Weekly Research Briefing: Readying the Shears

January 30, 2024

Welcome to Fed week. This week's FOMC meeting is a big one. There won't be a rate cut. Instead, this will be the meeting where the Fed decides if it will stick with its previous measures of inflation and financial condition monitoring. If nothing changes, then Jerome Powell will likely show us how sharp the Fed's scissors are to cut the Fed Funds rate at the March meeting. All the numbers have lined up perfectly for this soft landing and now the falling inflation has led to a rise in real rates. And as we can see from current rental prices, the inflation data is only going to continue lower. There is little reason for the Fed to allow real rates to continue to climb right now. Future cuts in rates would allow certain sectors of the economy (like real estate and small businesses) to refinance and catch their breath. Manufacturers, small business owners and Senator Warren are all on the same page calling for interest rate relief. Now let's see what Chairman Powell and the Fed have to say.

Away from the Fed, the market will remain laser focused on corporate earnings. To date, 1/4 of S&P 500 companies have reported earnings, but this week sees the arrival of the giant five (AAPL, AMZN, GOOGL, META and MSFT). While companies are beating their sales & earnings estimates at a better rate than in previous quarters, the stocks are responding less than expected to their beats. This is most likely due to the +15-20% gains in the average S&P 500 stock in the past 3 months. But there still were some bangers last week. Netflix's new sub number was 50% higher than estimates sending its stock up more than 10%. IBM saw a doubling quarter over quarter in Watsonx (their AI biz) sending their stock to double digit gains. And American Express missed revenues and earnings, but its confident guidance lifted the stock 7%. Now let's see what the mega-caps have in store for investors.

Besides the Fed and earnings, we also get the monthly jobs data on Friday. Last month came in better while January could have some strange weather impacts from our deep freeze and power outages. The other big item this week was the release of the Treasuries Q1 and Q2 financing estimates which dropped Monday afternoon. The borrowing estimates came in much less than expected ($760b for Q1 and $202b for Q2) and sent bonds and stocks ripping higher. Less paper issuance by the U.S. Government means less competition for financing by corporations so let the good times roll. Have a great week.

Let's start with earnings where global consumer favorite P&G had a great top line and bottom line set of figures...

If P&G unit sales are strong even with past price increases, then the global consumer should be in decent shape.

P&G said it had seen volume growth of 4 per cent in the US and 3 per cent in Europe for its fiscal second quarter. That sign of robust consumer demand, despite a 4 per cent increase in P&G’s pricing globally, also lifted shares in other consumer goods groups.

“That’s impressive because we’re at a point right now where the industry’s growth in the last two years has been driven entirely by price,” said Jason English, an analyst from Goldman Sachs.

“To continue that top-line growth, we have to have a successful handoff from price to volume, and what they showed in results today is [that] it’s happening,” he said...

While group sales of $21.4bn slightly undershot Wall Street’s consensus forecast, the strength of its margins in the quarter took analysts by surprise. The combination of price growth, productivity savings and more favourable commodity costs lifted P&G’s gross margin by 590 points before currency effects.

Andre Schulten, the group’s chief financial officer, pointed, however, to a likely slowdown in price increases, telling analysts on its earnings call that the next two quarters would “see less pricing benefit”.

Financial Times

A key U.S industrial/construction/energy economic bell-weather surges on better-than-expected earnings and guidance last week...

United Rentals said it expects fiscal 2024 revenue of between $14.7 billion and $15.2 billion, up from fiscal 2023 revenue of $14.3 billion and above analysts’ estimates of $14.2 billion, according to FactSet...

For the fourth quarter, United Rentals reported earnings of $11.26 a share on revenue of $3.7 billion. Analysts surveyed by FactSet expected earnings of $10.76 a share on revenue of $3.6 billion.

“Rental revenue for the quarter increased 13.5% year over year to a fourth quarter record of $3.119 billion, reflecting broad-based strength of demand across the company’s end-markets,” the company said in the earnings release.

United Rentals also announced that it intends to repurchase $1.5 billion of common stock in 2024, and raised its quarterly dividend by 10% to $1.63 a share.



