Zero-dark thirty. Again. Day like any other day. I left my small bed for my office in decay. The cobwebs that clutter my brain persist this morning for what seems like minutes . Coffee. Need coffee. Need water first. Of course.
There he is. The man in the blackened window. Handsome fellow. "Nice haircut." Thanks, I did it myself. "Where have you been?" I have never left you. "Seen Intel (INTC) ?" Yeah. Awful. "Lisa Su is going to eat that guy's lunch." Already has. Never was a fair fight. Now she's taking the rest of his meals. "No spit." ... "Oh, one more thing. Any thoughts on GDP?" Sit down, my longtime friend. We have much to discuss.
On Thursday morning, after what felt like a month straight of just awful macroeconomic data, what we saw was actually quite decent. Weekly Initial Jobless Claims continue to dwindle despite all these job cuts that we keep hearing about.
"You know how monetary policy comes with a lag and we believe that Main Street is only now starting to feel the effects of what the Federal Open Market Committee had done in 2022?"
"Well, job cut announcements behave in much the same way. Large companies have to give employees two months' notice before mass job cuts can commence. This means that job cuts announced in January aren't going to show up in the numbers until March at the earliest."
Ahh. So smart for just a reflection.
December was also a rip-roaring month for Durable Goods Orders, thanks to a near-record month for orders for civilian aircraft. While the headline print ran at +5.6% month over month, when you strip out transportation, December quickly becomes -0.1%. Orders for core capital goods that strip out both air and defense and are seen as a proxy for the overall health of the business cycle printed at -0.2%. Boo. Hiss.
Now for fourth-quarter GDP, which printed at headline growth of 2.9% quarter over quarter SAAR (seasonally adjusted annualized rate). This was down from Q3 growth of 3.2%, well below the Atlanta Fed's GDPNow forecast of 3.5% and well above the consensus view of 2.6%. All in all, a better day for the US economy than we have seen of late. Is it real? Or is this all smoke and mirrors? Hard to say.
We do know that this run of very low weekly jobless claims is temporary. We do know that for most types of durable goods, orders are contracting. We also see enough holes that we can poke in that GDP print. Let's go there.
At the surface, this was just what the doctor, or rather the FOMC ordered. A quarterly GDP print, or really two consecutive GDP prints, that put 2022 on the whole well into positive growth territory and appear to set the stage for this great white whale that the Fed has been hunting -- the "soft landing" of the US economy.
The Federal Reserve has been aggressive all year on increasing short-term interest rates while methodically drawing down on excess liquidity through the monthly reduction of the monetary base. Though the headline estimate for Q4 GDP printed at 2.9%, personal consumption expenditures, which are a significant driver, if not the significant driver, for the US economy, printed at growth of 2.1%. Economists had been looking/hoping for something in the mid 2%s.
Much of the boost to Q4 GDP came from increased private inventory investment, which in turn was led by investment in manufacturing-based inventories in support of the petroleum, coal and chemical industries. For real. Indeed, the contribution to percentage change (Table 2 from the release) shows a value of 1.46, up from -1.19 for Q3. This 1.46 inventory print is the highest number on an entire sheet with 60 categorized entries, even higher than personal consumption. In comparison, the goods contribution printed at 0.26 while the services contribution printed at 1.16.
In short, if your family is not benefiting from the inventory builds across the petroleum, coal or chemical industries, then the "healthy" growth for the quarter probably felt a lot less healthy to you. A narrowing trade deficit also contributed to the headline print, though this at least in part was due to a reduced demand for US exports, which is obviously a net negative.
The bottom line is this, final sales to domestic buyers printed at growth of just 0.8%, while final sales to domestic purchasers, which strips out trade and inventory adjustments, hit the tape at growth of just 0.2%. These are the two numbers that (non-political) economists look at as they are considered to be the more realistic view of economic health on Main Street, USA. No, the US did not overtly go into recession in late 2022, though some parts of the economy clearly have, and it is now this >< close.
Making the Doughnuts
Financial markets rallied in response to the data. Why not? Everything suddenly looked a lot better on the surface, if one did not actually do the homework. People do homework. Algorithms just try to create momentum.
