Good morning. Happy Friday.
The Asian/Pacific markets leaned up. Japan, South Korea, Taiwan, Australia and Thailand did well; India, Singapore and the Philippines were weak. Europe, Africa and the Middle East currently lean up, but gains are minimal. Turkey, South Africa and Norway are doing the best. Futures in the States point towards a solid gap up open for the cash market.
————— BLOG –>> The Predictive Ability of the First Day of the Year —————
The dollar is up. Oil and copper are up. Gold and silver are up. Bonds are down.
Stories/News from Seeking Alpha…
Jobs, unemployment, wages
It’s the first Friday of the month, and that means the non-farm payrolls report. Economists expect the NFP release to show that 200,000 jobs were added in December, with the unemployment rate staying near a 50-year low at 3.7%. Wage growth will also be a focal point, indicating how much the tight labor market may be contributing to inflation. Consensus estimates see average hourly earnings rising 5.0% on a Y/Y basis vs. 5.1% in November, and that figure had risen from 4.7% Y/Y growth in October.
What the Fed is watching: Price pressures have shifted from the goods side of the economy to the services side of the economy, where costs remain elevated given the fact that the labor market remains strong. Companies are continuing to hire for many open roles, making it difficult for the central bank to temper demand and bring inflation under control. Julia Pollak, chief economist at ZipRecruiter, said the Fed is looking for 3.5%-4.0% wage growth to get the economy back to 2% inflation, and this month’s number will help determine if November’s wage growth increase was part of a trend or an aberration.
What investors are watching: Hopes of a soft landing may still be in the cards, but the longer the current dynamics play out, the greater likelihood the economy could tip into recession. According to Pollak, the Fed is “hoping to pull off an unusual feat” in reducing job openings without increasing the unemployment rate, as it continues to raise rates to bring supply and demand into balance. Optimistic investors are banking on that scenario as well, but more pessimistic ones have been busy hedging their bets and diversifying their portfolios.
What CEOs are watching: “If they think demand is weakening and revenues are going to slow, they’re probably going to feel pressure to cut costs to maintain profitability,” said James Knightley, chief international economist at ING. “That does suggest that the pace of employment growth is likely to slow quite quickly through this year.” (17 comments)
#ChatGPT
OpenAI, the developer behind artificial intelligence bot ChatGPT, is in discussions to raise capital at a valuation of $29B, according to multiple sources. Venture capitalists are rushing in to profit from the viral technology, including firms like Thrive Capital and Peter Thiel’s Founders Fund. The transaction is being structured as a tender offer, where investors buy shares from existing holders, and would be double the $14B valuation the company received in 2021.
Snapshot: The deal is making waves in Silicon Valley, where many startups have prepared or seen big cuts to their valuations as investors pull back from new deals. The tender offer comes just a month after OpenAI released the newest form of its GPT-3.5 software. Following its launch, ChatGPT amassed 1M users in just five days, making headlines in the tech industry, just weeks after releasing image generation program Dall-E 2.
Microsoft (MSFT) is also eager to get some skin in the game (remember Tay from 2016?), holding advanced talks to increase its investment in OpenAI. In 2019, Microsoft even poured $1B into the startup and became its preferred partner for commercializing new technologies. Reports this week also suggested that it’s working on a version of Bing that uses the artificial intelligence software behind ChatGPT to close the gap with search engine leader Google (GOOG, GOOGL).
What is Generative AI? OpenAI is a leader in the field, which uses artificial intelligence to generate new original content, rather than analyzing or acting on existing data. Its product called ChatGPT uses natural language processing to generate responses to a user’s input, and can handle a wide range of queries. Examples include anything from essays and cover letters to lyrical music writing and solving complex math problems. (115 comments)
Gridlock on the Hill
Following 11 ballots that came up short, the U.S. House entered a fourth day of the new Congress on Friday without a speaker. A protracted stalemate over the candidacy of Kevin McCarthy has left the chamber paralyzed and there doesn’t appear to be a resolution in sight. Around 20 hardline conservative GOP holdouts have left McCarthy without the needed 218 votes to lock down the gavel, citing worries over his fiscal discipline and their views not being prominently reflected in the party’s agenda.