Consumer streaming giant Netflix put up a great set of numbers last week sending its stock launching nearly $100 higher...

13.1 million new subscribers. Looks like the end to sharing was well executed.


One of the most value-add companies in the semiconductor equipment food chain posted record high orders also sending its stock price $100 higher...

Another big green flag that the most complex chip cycle remains in overdrive right now as the appetite for high end computing power remains insatiable.


Some value-added conference call talking points showing strength across the economy...

From credit cards to residential furniture to big corporation technology spending.

"From an economy point of view, we're certainly in a strong economy, unemployment is at a pretty remarkable place." - Capital One Financial CEO Richard Fairbank

"We reached record levels of spending for both the full-year and Q4 in 2023. Total billed business grew 9% versus last year on an FX adjusted basis...Our premium customers are high-spending, loyal & drive our strong credit performance." - American Express CEO Stephen Squeri

"We are off to a solid start in 2024. Consumer spending remained resilient with first quarter year-over-year payments volume growth at 8%, U.S. payments volume grew 5% year-over-year, international payments volume grew 11%. Cross-border volume, excluding intra-Europe, rose 16% year-over-year in constant dollars with cross-border travel at 142% of 2019 levels, up from 139% in the fourth quarter... Consumer spend across all segments from low- to high-spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments." - Visa CFO Chris Suh

"I would say that well - in most of 2023, especially the last six or seven months, consumers were focused on other areas. They had already purchased a lot of home furnishings and their interest in other areas was evident. But what we saw actually in December is the month where we saw somewhat more of a - you might say greater trends and traffic, an interest in the home. So, we believe that after six or seven months of not having that focus, consumers are getting back into the home." - Ethan Allen Interiors CEO M. Farooq Kathwari

"I see '24 playing out quite similar to '23. While there has been a lot of talk about reduced software budgets and reduced technology budgets overall, we are not seeing that. We are seeing that people are a bit more discriminating in what they're spending on. But that is as is spending more on AI, more on digital transformation, and I'll come to why it might mean that they are sort of focusing less on some other areas. So why is that? We see that there is a remarkably resilient economy. We can see that across South Asia from India to Japan, to the Middle East. Europe has kept remarkably resilient despite the conflict in Eastern Europe. Then when we come to North America, the economy here is resilient. Latin America, despite some early predictions, has actually done quite well." - IBM CEO Arvind Krishna

"Q4 provided an exceptionally strong finish to 2023, most importantly, in terms of cloud momentum. Current cloud backlog increased by a strong 27%, that’s higher growth than ever before, and cloud revenue growth accelerated to 25%. This great success was powered by strong customer momentum." - SAP SE Co-CEO Christian Klein

The Transcript

If you need a big thermometer for consumer credit, just look at these comments from Capital One combined with its stock chart since their last earnings report three months ago...

If the U.S. consumer was deteriorating meaningfully, the COF chart would not be +55% over their last two earnings reports. Time for the consumer credit bears to go into hibernation.

Pulling up on domestic card credit. We believe that normalization has run its course and credit results have stabilized. The 30-plus delinquency rate has been stable on a seasonally adjusted basis for a number of months now.

Since August, our monthly delinquency rate has been moving in line with normal seasonality and at stable ratios relative to the same month in 2018 and 2019. And at this point, we have a pretty good window into January as delinquency entries in December indicate continuing delinquency rates stability in January. We've always said that delinquencies are the leading indicator of where charge-offs are going. Charge-off rate tends to follow delinquency rate by about three to six months.

Based on the stability we've seen in our delinquencies since August and extrapolating from our current delinquency inventories and flow rates, we believe the charge-off rate is stabilizing now and settling out to about 15% above 2019 levels., I give this window because investors have been asking for quite some time when will charge-offs level off. So, this is the point where we see that happening, meaning charge-offs should move more or less with seasonality in the coming months.

Capital One


Here is how the Q4 earnings season is stacking up...

@MikeZaccardi: 73%/65%/51% of reporters beat on EPS/sales/both, better than the historical average of 63%/59%/44% and last quarter’s 65%/59%/48%.