The Fed, until going into its blackout period this week, had been out in force, trying for the most part to message the likelihood of an increase to the target for the fed funds rate of 25 basis points next Wednesday to bring that target range up to 4.5% to 4.75%. Fed funds futures trading in Chicago are now pricing in a 98% probability for such a move.
Really, only St. Louis Fed President James Bullard had been out front of late trying to talk up a 50-basis-point move in order to get the overnight rate to 5% ahead of a probable economic slowdown. Bullard's thesis got some backing from over-exposed economist Mohammed El-Erian in an op-ed at Bloomberg News on Thursday. The idea, according to the Fed, is to get the fed funds rate to at least 5% in one or two moves and then leave it there a la Bank of Canada potentially for the rest of the year.
The bond market has been pricing in anything but a soft landing as exhibited by the yield spread between US Ten-Year and Three-Month paper. The spread has run at approximately -125 basis points for close to three weeks now. Those trading fed funds futures also have other ideas. These traders see the FOMC capitulating later this year as those futures are now pricing in a terminal rate of 4.75% to 5% that runs from March 22 through Nov. 1, when the FOMC would implement the first of two 25-basis-point rate cuts for late 2023.
The only major financial market apparently buying into the whole "soft landing" or no recession at all story is the equity market. Either that, or algorithms have gotten to the point where they can just game the Fed without any regard whatsoever for the real-world concerns of the human race. This is very possible.
Another day, another rally. On Thursday, winners beat losers at the New York Stock Exchange by greater than 2 to 1 and at the Nasdaq by about 3 to 2. Advancing volume took a 64.4% share of composite trade for names domiciled across the street from George Washington and a 59.2% share of composite trade for names domiciled across the street from Father Duffy. On the index level, the entire screen was green with the exception of the VIX. That said, with the S&P 500 up 1.1% and the Nasdaq Composite up 1.76%, the Dow Transports, which have been weak of late (which can foretell economic contraction), lagged yet again, up just 0.01% for the session.
Where are we on the charts? Glad you asked.....
The S&P 500 has now broken out of that potentially bearish running triangle that I showed you and in doing so has pulled away from its 200-day simple moving average (SMA) as the 50-day SMA barrels toward that line, setting up a "golden cross" scenario. The daily moving average convergence divergence (MACD) is in good shape and the index is not yet overbought. Though I have been generally negative on the markets and have only tried to pick my spots, I must respect price. That's rule No. 1. Play the environment provided, not the one you want or the one you think would be more correct.
The Nasdaq Composite has not only also broken out beyond its upper trend line and has just experienced a "baby" or swing-traders' golden cross (21-day exponential moving average over 50-day SMA), but now presses up against its 200-day SMA. Indeed, the Nasdaq Composite kissed that level on Thursday without making a serious attempt at piercing the line.
Is this 200-day SMA of the Nasdaq Composite where the bears make their final stand? Is this where the last of them capitulate? Melt up into month's end followed by a February to forget?
-- I am still short Tesla (TSLA) . If anything, my smallish short position has grown a bit. My average price on the position is up to $156.28. I will cover this position, win or lose, ahead of the weekend.
-- Long positions in both Disney (DIS) and Salesforce (CRM) continue to react well to pressure from activist investment. Salesforce (a small long) took back the stock's 200-day SMA on Thursday after not touching that line in over a year (Jan. 4, 2022). I believe this stock can be added to on weakness as long as this line is held and as long as the weighting of this stock upon my book does not exceed 2%. Disney, which I already added to on weakness, took back its 200-day SMA earlier in the week and is rapidly turning into a major victory. The stock has quickly become my fifth-largest holding. I will not reduce unless that line is lost. My current target is $126.
Economics (All Times Eastern)
08:30 - Personal Income (Dec): Expecting 0.2% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (Dec): Expecting -0.1% m/m, Last 0.1% m/m.
08:30 - PCE Price Index (Dec): Expecting 5.1% y/y, Last 5.5% y/y.
08:30 - Core PCE Price Index (Dec): Expecting 4.4% y/y, Last 4.7% y/y.
10:00 - Pending Home Sales (Dec): Expecting -1.0% m/m, Last -4.0% m/m.
10:00 - U of M Consumer Sentiment (Jan-F): Flashed 64.6.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 771.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 613.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AXP) (2.24), (CVX) (4.27), (CL) (0.77), (HCA) (4.78), (ROP) (3.77)