Stock indexes are little changed as investors await big Wall Street bank earnings this morning, as well as more key inflation data.
The Producer Price Index (PPI) this morning is expected to show a slight acceleration in headline prices while "core" prices remain flat for December. Data yesterday showed another slowdown in "core" CPI (Consumer Price Index), which strips out volatile food and energy prices and is one of the Fed's preferred inflation gauges.
The year-over-year core rate slowed to +3.9% from +4.0% in November, which was a bit above analyst expectations of +3.8%. By contrast, headline CPI accelerated to +3.4% year-over-year from +3.1% in November and versus expectations for a rate of +3.2%.
Rising energy and food prices contributed to the bigger gain in headline inflation, while strong increases in shelter and services costs are keeping "core" inflation elevated. However, bulls point out that the annual core rate nonetheless continues to move closer to the Fed's +2.0% target and don't see the December data changing the outlook for rate cuts in 2024.
Most everyone on Wall Street seems to be agreeing that the Fed has pivoted and will be cutting rates in 2024, the debate now surrounds the timing of the first cut, as in will it happen in March versus May or June? There are some worries that if the disinflation trend stalls in the first part of the year and rate cuts subsequently get pushed to the second half, the Fed may not be able to deliver the degree of cuts that bulls are currently penciling. That's partially due to the Presidential election in November and the belief that the Fed won't want to cut rates in the month's before in order to avoid looking like its supporting one parties campaign over the other.
That theory would basically take a September rate move off the table, leaving just three (July, November, and December) policy meetings in the second half of 2024 that rate cuts could happen. Again, that's just a theory and there is a lot of time and data between now and then but it's worth understanding why it's so important to many stock bulls that rate cuts begin in the first half of the year.
Investors over the next few weeks will be turning their focus to Q4 earnings season, which "unofficially" kicks off this morning with earnings from Bank of America, Citigroup, JP Morgan, and Wells Fargo. Analysts expect overall earnings for S&P 500 companies in Q4 to grow +1.3%. That's down substantially from earlier projections for growth of as much as +8.0%, which is due in part to negative guidance issued by numerous companies over the quarter.
Downward revisions by analysts were led by the financial sector, primarily banks. Notably, just over two-thirds of the earnings announcements scheduled over the next week are in the financial sector. Meaning the Q4 reporting season may get off to a rocky start. At the same time, with investor sentiment about banks so low, many believe earnings are more likely to surprise to the upside rather than the downside.
The earnings calendar for next week includes Goldman Sachs, Interactive Brokers, Morgan Stanley, Pinnacle Financial, and PNC Financial on Tuesday; Alcoa, Charles Schwab, Citizens Financial, Discover Financial, and Kinder Morgan on Wednesday; Fastenal, JB Hunt, PPG Industries, and Truist Financial on Thursday; and Ally Financial, Comerica, Fifth Third Bancorp, Huntington Bancshares, Schlumberger, State Street, and The Travelers Companies on Friday.
Economic data next week includes Retail Sales, Import/Export Prices, Industrial Production, and the NAHB Housing Market Index on Wednesday; Housing Starts and Business Permits on Thursday; and Existing Home Sales and Consumer Sentiment on Friday. I should also mention that the World Economic forum kicks off next week in Davos, Switzerland. Known simply as "Davos" this year's event, titled "Rebuilding Trust," runs January 14 - 19 and will include attendance by top figures from the global economy.