Positive earning reactions have been little to get excited about this season...

Disappointing reactions have also been light.

Some of the bigger reactions in the last week...

@ConsensusGurus: Top Earnings Reactions of the Week

@ConsensusGurus: Worst Earnings Reactions of the Week

Here is the big calendar for this week...


The Atlanta Fed would like you to dismiss any near term calls for a recession...

Last week's Q4 GDP arrived at a better than expected +3.3%. There will be revisions, but now we roll forward to begin guessing the Q1 2024 GDP figure. The Atlanta Fed still has the hot hand in guesstimating so we should expect the economic forecasts to rise as the quarter progresses.

Latest estimate: 3.0 percent -- January 26, 2024

The initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 3.0 percent on January 26. The initial estimate of fourth-quarter real GDP growth released by the US Bureau of Economic Analysis on January 25 was 3.3 percent, 0.9 percentage points above the final GDPNow model nowcast released on January 19.

Atlanta Fed

Last week's PCE was in line with expectations and helps to give the Fed many options on future rate cuts...

The Fed’s preferred inflation measure, the personal-consumption expenditures price index, rose 2.6% in December from a year earlier, the Commerce Department said Friday, well below the 5.4% increase at the end of 2022.

Core prices, which exclude volatile food and energy costs, rose 2.9% on the year, the smallest year-over-year increase since March 2021. Using three- and six-month annualized rates, core inflation was 1.5% and 1.9%, respectively, in December.

“It really is amazing that these three- and six-month inflation rates are below 2%,” said Charles Evans, who was president of the Chicago Fed from 2007 until early 2023. “Six months is a pretty good amount of time” to provide confidence that inflation has sustainably returned to the lower rates seen before the pandemic, he said...

“Everything is now pointing to inflation heading back to 2% and it’s harder to see why they need to keep rates at 5.5%, which officials acknowledge is restrictive territory,” said Andrew Hunter, an economist at Capital Economics.


Remember that apartment and housing rents are only going to help drag inflation prints lower in the future…

@carlquintanilla: MORGAN STANLEY: “.. A weaker-than-expected New Tenant Rent Index points to less rent inflation in 2H24, and lowers our 2024 forecast for core #PCE inflation by 0.1pp to 2.2% .. We now expect a steeper decrease in rent inflation starting in July, with monthly prints reaching pre-COVID levels by the end of the year ..”

@carlquintanilla: @NewEdgeWealth: “.. the important story is that #PCE housing inflation clicked below 2% and is ready to surf right down the rental pipeline. The Cleveland Fed/BLS new rent repeat index has entered the deflation dome .. It won’t be long before the rental market softens such that the broader PCE index lands in a periodic of mild deflation.”

Hello soft landing...

@HumbleStudent: What a soft-landing looks like. Tame PCE inflation, accelerating real GDP growth.

Dallas Fed Manufacturers put up another depressing survey this month...

@LizAnnSonders: January @DallasFed Manufacturing Index down to -27.4 vs. -11.8 est. & -10.4 prior … new orders, production, and shipments all weakened/in contraction; capex moved higher but 6-month outlook softened; prices paid increased and employment fell further into contraction.

Not only are manufacturers depressed about their business, but so are the left-leaning members of the Senate...

Senator Elizabeth Warren and three Democratic colleagues urged Federal Reserve Chair Jerome Powell to lower interest rates to help bring down housing costs ahead of the central bank’s policy meeting this week.

“High interest rates have aggravated the country’s persistent crisis of housing access and affordability,” the senators wrote in a letter dated Jan. 28. “As the Fed weighs its next steps in the new year, we urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many.”

Warren, a Democrat from Massachusetts and a frequent critic of the Fed’s rate-hike campaign, was joined by Colorado’s John Hickenlooper, Nevada’s Jacky Rosen and Rhode Island’s Sheldon Whitehouse. The letter was first reported by CNN.


If Powell sticks with his previous definition of financial conditions, then rate cuts are coming...