What it means: The situation is effectively bringing the legislative branch of the government to a standstill. Congress is unable to pass legislation, while representatives cannot offer formal services to their constituents. It has also prevented the installation of committee chairs or work on panels and hearings, while blocking lawmakers from accessing classified intelligence that is only available to Congressional members after they have taken their oath of office.
“Watch over the seeming discontinuity of our governance, and the perceived vulnerability of our national security,” said House Chaplain Margaret Kibben. “Build your hedge of protection against those who would take advantage of our discord for their own gain.”
How does it end? The drama has already resulted in the longest contest for speaker since 1859 and tensions are rising. McCarthy has given into some concessions – such as a rule change for votes to oust a sitting speaker and expanding the number of seats on the powerful House Rules Committee – but they have failed to produce a breakthrough thus far. If McCarthy cannot unite the Republicans, the party would have to search for an alternative, or go the unlikely route of striking a deal with Democrats on a unity candidate that would need support from both parties. (7 comments)
CES 2023
What happens in Vegas stays in Vegas, except at CES… hopefully. The world’s biggest tech expo, known as the Consumer Electronics Show, is kicking into high gear with more than 170,000 people in attendance. Over 3,200 exhibitors are optimistic that the technology displayed at the event will spread into the broader market, and with many on the hunt for innovations of the future, there’s a good chance that it will.
Some revelations: Sony (NYSE:SONY) is teaming up with Honda (NYSE:HMC) on a new brand of electric vehicle called Afeela, while BMW (OTCPK:BMWYY) unveiled its “i Vision Dee” concept car that changes color. Samsung (OTCPK:SSNLF) advanced a new era of screens with its pricey Micro LED technology and ASUS (OTC:AKCPF) revealed a laptop with the first 3D screen that does not need a pair of glasses. Google (GOOG, GOOGL) is also finally jumping into media sharing, allowing phones to share music to a speaker running Android, regardless of which company made the device.
There were other strange and surprising gadgets like L’Oréal’s (OTCPK:LRLCF) eyebrow printer, electric powered in-line skates, and a toilet insert that can analyze urine to see if you’re drinking enough water or track the reproductive cycles of women.
Other companies with a presence at the show: Abbott Laboratories (NYSE:ABT), Adobe (NASDAQ:ADBE), Advanced Micro Devices (NASDAQ:AMD), BlackBerry (NYSE:BB), BMW (OTCPK:BMWYY), General Mills (NYSE:GIS), General Motors (NYSE:GM), IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), Palantir (NYSE:PLTR), Qualcomm (NASDAQ:QCOM), Samsung (OTCPK:SSNLF), Uber (NYSE:UBER), Verizon (NYSE:VZ), Walmart (NYSE:WMT) and Warner Bros. Discovery (NASDAQ:WBD).
Today’s Economic Calendar
8:30 Non-farm payrolls
10:00 Factory Orders
10:00 ISM Service Index
11:15 Fed’s Bostic Speech
12:15 PM Fed’s Barkin Speech
1:00 PM Baker-Hughes Rig Count
3:30 PM Fed’s Bostic Speech
What else is happening…
Eurozone inflation rate slides to 9.2%, lowest reading in months.
Crypto collapse: Silvergate Capital (SI) tumbles amid customer withdrawals.
In wake of Avatar hit, Disney (DIS) sets course for change in 2023.
WWE (WWE) jumps 12% as Vince McMahon takes action to pursue a sale.
Mercedes-Benz partners with ChargePoint (CHPT) on charging network.
Delta (DAL) set to provide free Wi-Fi to most U.S. flights.
