Those who have ever tried to track anything from a wild animal to a human being to a group of human beings through a wilderness environment know... that the environment itself as well as luck and the skill of those being tracked matter as much as the skill of the tracker. What matters? What does not? What looks more like coincidence? Keep it simple, stupid. You keep telling yourself. Too fresh? Too wet? Too dry?
For those who love the thrill of playing oddsmaker without consequence, a Goldman Sachs research paper placed the odds of domestic economic contraction at 35% over the weekend as the Fed tries to steer monetary policy through the current period of high inflation/elevated demand despite the excessively liquid/poorly supplied environment. Must be nice to be able to say down the road, that you had either called a recession or put "minority" odds upon the occurrence of economic contraction, thus claiming victory regardless of outcome. Useless, but thanks.
Digging In a Bit
The Federal Reserve Act mandates that the central bank conduct policy "so as to promote" maximum sustainable employment and stable prices. I have no idea if an official unemployment rate of 3.6% illustrates something close to "full employment". From a labor market perspective, there is no doubt that anyone who is able, could find employment, if insensitive to price for wages, almost upon request in most regions.
However, "full employment" from the macroeconomic perspective involves far more than just labor markets. I don't think too many second or third level thinkers would dare refer to this economy as currently running at or near full employment. It has become overtly clear that in order for the US economy to reach such an "Eden-like" state that the unemployment rate would probably need to go negative (allow for increased immigration) with the increase in those employed primarily drawing below market wages (not likely).
Pushing beyond all the fancy talk, and unrealistic "supposing", plainly speaking... I don't think any economist or economic watcher would see the Fed as having failed in guiding economic performance through the pandemic and for the most part, achieving mandate number one. Mandate number two is the problem.
Now, with consumer prices running at scary growth of 8.5% and producer prices printing at absolutely terrifying growth of 11.2%, the Fed has been put in the position of corralling near-runaway inflation without damaging economic activity, nor labor markets to the point of contraction. Many see higher interest rates and a reduced monetary base as some kind of elixir that will surely drag on demand... and these combined forces surely will do just that.
However, where there is the intersection of both scarcity - caused by either warfare or pandemic lockdown conditions in key regions of the world that are either blessed with abundant natural resource, or have become hubs of manufacturing production for margin seeking corporations - and near-inelastic demand, tighter monetary policy will prove futile in arresting the pace of price appreciation.
I didn't even get into the inflationary impact of green or ESG style investment. What can monetary policy do about electric vehicles that require on average 400 additional pounds of aluminum and 150 pounds of additional copper than do their traditional ICE (internal combustion engine powered) counterparts of similar size. What can monetary policy do about the increase in the broad consumption of nickel, graphite, lithium, etc., required to power batteries, and machines that produce energy through wind and solar means? The future will prove less ESG friendly than we think, and will be expensive. More on that later.
Earnings season starts to heat up this week. Last week, a number of large banks and a few other firms posted first quarter results. According to FactSet, with 7% of S&P 500 companies having already crossed the finish line, the blended (results and expectations) rate of Q1 earnings growth has inched up to 5.1% from 4.7% the week prior. The blended rate of Q1 revenue growth increased slightly to 10.8% from 10.7%. The highlights for day traders will likely come from Netflix (NFLX) and Tesla (TSLA) , while defensive minded investors probably look for opportunity as firms like Johnson & Johnson (JNJ) and Procter & Gamble (PG) go to the tape.
Traders have suffered on both the debt security and equity security fronts these past couple of weeks all as the US dollar and a number of commodities across the energy, agricultural, precious metals and industrial metals spaces have ascended in value together. One must stop and appreciate just how difficult it should be for dollar denominated commodity futures contracts to rise in value in a strengthening environment for the greenback.
While WTI Crude trades close to $107 per barrel, the US Ten Year Note pays 2.87%. As far as equities are concerned, The S&P 500 gave up 2.39% last week to close on Thursday, down 7.84% for 2022, and 8.84% off of the all-time high for the index (January 4th). There has been a clear rotation out of "growthy" type sectors and into more "defensive" type sectors more reflective of businesses that make and sell goods at a profit while returning something to shareholders. The Nasdaq Composite closed on Thursday, down 3.93% for the week, down 14.66% year to date, and 17.65% off of the all time high for that index (November 22nd).
Chart watchers will notice that the S&P 500 failed to crack its own 21 day EMA all week, and closed the week below its 50 day SMA on Thursday for the second daily session in three...