At the committee’s meeting last May, Chair Jerome Powell introduced his preferred definition, which subtracts the one-year bond market breakeven rate of inflation from the effective fed funds rates. At the time, that made real rates look far higher than they did using most other logical alternative measures, so it looked as though he might be establishing a rationale for cuts. That is even more the case now. Subtract current core CPI inflation from fed funds, or take the yield on 10-year Treasury Inflation-Protected Securities (TIPS), and real rates look considerably less alarming.


Former Kansas City Fed member, Esther George, suggests cutting rates so as not to get behind a rollover in jobs...

“We made a very aggressive tightening. Look not only at the supply that came back but also the demand that came down last year,” said Esther George, who served as president of the Kansas City Fed from 2011 until last year. There is potentially “a lot of room” to cut rates before they are in neutral territory again.

Officials are also shrinking their $7.7 trillion asset portfolio—sometimes called “quantitative tightening” or QT—faster than they did five years ago. “They’ve got QT going on steroids, still,” said George.

Policymakers are right to worry that cutting rates then raising them again would blemish their credibility, said George. But she said the greater risk now is that taking too long to cut rates causes damage to the labor market that is hard to repair.

In November, for example, the hiring rate in the U.S. dropped to its lowest level in 10 years, a sign more companies might feel they are overstaffed. “The labor market is such a tricky one,” said George. Before a downturn, “it always looks like it’s not too bad, and then it goes south quickly.”


If history is any guide, then March would be the perfect time for a Fed rate cut...

Apollo Academy

And because you were thinking about it, here is how stocks react after the 1st Fed cut...

@edclissold: The Fed is preparing the markets for a rate cut. Cuts have been bullish on avg. The DJIA has been flat before the 1st cut & up 15% a year later. Context matters, esp. vs the economic cycle. (Btw, we use the DJIA for more history but trends are similar w/SPX). @NDR_Research

On Monday, the largest asset manager in the world joined the party for U.S. Equities...

Capital markets activities are bound to be better in the future...

"...we have been operating for the last 18 months at what I'd call decade-low transaction volume across investment banking. And I just don't think that sustains. I think you get back to kind of 10-year averages over the 11 next 12 to 24 months, and therefore you see a pickup in that ..and one of the places where we're starting to see that is in M&A activity. We've seen a handful of big deals in the energy space. We certainly see more dialogue. And I also think the financial sponsors, the private equity players, who have really been shut down from an activity perspective, are starting to get more active, and I would expect that to pick up in 2024 and into 2025" - Goldman Sachs CEO David Solomon

The Transcript

Goldman Sachs should have Blackstone on speed dial...

Blackstone plans to step up its dealmaking before a rebound in markets drives prices higher, the president of the private equity firm has told the Financial Times.

“The wheels of merger and acquisition activity are picking up . . . We’d like to [invest] more before it is a consensus view because, by the time you get there, then valuations have moved,” said Jonathan Gray.

Since 2022, a sharp rise in interest rates has caused takeover activity and the listings of new public companies to slow markedly. Expectations that the US Federal Reserve will soon start cutting interest rates from two-decade highs have raised hopes among dealmakers for an M&A recovery.

Gray said that lingering uncertainty over the health of the economy and the timing of rate cuts had created a window of opportunity for the investment group, which manages more than $1tn in assets.

“It’s during this period of time where there’s still uncertainty and you’re bouncing along the bottom where we want to be aggressive,” said Gray.

Financial Times

Just a broad valuation update versus the historical measures...

@dailychartbook: The S&P 500 is statistically expensive. via BofA.

As we have written previously, plug-in-hybrid automobiles will be in high demand until the U.S. charging network is more dependable...

Some influential dealers are pressing General Motors to introduce hybrid models, worried they risk losing customers who aren’t ready to make the switch to fully electric cars.

Dealers who serve on advisory committees to the automaker have urged executives in several recent meetings to add hybrids to GM’s lineup, according to people involved in the discussions. GM has focused on fully electric cars in recent years and largely bypassed hybrids, which pair an internal combustion engine with a small battery and electric motor to boost fuel efficiency.