Bed Bath & Beyond (BBBY) plunges with bankruptcy a possibility.
Another downsizing: Stitch Fix (SFIX) cuts 20% of salaried workforce.
U.S. natural gas sinks again despite big inventory draw.
Putin orders 36-hour ceasefire in Ukraine for Orthodox Christmas.
—————
Good morning. Happy Thursday.
The Asian/Pacific markets leaned up. China, Hong Kong, Taiwan and Singapore did well; Indonesia and Thailand were weak. Europe, Africa and the Middle East currently lean up. The UK, South Africa, Norway, Austria, Sweden and the Czech Repubic are up; Turkey, Switzerland and Denmark are down. Futures in the States point towards a moderate gap down open for the cash market.
————— BLOG –>> The Predictive Ability of the First Day of the Year —————
The dollar is up. Oil and copper are up. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Shrinking headcount
Tech layoffs are coming thick and fast as the industry pares back on staffing amid macroeconomic headwinds. The first waves occurred in the middle of last year, but are only growing in strength and numbers. Many companies hired too aggressively during the pandemic, and they are realizing that inflated payrolls and elevated costs are not holding up in the current business environment.
The latest: Salesforce (CRM) is cutting 10% of its workforce, and is closing some offices, leading to $1.4B-$2.1B in charges for the company and around 8,000 layoffs. Amazon (AMZN) is also slashing its headcount – by over double that figure. The retail behemoth has confirmed that 18,000 employees will get the axe, with the bulk of the roles due for elimination concentrated in the firm’s e-commerce and human resources organizations.
“The environment remains challenging and our customers are taking a more measured approach to their purchasing decisions,” Salesforce co-CEO Marc Benioff wrote in a letter to employees. “Amazon has weathered uncertain and difficult economies in the past, and we will continue to do so,” CEO Andy Jassy declared. “These changes will help us pursue our long-term opportunities with a stronger cost structure; however, I’m also optimistic that we’ll be inventive, resourceful, and scrappy in this time when we’re not hiring expansively and eliminating some roles.”
By the numbers: According to tracking website “layoffs.fyi,” more than 150K tech workers were fired in 2022, and that number is poised to grow this year. Companies in the industry that have shed employees include Airbnb (ABNB), Booking Holdings (BKNG), Carvana (CVNA), Cisco (CSCO), Groupon (GRPN), HP (HPQ), Lyft (LYFT), Meta (META), Netflix (NFLX), Peloton (PTON), Twitter, Uber (UBER) and Zillow (ZG).
Counting the minutes
The persistently tight labor market is playing into the Fed’s decision to continue raising rates, but at a smaller increment, according to the minutes of the FOMC’s meeting on Dec. 13-14. Last month, the Fed’s policymaking arm increased its key rate by 50 basis points to 4.25%-4.50%, a smaller increase than the 75 bps hikes it implemented in its previous four meetings. Officials also raised inflation expectations at their last gathering, with the median PCE inflation projection at 3.1% at the end of this year, up from the September projection of 2.8%.
No sign of a pivot: Fed officials agreed that inflation remained “unacceptably high” and risks remained to the upside. While October and November data were “welcome reductions in the monthly pace of price increases,” it would take “substantially more evidence of progress to be confident that inflation was on a sustained downward path.” The pace of increases for prices of core services, excluding shelter, was also notable, while that factor is likely to “remain persistently elevated if the labor market remained very tight.”
“Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks of the inflation outlook remained tilted to the upside,” according to the minutes. They named such uncertainties as: China relaxing its zero-COVID policies, Russia’s war against Ukraine, and the effects of many major central banks firming policy at the same time. Stocks gave up their gains on the news, but closed the session slightly higher on Wednesday in a volatile trading spell.
