What an exhausting way to run in place. The S&P 500 started the week at 4134 and closed yesterday at 4135. In case you didn’t see or hear, It was these words from the Amazon call that broke its post earnings rally: “the uncertain economic environment and ongoing inflationary pressures continue to be a factor, and we believe it’s continuing to drive cautious spending across consumers. This means our customers are looking to stretch their budgets further and are focused on value. We saw some moderated spending on discretionary categories as well as shift to lower priced items and healthy demand in everyday essentials, such as consumables and beauty.”
With respect to AWS, “Given the ongoing economic uncertainty, customers of all sizes in all industries continue to look for cost savings across their businesses, similar to what you’ve seen us doing at Amazon. As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter, and we are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 bps lower than what we saw in Q1.”
I want to highlight again my point I made yesterday that the economy in 2023 has 2 parts. One pre SVB and one post SVB. This is what Cloudflare said in their call last night and whose stock is down 25% this morning: “Macroeconomic uncertainty, which intensified over the course of Q1 with every failing bank, resulted in a material lengthening of sales cycles, a significant decline in close rates, even as win rates held strong, and an extreme back end weighting to the quarter. To give you some sense, almost half the new business closed in the last two weeks of the quarter, which is very nonlinear for us. All of these factors put pressure on growth. The quarter most reminded me of Q1 of 2020, when businesses were paralyzingly nervous about the impact of Covid. I think this parallel shows how, with uncertainty in the economy, companies are closely watching their own businesses before committing to new spending.”
To bring to light the 2 sided stock market, my good friend Jim Bianco mentioned in a tweet yesterday that through April 26th, the ytd return in the S&P 500 was 5.13%. The top 8 stocks Meta, Apple, Amazon, Netflix, Alphabet, Microsoft, Nvidia and Tesla had contributed 5.57% to the overall increase. Thus, the other 492 stocks were a drag of .44% in return.
Another call of note was Capital One, which is trading off post earnings. They raised their allowance for bad debt by 40 bps q/o/q and “our assumptions for key economic variables remain similar to those of last quarter. We continue to assume economic worsening from today’s levels on most measures.” Their delinquency rates are now back to 2019 levels after being below the last few years.
“And across our businesses, credit trends continued to normalize in the quarter, and we reached or were approaching pre-pandemic levels at quarter end.” And read these assumptions, “we are assuming material worsening of labor markets with the unemployment rate rising from today’s very low levels to above 5% by the end of 2023. We are also assuming adverse effects from inflation and some further worsening of consumer profiles from the sort of flip side of their extraordinary outperformance in the earlier period during the pandemic.” I guess plan for the worst and hope for the best?
So far in all the earnings reports, ‘normalize’ and ‘optimize’ are code words for ‘weaker’ and/or ‘softer.’
The yen is getting slammed and JGB yields are falling as the new BoJ Governor in the face of 40 yr highs in inflation continues on with negative rate policy and current YCC. This said, he’s getting rid of forward guidance and I believe is setting us up for a change in YCC in June possibly. The BoJ also announced, and something we’ve heard about the past few weeks, a self-analysis will take place of monetary policy over the past few decades. Maybe they’ll come to the conclusion of how deranged it’s been. The RBA is doing the same review and the Federal Reserve needs to do the same inward looking analysis.
Tokyo by the way said April CPI for the city rose 3.8% y/o/y ex food and energy, 3 tenths more than expected and up from 3.4% in March. If the BoJ wasn’t such a direct arm of the Japanese government in financing it, they would have already tightened policy by much more. The job market did weaken somewhat in March as the jobs to applicant ratio dipped and the unemployment rate rose.
Apartment List released its National Rent Report today and said for April rents rose .5% m/o/m and that is the 3rd straight month of gains, “but represents a slight slowdown from last month at a time of year when growth is typically picking up steam. This month’s increase was also less than the typical April price change that we saw in pre-pandemic years. Even though prices are trending up again, a combination of sluggish demand and increasing supply is keeping rent growth in check.” The y/o/y gain is now 1.7%. This compares with the pre Covid pace in 2018 and 2019 of 2.8%. The vacancy rate rose to 6.8% and should go higher with the large amount of construction underway, though will fall off a cliff after these projects are done because nothing now is getting green lit.
Understand with this survey, it is ONLY measuring NEW leases, not the rollover of maturing ones. However, the trend overall downward is clear and is certainly front running the expected falls in the rent components of CPI and PCE (which measure both metrics) and why the Fed keeps looking backwards.
In Europe, the Eurozone economy grew .1% q/o/q and by 1.3% y/o/y, both one tenth under the estimate but kept afloat by the mild winter. Germany also reported a bigger than expected rise in unemployment for April of 24k, 3x the estimate and the most since last August. France said its April CPI was above expectations while Spain’s was below. We await the German read at 8am and the estimate is for little change from the above 7% seen in March.
In response, the euro is down as are bond yields. The 5yr 5yr euro inflation swap is unchanged at 2.49%, holding near its recent highs.