thursday's earnings release...

The CFO of Visa echoed American Express' optimism about the economy...


Mastercard also showed very strong spending trends continuing into 2023...

CEO: "We closed out the year with strong financial results and notable wins...While macroeconomic and geopolitical uncertainty persists, consumer spending has been remarkably resilient"

The Transcript

ADP touches many businesses in the U.S. They are fine with the macro environment...

“Granted there are some signs of deceleration, layoffs and temp, but the bigger picture is still healthy…Unemployment continues to be very low. Unemployment applications are still at record lows. They're not increasing. So the macro environment continues to be very, very favorable for us, irrespective of some of those headlines that we're seeing” - Automatic Data Processing CFO Don McGuire

The Transcript

ADP and Carl Quintanilla are on the same page...

Robert Half is not worried about the current string of tech layoff announcements...

"I'd say there's a psychological and sentiment impact to all tech and that there's a perception that there are a lot of tech people on the market that the tech market has loosened a lot. The reality is a lot of those layoffs aren't even tech people. They're recruiters, HR, back-office people at tech companies. Further, those that are getting laid off, typically are finding new positions fairly quickly. And so we would say that the tech market, in fact, is stronger than the perception that's being led by big tech, which has very specific, in many cases, company-specific circumstances" - Robert Half International CEO M. Keith Waddell

The Transcript

The current tech layoffs are only a small fraction of what was hired during COVID...

But even assuming every tech worker had four full-time WFM jobs, the recent layoff announcements have been welcome news to stock prices. Doing more with less and increasing cash flow is what the market wants right now.


Even Amazon is cutting back on free delivery at Whole Foods/Amazon Fresh to improve cash flow margins in that business...

[AMZN] Reportedly plans to start charging fees for grocery orders of less than $150 for US customers (was previously a $35 threshold)

  • Starting Feb 28th, Amazon Fresh delivery orders under $150 will be subject to a service fee for Prime members. Will charge $3.95 for orders of $100-150, $6.95 for orders $50-100, and $9.95 for orders under $50.


Christopher Mims had a good article over the weekend about the end of the "nice-to have" economy...

Over the past decade, startups delivered Americans conveniences of every description, and more recently, pandemic lockdowns supercharged our spending on them.

Amid the longest boom in tech so far, investors were eager to subsidize the losses of these startups—and by extension, subsidize our consumption of their products—on the logic that they would grow into their oversize valuations.

Now, the party is ending.

Americans’ confidence in the economy is at nearly its lowest point since the 2007-09 recession, on account of inflation-battered spending power, a cooling job market, and a stock-market dip that is hurting the finances of retirees in particular. As a result, consumers are paring back their spending on most things.

That’s showing up in the revenue of companies in what might be called the “nice-to-have economy”—those companies offering the kinds of luxuries and conveniences that many of us got accustomed to in the past few years, from rapid delivery and used-car vending machines to personalized fashion or online fitness coaches. Part of what has enabled these startups is technology, which helps explain why they were valued by investors at earnings multiples typical of high-growth tech companies with the potential for high margins.


As expected, COVID/WFM accelerated PC spending. Now the industry normalizes hitting Intel and many others...

@TheTranscript_: The PC markets remain heavily challenged: "Since many consumers already have relatively new PCs that were purchased during the pandemic, a lack of affordability is superseding any motivation to buy, causing consumer PC demand to drop to its lowest level in years" - Gartner

When 85% of the ACWI equity markets trade above their 200 day moving averages, you want to make sure that you have some exposure...

@_rob_anderson: The improvement in long-term breadth readings has been global in scope. The percent of ACWI markets trading above their 200-day moving averages is now at 79%, the highest level in over a year.

Bank of America sees investors getting positioned overseas as Euro equity fund buying nears record levels...


I wonder how many stock investors are forecasting a similar 10-year return for cash and U.S. growth stocks?

Here is Vanguard’s new 10-year return projections for the liquid asset classes. These are not inflation adjusted, they are actual. Vanguard's outlook is now biased toward Int’l stocks and bonds. The only positive in this outlook for U.S. growth stock investors is that their holdings should outperform U.S. inflation.


Some valuable and constructive comments below about the state of the private markets from David Rubenstein...

Allison Nathan: Will the backdrop for private markets remain difficult this year after a tough period for dealmaking in 2H22?

David Rubenstein: The narrative around the difficult environment for private equity (PE) over the last six months seems to center around a lack of financing for buyouts amid the substantial re-rating of rates. But the problem was not so much that debt was unavailable; while it was certainly harder to secure than in the prior low-rate environment, many more sources of debt exist today as private equity firms and hedge funds have developed private credit businesses, so commercial banks are no longer the only game in town for financing. Instead, the main problem was that markets tend to freeze when recession risk rises. When recession could be on the horizon, the gap between the price sellers—who don’t want to be seen as giving something away—are willing to sell at and the price buyers—who are afraid of overpaying on the eve of a recession—are willing to buy at widens. So, as recession risk recedes and the pace of rate hikes slows, I suspect deal activity will improve. And two straight years of very modest deal activity is very unusual, so my sense is that activity will probably pick up this year.

Allison Nathan: That said, the large gap between private and public valuations has received significant attention. Could the de-rating of private equity be the next shoe to drop for markets?

David Rubenstein: It’s true that the valuation gap between public and private markets widened substantially last year; public markets declined 20-30% while private markets were marked down 5-10% in some cases, and not at all in others. Some people believe that this divergence is the result of PE firms not being realistic or tough enough on themselves, and that these marks should decline. But as someone who has participated in many investment committee meetings on valuation issues like this, my view is that many PE firms have been more resilient than many people expected simply because these firms have substantial skin in the game and so tend to be laser-focused on the bottom line and managed very intensely and, in many cases, better than public companies. Based on what I know, PE marks are more likely to rise than decline in 2023.

Goldman Sachs

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