... While the Nasdaq Composite failed to even touch that line all week...
... which is very dangerous. Swing traders will note that the Nasdaq Composite's 21 day EMA appears to be closing in on that 50 day line.
The Chinese Economy
Readers may or may not be aware that on Sunday night (NY time), China's National Bureau of Statistics posted a plethora of economic data. For the first quarter, Chinese GDP printed at annual growth of 4.8% versus expectations for 4.4%. While well below Beijing's growth performance of years past, this number was an acceleration from the 4.0% growth produced during China's fourth quarter. However, it is also clear that the Chinese consumer and those dependent upon consumer activity are suffering due to China's "zero-Covid" pandemic policy of strict lockdown. Chinese retail sales for March contracted 3.5% from the year ago period just one month after the January/February (combined due to Lunar New year) y/y growth of 6.7%. It would be difficult given the locked down state of so many Chinese cities to hold out much optimism for April.
The Bureau of Economic Performance goes to the tape with its first estimate for Q1 GDP in about a week and a half (April 28th). Currently, the Atlanta Fed's GDPNow model, which is more real-time snapshot than predictor, shows the first quarter running at annualized (and salted and peppered) growth of 1.1%. The model was not updated for Friday's release of March Industrial Production and Capacity Utilization due to the Good Friday/Passover religious observations, so by the time the model updates this Tuesday for March Housing Starts, there could be some improvement.
That would be because those numbers were surprisingly strong. March Industrial Production "popped" 0.9% month over month versus expectations for growth of 0.4%. This made March a third consecutive month of robust headline growth for this data-point. Breaking that number down, Manufacturing Production grew (+0.9%) with the headline, while Mining Production (+1.7%) outperformed for a second consecutive month, and Utilities Production underperformed (+0.4%) for a second consecutive month. Makes sense. Warmer weather. Insatiable demand for resources.
Capacity Utilization also surprised at 78.3% (consensus: 77.8%), where the breakdown by industry group was similar to the headline growth numbers posted. Manufacturing Capacity hit the tape at 78.7%, while Mining Capacity printed at 79.5. (Which is a recent high, but still well below the 50 year average... with commodity prices running. Kooky. It's as if nobody trusts the regulatory environment.) Lastly, Utility Capacity ran at just 75.1% for March.
It may not be a component of the Atlanta Fed's GDPNow model, but the New York Fed did release the Empire State Manufacturing Survey for April on Friday as well. The survey stunned everyone, in a good way... for current conditions. Check this out... the headline number printed at 24.6 versus expectations for something close to 1.0. New Orders printed at 25.1, up from -11.2 in March. Shipments hit the tape at 34.5, up from -7.4 in March. Prices Paid heated up further while Prices Received saw the torrid pace of acceleration slow to merely really hot. Overall, a really strong survey.
That said, there was almost a shocking level of pessimism or lack of confidence expressed by respondents. Forward looking indicators, which are considered to be six months out, saw the expectations for New Orders drop from 41.1 in March to 15.0, and Shipments from 42.3 in March to 13.4. Priced Paid and Prices Received remained steady from March to April, but there is an expected contraction coming for Inventories. While there was no great massed expectation for a reduction in the number of employees, there was certainly a drop in expectations for the average workweek from 15.0 to 5.5.
These are difficult times for equity investors. There have been a few layups... like the defense contractors. There has been carnage across tech. Energy has been what has worked, with a focus on domestic gas. We knew that materials have worked on and off. That is likely a story of continued close to inelastic demand. ESG investment places demand on resources, while fear of regulation enforces scarcity. You probably saw Taiwan Semiconductor's (TSM) results last week. Demand for semis of all kinds is not going away. Still the stocks remain out of favor. I remain cautiously (because I do realize that I could get my face ripped off here) in accumulation mode as these names come in. Not a game for the faint hearted.
A recession? Yeah, that will leave a mark. Better to point out that the 10's and 2's inverted and that sometimes precedes a recession by nine months to two years, while also pointing out that the 10's and 90's (days) never came close to inverting and that spread has been more accurate than has been the 10's and 2's over time than to place a percentage on the likelihood of recession. Sounds like someone trying harder to not get it wrong than trying to get it right.
Economics (All Times Eastern)
10:00 - NAHB Housing Market Index (Mar): Expecting 77, Last 79.
The Fed (All Times Eastern)
16:00 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (JBHT) (1.94)