US Deficit Tops Half Trillion in the First Quarter of Fiscal Year: For the period from October 2023 through December 2023, the budget deficit totaled just shy of $510 billion, following a shortfall of $129.4 billion in just December alone, which was 52% higher than a year ago. The jump in the deficit pushed total government debt past $34 trillion for the first time. Compared to last year, which saw a final deficit of $1.7 trillion, 2024 is running even hotter. Source CNBC
Interesting... Hertz Sells EVs, Wants More Combustion Vehicles: Car rental giant Hertz this morning said it would sell 20,000 of its electric vehicles to buy more internal combustion vehicles, citing expensive repairs for its EVs. The move marks an abrupt reversal by Hertz, which in 2022 announced plans to buy 165,000 EVs from Tesla and Volvo unit Polestar. Expenses related to collision and damage, primarily associated with EVs, remained high in the quarter, thereby supporting the Company's decision to initiate the material reduction in the EV fleet, Hertz said in a filing this morning to the SEC. Hertz is now writing down a $245 million loss with the move. Repairing an EV after a collision in 2022 cost about 56% more than a conventional internal combustion vehicle, per a report last year from CCC Intelligent Solutions. The wait time for such repairs was also about 25% longer with an EV. This is far from a death knell for EVs but it's another example of how far the vehicles still have to go. And for a rental provider like Hertz, it makes sense that the higher repair costs and longer wait times were untenable. Source Axios
U.S.-Led Coalition Launches Strikes on Houthi Rebel Targets in Yemen: A U.S.-led coalition launched more than a dozen strikes on Houthi rebel targets in Yemen late Thursday, a U.S. defense official said, two days after the Yemeni rebel force defied an ultimatum to halt its attacks on ships transiting the Red Sea with a barrage of missiles and drones. The U.S. has said the strike by U.S. and British forces was intended to reduce the Houthis’ ability to continue their campaign. The group’s more than two-dozen strikes, which it said were a response to Israel’s war on the Hamas militant group in Gaza, have hindered the movement of gas, oil, and good services in the Red Sea. The Biden administration and the U.S.-led coalition had been reluctant to respond too forcefully to the Houthis lest it trigger a war in the region, in part due to the group’s backing from Iran. Container volumes through the Suez Canal from mid-December to Jan. 7 fell more than 60% compared with the same period a year ago, from 3.3 million boxes to 1.3 million boxes as the result of the ship diversions. Source WSJ
Red Sea Crisis Sends Shipping Costs Soaring: The diversion of container ships from the Suez Canal around the Cape of Good Hope in South Africa is having a “global contagion” effect on freight rates, according to a S&P Global report published this week. Trade between Asia and Europe has faced the largest impact with the Suez Canal serving as a crucial gateway between the two regions. The rate for a 40-foot container from North Asia to Europe has surged more than +600% to $6,000 since the outbreak of the Israel-Hamas war in October, according to S&P Global Commodity Insights. But the Red Sea crisis is now having a significant impact further afield with shipping costs between Asia and the U.S also spiking. Shipping rates from North Asia to the U.S. East Coast have jumped +137% for a 40-foot container from early October, while rates from North Asia to the U.S. West Coast have jumped +131% during the same period. JPMorgan told clients on Tuesday that the fight against inflation could stall in the coming months if shipping costs push the price of goods higher. Consumer prices change slowly and it would take months for them to respond to rising transportation costs if at all, said Chris Rogers, head of supply chain research at S&P Global Market Intelligence. Source CNBC
Venture Funding Plunged in 2023: U.S. venture capital investing was way down in 2023. Everyone suspected it, but now there's official data via the annual Venture Monitor report from PitchBook and the National Venture Capital Association. VCs disbursed $170.6 billion to 15,766 U.S. startups last year, compared to $242.2 billion for 17,592 companies in 2022. Red arrows persist the deeper you dive into the data. Fundraising and exists both dropped — as did valuations, except for seeds. Deal counts were weaker across company stage, including for crossover rounds, as were tech deals, life sciences deals, and corporate venture capital. Q4 was the year's slowest quarter with less than $40 billion of activity. That's fairly typical, but the figure fell short of any of the prior three fourth quarters. For perspective, the $170.6 billion in 2023 U.S. venture volume was only -1.4% lower than the 2019 total and well above 2018. The Q4 2023 Venture Monitor report is available Source Axios and Pitchbook
The Myth of the Great Boomer Wealth Transfer: As the boomer generation hits their twilight years, the question of what will happen to their money has become a source of fascination and consternation for economists, estate planners, and families across the country. Boomers hold a massive amount of wealth: The 55.8 million Americans over 65, about 17% of the population, hold half of America's wealth — $96.4 trillion, according to the Federal Reserve. The general assumption is that as this older generation dies, that money will trickle down to younger generations and give cash-strapped families a leg up. But it isn't that simple. Most of the money held by America's older generations will get eaten up by long-term care and end-of-life costs, and what remains will mostly end up in the hands of other already-wealthy people. It's important to note that while the total assets held by boomers is a lot, most of that is held by a small number of people. Many of the nation's wealthiest individuals (such as the billionaires Michael Bloomberg, Warren Buffett, Larry Ellison, and Bill Gates) are in this demographic — and their wealth isn't about to trickle down to everyone. The median net worth of people between the ages of 65 and 74 was $266,400 as of 2019, according to Federal Reserve data — not much higher than the average net worth for other age demographics. Source Business Insider
Why Renters are Feeling Worse About Their Finances Than Homeowners: Renters are among the most likely to describe their current financial situation as poor, while homeowners have a rosier take, according to the Axios Vibes survey by The Harris Poll. Americans who rent their home have been through the wringer over the past few years, dealing with double-digit rent increases, while soaring home prices and mortgage rates pushed homeownership increasingly out of reach. The median asking rent in the U.S. is up 40% from the first quarter of 2020 — i.e., before the pandemic — according to the latest census data from the third quarter of 2023. In some regions, increases were higher. Wages did not keep up. Average hourly earnings rose 20% from February 2020 to December 2023, per government data. Homeowners were in a different boat. The value of their homes soared, while their monthly mortgage payments mostly did not. Source Axios
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