Outlook: With risks to inflation remaining elevated, no participants expected that it would be appropriate to reduce the federal funds rate target range in 2023. That uncertainty also means the Fed will have to be flexible when moving policy to a more restrictive stance. There was also discussion about balancing the risks of not tightening enough, which would lead to surging inflation expectations, as well as the lagged cumulative effect of continuous policy tightening, which could lead to unnecessary cuts in economic activity. (26 comments)
Stuck on the road
Whether it’s dwindling savings or poorly stocked dealerships, the U.S. auto industry just had its worst sales year in more than a decade. Only 13.7M vehicles were sold in 2022, according to the research firm Wards Intelligence, marking an 8% decrease from the previous year and the lowest overall figure since 2011. Sales had even surpassed 17M vehicles for five consecutive years before the coronavirus pandemic erupted in early 2020.
Quote: “When we started the year off, the whole industry had projections all above 16M,” said Jack Hollis, head of sales for Toyota (NYSE:TM) North America. “It’s not all doom and gloom,” he added, noting that there were signs that supply chain snarls were easing and raw material prices were coming down.
However, Toyota did lose its sales crown to General Motors (NYSE:GM) in 2022. The Michigan-based auto manufacturer delivered 2.2M vehicles in the U.S. due to a strong performance in its full-size pickup and SUV segments (the categories made up over half of total sales for the full year). Moving forward into 2023, the automaker expects EV sales to rise substantially and promote continued growth.
Rising rates: Financing a vehicle is growing more expensive than ever for consumers, according to car shopping experts at Edmunds. 15.7% of new car buyers had a monthly payment of more than $1,000 last quarter – marking a record high for the industry – compared to 10.5% in Q4 of 2021 and 6.7% in Q4 of 2020. (12 comments)
Abortion pills
Six months after the U.S. Supreme Court overruled Roe v. Wade, the FDA has rolled out a regulatory change that will allow retail pharmacies to offer abortion pills. Until now, only a handful of mail-order pharmacies and certified doctors were allowed to prescribe and stock the tablets, but the new rules will grant more access to states where abortion remains legal. While pharmacies will have to decide whether to offer the drugs, some sellers have already jumped on the bandwagon.
Quote: “We intend to become a certified pharmacy under the program,” Walgreens (NASDAQ:WBA) said in a statement. “We are working through the registration, necessary training of our pharmacists, as well as evaluating our pharmacy network in terms of where we normally dispense products that have extra FDA requirements and will dispense these consistent with federal and state laws.”
Other companies, such as Rite Aid (NYSE:RAD), are reviewing the new FDA rules, while CVS Health (NYSE:CVS) said it will seek certification where legally permissible. Besides becoming certified, pharmacies must commit to only fill prescriptions from certified prescribers, while maintaining records and confidentiality. Prior to the pandemic, there was an “in-person” clause that required patients to see healthcare providers in a physical location, but that was relaxed in April 2021 and allowed the pills to be sent by mail.
Other details: Abortion pills containing mifepristone work together with another drug called misoprostol by blocking a hormone necessary to sustain pregnancy and causing uterine contractions. Mifepristone is sold under the brand name Mifeprex by Danco Laboratories, as well as by generic manufacturers like GenBioPro. According to the Guttmacher Institute, the use of abortion pills has steadily climbed among medical providers since first being approved in 2000, accounting for over half of all U.S. abortions last year.
Today’s Economic Calendar
7:30 Challenger Job-Cut Report
8:15 ADP Jobs Report
8:30 Goods and Services Trade
8:30 Initial Jobless Claims
9:20 Fed’s Bostic Speech
9:45 PMI Composite Final
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
1:20 PM Fed’s Bullard Speech
4:30 PM Fed Balance Sheet
What else is happening…
Still no House speaker after Kevin McCarthy fails to win GOP support.
Disney’s (DIS) Avatar sequel grosses $1.48B, on track to pass Top Gun.
Romeo & Juliet stars sue Paramount (PARA) over 1968 teen nude scene.
Cruise stocks pop as Carnival (CCL) moves to increase add-on prices.