The dealers said they expressed concern that more customers are looking for a middle ground between conventional gas-engine cars and EVs, which are more expensive and require regular charging...

Toyota, Honda, Hyundai and Kia are the major players in the hybrid market. Sales of hybrid vehicles in the U.S. surged more than 50% last year, after a small drop in 2022, according to research firm Motor Intelligence.

Those include regular hybrids, which supplement the gas engine but generally don’t propel the car on electric power alone, and plug-in hybrids, which can travel in electric mode for a certain distance—typically 10 to 40 miles—before the gas engine takes over.

“Hybrids are what’s hot right now,” said Chris Hemmersmeier, a Salt Lake City-area car dealer who has GM stores as well as other brands, including Kia and Jeep.

He said hybrid models at those non-GM stores—including the Kia Sportage compact SUV and Stellantis’s Jeep Wrangler and Grand Cherokee plug-in-hybrid SUVs, sold under the 4xe name—have been selling briskly, and he’s worried GM’s EV-heavy focus will cause his stores to lose customers.


Here is something that you would have never expected...

Generators become a must-have for Houston home buyers

When cold temperatures hit Houston, the thing on everyone’s mind is power. After the 2021 power crisis, I ordered a whole-house generator, and I wasn’t the only one. There were so many people placing orders that it took almost six months to get mine. In fact, after the crisis, generators became a must-have luxury item for a lot of home buyers in the area. During the cold front that hit Houston earlier this month, I put a home on the market with a huge generator and included a photo of it in the listing. Almost immediately, the future buyers had their agent reach out to me. They wanted to know how old the generator was and if it worked properly. They closed on the home last week for over the list price of $5.25 million. They asked to have the generator checked for a second time before they moved in. Not only did the generator play a huge role in their decision to buy, but it’s going to be the only thing they don’t touch during their planned renovation of the property.

—Dee Dee Guggenheim Howes, Compass, Houston


It's going to cost you a fortune again to spend the summer (or year round) in the Hampton's...

Home prices soared to a record in New York’s Hamptons and sales rose year-over-year for the first time in 10 quarters.

Properties in the Long Island beach towns changed hands at a median of $1.85 million in the three months through December, up 45% from the fourth quarter of 2022 and more than double pre-pandemic levels, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported Thursday. Purchases climbed 8.8% to 273.

Competition is heating up again in the Hamptons after an extended lull — which in itself followed a Covid-era buying frenzy that had picked the market clean. The decline in mortgage rates toward the end of last year helped pushed some fence-sitters to think more seriously about committing to a purchase.


Here is a good landmark hotel property data point...

Blackstone Inc. struck a deal to sell the Arizona Biltmore hotel in Phoenix to Henderson Park, a London-based private equity real estate manager.

Blackstone agreed to sell the luxury hotel for $705 million, according to people familiar with the matter, who asked not to be named citing private matters. Spokespeople for Blackstone and Henderson Park declined to comment.

The deal comes nearly six years after Blackstone bought the property, a Waldorf Astoria resort, for roughly $400 million from Singaporean sovereign wealth fund GIC. Blackstone since spent more than $150 million renovating the property. Brokerage Eastdil Secured advised Blackstone on the sale to Henderson Park.


Speaking of hotels, is this proof that good sleep can be a superpower?

I'll let you be the judge, but since the Edmonton Oilers spent five nights at the Equinox hotel at Hudson Yards, they have gone on a 16 game winning streak. The Avalanche are in NYC for two games next week after the All-Star break. Hopefully their travel manager has them booked in the best sleep hotel room in the city.

A stunning NHL streak. Remember when we buried the Oilers (semi-pun alert) a couple months ago? Edmonton entered a Dec. 20 game at 13-15-1 — two games below .500. Fast forward: They are at 16 consecutive victories, just one game from tying the NHL record of 17. Bad news: They have to wait to attempt to set the record after the All-Star break.

The Athletic


And just like that, AI puts $1,300 into my household...

Given that I don't bake banana bread, I see $0.50 per week in savings for the rest of my life.


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