Alibaba (BABA) rallies on capital increase approvals for Ant Group.
Microsoft (MSFT) drops as UBS slashes rating on cloud worries.
…reportedly building a version of Bing that uses tech behind ChatGPT.
Verizon (VZ) adds subscribers in Q4, will cut spending in 2023.
Lower energy prices: Exxon (XOM) signals strong, but weaker Q4 profit.
Student defaults could cross pre-COVID levels without debt relief – NY Fed.
—————
Good morning. Happy Wednesday.
The Asian/Pacific markets were split with big movers in both directions. Hong Kong, South Korea, Australia, New Zealand and the Philippines did great while Japan, India and Indonesia were weak. Europe, Africa and the Middle East currently lean up. Poland, France, Germany, Switzerland, Hungary, Spain, the Netherlands, Italy, Sweden and the Czech Republic are doing well; Turkey, Russia, Norway and Saudi Arabia are down. Futures in the States point towards a moderate gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are down. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
On your marks
After closing out a year in which the S&P 500 dropped nearly 20%, Wall Street extended its gloomy demeanor into the start of 2023, with stocks edging lower amid retreats in some high-profile names. The Nasdaq Composite (COMP.IND) led the declines among the major averages, closing the session down 0.8%, while the S&P 500 (SP500) fell 0.4% and the Dow (DJI) finished fractionally lower. As mentioned in recent editions of Wall Street Breakfast, volatility is likely to remain a big theme for markets this year as economic uncertainty lingers and each data point becomes an opportunity for a clearer picture.
Commentary: “Markets stumbled into 2023 on the first trading day as the markets awaited Wednesday’s release of the December FOMC meeting minutes,” Marketplace author Andrew Hecht told Seeking Alpha. “The price action indicates that the market’s sentiment is for a continuation of hawkish squawking from the central bank. Meanwhile, industrial and agricultural commodity prices were mostly lower, while gold, silver, and platinum prices increased.”
Energy marked the worst sector performer on the session, falling 3.6% after crude oil dropped to around $77 a barrel, though tech was also a notable decliner. Six of 11 S&P segments finished the day lower, but futures linked to the benchmark index turned green overnight, and the question now is if that can hold.
On the move: Tesla (TSLA) suffered additional downward pressure on Tuesday, continuing a slide that forced the stock sharply lower during December. Hurt by a disappointing deliveries report, shares of Elon Musk’s EV maker plunged another 12% to set another 52-week low at $108 (TSLA has tanked 73% over the past year). Apple (AAPL) also staged a notable retreat, with shares slumping nearly 4% following a report that it might be cutting production levels of the MacBook and Apple Watch. The iPhone maker’s market capitalization dipped below $2T during the session, exactly a year after it first notched the $3T milestone. (19 comments)
Euro adoption
The eurozone is bringing in the new year with a new member, marking a symbolic sign of European unity as Russia continues its war against Ukraine. Croatia is now the 20th country to adopt the euro, marking a milestone for the nation of nearly 4M people. Croatia, which has sought out closer ties since its EU accession in 2013, will also join the border-free Schengen area – a bloc of 26 countries that has enabled a population of 420M to move freely among members – making it the largest border-free area in the world.
The transition: The kuna can still be used until Jan. 15, though anyone paying in the old currency will receive their change in euros. After that date, bills and coins will be permitted to be exchanged at any Croatian post office until June 30, and at any Croatian bank until the end of 2023. For those taking longer to part with their cash, kuna coins can be exchanged at Croatia’s central bank until December 2025 and banknotes until further notice.
“Croatia is the country that stands to profit the most from entry into the eurozone,” noted Boris Vujcic, governor of the Croatian central bank. “When your currency depreciates against the euro it means your debt is worth more, so your borrowing costs as a country are higher to reflect this risk.” At the time of writing, the euro is up 0.6% at $1.0610.
Go deeper: Croatia already relies on the euro for more than half of its foreign trade and for nearly three-quarters of its tourists. Joining Schengen is likely to support the country’s tourism industry, which accounts for over 20% of GDP, though there are more mixed feelings with regards to euro adoption. Many say it will usher in a period of economic stability and safety, especially as inflation soars across Europe, while others say it would only benefit larger countries like France and Germany. (1 comment)
Not guilty
In a statement that was widely expected, Sam Bankman-Fried, the disgraced co-founder and CEO of the now-bankrupt FTX cryptocurrency exchange, has pleaded not guilty to all criminal charges in federal court. The one-time billionaire entered his plea to eight criminal counts ranging from wire fraud to conspiracy to pursue money laundering before U.S. District Judge Lewis Kaplan in Manhattan. Kaplan was said to have set an Oct. 2 trial date and a federal prosecutor noted that the SBF trial could last about four weeks.
Bigger picture: The news comes shortly after two of Bankman-Fried’s associates, Gary Wang, FTX’s former CTO and co-founder, and Caroline Ellison, the former CEO of Bankman-Fried’s trading firm, pleaded guilty to fraud charges and agreed to cooperate with U.S. prosecutors to build a case against SBF. In her plea hearing on Dec. 19, Ellison admitted that she conspired with others to use billions of dollars of customers’ funds from Bankman-Fried’s failed trading platform. If convicted, SBF, who has been accused of defrauding investors and FTX customers, could face up to 115 years in prison.
Meanwhile, U.S. financial regulators, in their first statement since the FTX meltdown, advised banks exposed to the cryptocurrency sector to ensure that their activities were “legally permissible.” The Federal Reserve, FDIC, and the Office of the Comptroller of the Currency said in a joint announcement they believe that issuing/holding cryptos on an open, public and/or decentralized network is “highly likely to be inconsistent with safe banking practices.” The regulators also raised safety and soundness concerns about the business models of crypto-related firms.
Outlook: While they said banking organizations are “neither prohibited nor discouraged from providing banking services to customers of any specific class or type,” the group is reviewing how banks can engage in crypto activities while ensuring safety, consumer protection, and compliance with laws. “The agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets.” (8 comments)
Travel restrictions
An explosion of COVID-19 cases across China is overwhelming funeral homes and crematoriums, in a development that brings back flashbacks from the early days of the pandemic. It follows the lifting of China’s three-year old zero-COVID policy, which implemented strict restrictions – like quarantine and lockdowns – to stop community transmission as soon as infections were detected. Beijing has even done away with reporting and tracking, prompting worries over the virus’ spread, the lack of genomic sequencing data and the potential for a dangerous or super-contagious new variant.
Snapshot: The U.S. and U.K. are reintroducing compulsory pre-flight COVID-19 tests for inbound travelers from China, while countries like Japan and Italy are requiring travelers to test upon arrival (and go into quarantine if they are positive). The EU is also moving toward mandating masks and pre-flight testing on arrivals, with the bloc’s Health Security Committee drafting an opinion that includes the recommendations. That’s in contrast to a stance from the European Center for Disease Prevention and Control, which thinks the measures aren’t justified.
China feels the same way, calling the new testing requirements “discriminatory” and a politically-motivated effort to undermine the government. “We believe that some countries’ entry restrictions targeting only China lack scientific basis and some excessive measures are unacceptable,” Foreign Ministry spokeswoman Mao Ning said at a press briefing. “We firmly oppose attempts to manipulate COVID prevention and control measures to achieve political goals, and China will take corresponding measures based on the principle of reciprocity in different situations.”
Knock-on effects: As COVID-19 upends the world’s second-largest economy, China is reportedly moving away from the costly subsidies it has poured into building a domestic chip industry. The mega investments were intended to help it better compete with the U.S., which passed the Chips and Science Act this past summer. The decision could also have ramifications for spending in other critical areas, especially in industries that haven’t produced breakthroughs or achieved self-sufficiency of key technologies. (13 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
10:00 ISM Manufacturing Index
10:00 Job Openings and Labor Turnover Survey
2:00 PM FOMC Minutes
What else is happening…
Lawsuits coming? Southwest (LUV) slides despite shoring up schedule.
Rivian (RIVN) produces 10K vehicles in Q4, short of full-year target.
Mining stocks rally as gold hits highest level since mid-June.
Disney (DIS) executive hired to lead Apple (AAPL) TV+ marketing.
Solana’s (SOL-USD) price rockets as Bonk airdrop sparks interest.
—————
Good morning. Happy Tuesday. Hope you had a good weekend.
The Asian/Pacific markets leaned to the upside. China, Hong Kong, Taiwan and Thailand did great; Australia and Malaysia were weak. Europe, Africa and the Middle East are doing well. The UK, Denmark, Poland, Germany, South Africa, Switzerland, the Netherlands, Italy, Austria, Sweden and the Czech Republic are leading. Futures in the States point towards a moderate gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up. Oil is down; copper is up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
What will economic growth look like?
Risk: With inflation peaking at 9.1% in June, a recession is now the No. 1 economic concern going into 2023. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures and an aggressive Fed), companies lay off workers and more people are hesitant to spend. Weak expectations or prior over-investing also factor into the equation, with many firms feeling that large swaths of the economy could, or are already, experiencing worsening macro forces and a series of unknown variables (war, pandemic, energy prices, etc.).
“The new year is going to be tougher than the year we leave behind,” said Kristalina Georgieva, Managing Director of the International Monetary Fund. “Why? Because the three big economies – U.S., EU, China – are all slowing down simultaneously. We expect one-third of the world economy to be in recession. Even countries that are not in recession, it would feel like recession for hundreds of millions of people.”
Opportunity: Many corporations haven’t slashed their profit forecasts, while hiring remains surprisingly robust and the unemployment rate is sitting near historical lows at 3.7%. If that resilience holds up and inflation continues to cool down, a soft landing could be in the making. The Fed also won’t hike interest rates to the moon (and has even begun to take its foot off the accelerator), which could mean that somewhat of a slowdown is in store, but not one that slams the brakes on the economy.
“The U.S. may avoid a downturn in part because data on economic activity is nowhere close to recessionary,” according to Jan Hatzius, chief economist at Goldman Sachs. “GDP grew 2.6% (annualized) in the third quarter,” while the country added 261,000 jobs last month. “Even as financial conditions have tightened, the rise in real income is likely to be the stronger force next year. Unlike other bouts of high inflation, supply chains are normalizing as will housing rental markets – a source of disinflation that wasn’t there during the 1970s – while spending is rotating from goods to services and inventories are rebounding.” (7 comments)
Will central banks begin to pivot?
Risk: While inflation has eased recently, it is still way higher than the central bank’s desired 2% target. “We will stay the course until the job is done,” Fed Chair Jerome Powell declared at December’s policy meeting, while ECB President Christine Lagarde added that, “we’re not pivoting, we’re not wavering.” Last month, the Fed even raised its benchmark interest rate to the highest level in 15 years, and some fear that heightened geopolitical risks or uncontrollable events could happen again, causing inflation to spring back and return to its upward ascent.
“Inflation forecasts were nowhere near high enough in 2022, and there’s no reason to believe they’ll be materially better in 2023. There’s more risk of a high-side surprise,” BMO Capital Markets macro strategist Benjamin Reitzes said in a research note. “In the future, it seems likely that supply chains will be shorter, more diversified and more resilient. Trade will likely narrow to more trusted partners and these changes will increase resilience, but at the cost of efficiency. And through this adjustment, production costs could rise, increasing price pressures.”
Opportunity: The Fed raised rates seven times in 2022, pushing its benchmark from a range of 0% to 0.25%, to the current 4.25% to 4.50%. However, smaller increases were implemented in December and officials signaled that they only plan to keep raising rates to between 5% and 5.5% in 2023. Better outlooks are already materializing, with many seeing the Fed continuing to raise rates in the first quarter, pausing in the second and possibly cutting rates in Q3 or Q4.
“Slowing demand, price discounts due to elevated inventories and declining housing prices, among other factors, will help temper inflation, which should in turn prompt major central banks to pause and assess their recent historic string of rate rises,” Morgan Stanley wrote in its 2023 Global Macro Outlook. “As consumer goods’ supply chains recover and labor markets see less friction, we could see a sharper and broader fall in inflation, which would imply a somewhat easier path for policy and higher growth globally.” (3 comments)
What will the year look like for stocks?
Risk: “Don’t fight the Fed,” is alive and well, with equities coming off a bruising year. Curtains have closed on the easy money era as investors demand cash generation and revalue unprofitable growth companies. Predicting a bottom is tough and many wouldn’t be surprised if volatility still remains the name of the game. According to a recent analysis from 34 SA contributors, stocks are not likely to rebound in 2023, with the median expecting the S&P 500 to end the year at 3,799 (-1.0%) and the average seeing the benchmark index at 3,755 (-1.2%).
Many contributors predict that the S&P 500 will bottom-out at a much lower level than it is today, sometime in mid-2023, followed by some sort of rebound. The most optimistic forecast for the S&P 500 for 2023 is a rise of +35.8%, while the most pessimistic contributor who submitted a prediction for 2023 expects the index to close at 2685, or -30.1% lower. The Seeking Alpha Quant Rating for the SPY (SPDR S&P 500 Trust ETF) is also a Hold.
Opportunity: Some are more bullish on stocks, especially when looking at individual sectors. They highlight last year’s outperformers, like energy (NYSEARCA:IYE) and defense (BATS:ITA), as well as insurance players (NYSEARCA:IAK) and some basic materials (NYSEARCA:SLX). When polled in late December, more than 62% of the over 2,400 respondents to Wall Street Breakfast’s “Survey Monday” said that they would tilt most of their investments to equities in 2023, compared to cash (17.4%), bonds (12.2%), commodities (5.5%) and crypto (2.8%).
Elazar Advisors, author of Fed Trader, predicts the benchmark S&P 500 Index will rally some 20% to end the coming year at 4,520. “Recession is unlikely, inflation will drop and interest income will add to the economy and help drive stocks higher,” writes ANG Traders, Marketplace author of Away From The Herd. Also, check out the analysis and The Fortune Teller’s Predictions For 2023.
Will government debt be a serious problem?
Risk: America’s national debt topped $31T for the first time in November, and the number is not getting any lower. The gloomy fiscal milestone has added to worries about the economic health of the country, and lawmakers may need to pursue policy realism, especially if a recession kicks into high gear. Other factors like an aging U.S. population, elevated healthcare and defense costs and a tax system that doesn’t bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.
“So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,” said Michael Peterson, CEO of the Peterson Foundation, which promotes deficit reduction. “Too many people were complacent about our debt path in part because rates were so low.”
Opportunity: There’s no magic number or level for when a government’s debt begins to hurt its economy, and the country has easily handled a much heavier debt load than was once thought possible (and even use those conditions to remain competitive on the international stage). Default isn’t imminent, and even a divided Congress ultimately finds ways to raise the debt ceiling. Some go a step further and say that the record amount of red ink doesn’t matter at all, and instead focus on the interest the government pays on all its debt as a percent of GDP.
“The debt will grow when the government’s spending exceeds its tax revenues, and this is typical in many developed countries,” noted William Lastrapes, economist and professor at the University of Georgia. “There is no perception by bond markets that the federal government can’t pay back its debt, or at least enough debt for it to matter.”
Today’s Economic Calendar
9:45 PMI Manufacturing Index
10:00 Construction Spending
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