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Peter Boockvar

February 15, 2023 By Peter Boockvar

A game of chicken now between stocks and bonds?

On the day before the January payroll report a few weeks ago, the 2 yr yield closed at 4.11% and has tightened by 50 bps since. The 10 yr yield is up by 34 bps over the same time frame. The S&P 500 was at 4180 that day and has fallen just 1% since in the face of that. And it’s not just a rate vs stock look. Since that day too the earnings picture continues to soften. I was sarcastic last month saying that I ‘guarantee’ that about 70-75% of companies would beat the earnings estimates. I was wrong as just under 70% are exceeding those expectations and with very mixed guidance. Either the stock market at current levels believes that this rate move higher won’t last or it’s delusional in thinking it’s ok at the same time an earnings recession has begun. 

The visual of the 6 month T-bill which we know is at 5%, and is just following the expectations for the fed funds rate, could very well be a chart of someone’s bipolar personality. Maybe after achieving some level of price stability, the Federal Reserve can find a way to reach some extended period of interest rate stability. 

6 Month T-Bill

It’s hard to get more global of a business than the consumer products company Coca Cola (a stock we own). Here are some quotes from their earnings call yesterday:

“During the fourth quarter, the environment remained dynamic, as inflation, geopolitical tensions, pandemic related mobility restrictions and currency volatility persisted. Despite this range of factors, consumer demand help up relatively well and our industry remains strong.” 

But we also know that their revenue growth was mostly all price as case volumes fell 1% y/o/y (in part due to Russia business closure and China though). In describing their 15% revenue growth, “This was driven by pricing actions across markets and revenue growth management initiatives to retain and add consumers.” 

Also, “we do see both inflation moderating as we go through 2023 and of course, our own implied pricing beginning to moderate as we go through ’23, in part because the input costs inflation is moderating, but also because we begin to cycle some of the price increases from 2022.” And herein is something to watch for those companies that have been mostly driving revenue growth via price increases, as inflation falls they’ll see “Moderating revenue growth rate as a function of moderating inflation” said Coke. 

As for travel, which certainly has been an economic bright spot, here is what Airbnb said:

“First, guest demand on Airbnb remains strong. Nights and Experiences Booked increased 20% in Q4. We had our highest number of active bookers ever in Q4, demonstrating guests’ excitement to travel on Airbnb despite evolving macroeconomic uncertainties. During the quarter, we also continued to see guests booking trips further in advance, supporting a strong backlog for Q1. Second, guests are increasingly returning to cities and crossing border…Third, guests continue to book longer stays on Airbnb.” 

Marriott said this:

“With Asia-Pacific ex China surpassing pre-pandemic levels in the fourth quarter, all regions except Greater China have now more than fully recovered.” And “leisure ADR rose 22%.” 

While they said the above quote on recovery, they confused me though by saying, “In the fourth quarter, mid week occupancy was still down mid single digit percentage points vs 2019, while occupancy on shoulder and weekend nights was down the low single digits.” 

As for how 2023 has started, “To date, we have not seen signs of demand softening. Certainly trends could change relatively quickly given our average transient booking window is around three weeks. But a month and a half into 2023, booking demand and pricing remains strong.” 

On the China reopening, “We saw a huge demand surge in January during the Chinese New Year holiday with RevPAR for the holiday period nearly in line with 2019. Other regions are also anticipated to benefit from an increase in oubound China travel, especially, APAC, where over 40% of room nights in 2019 came from Chinese travelers.” I remain positive on the impact to the Asian economies with the Chinese reopening and also parts of Europe.

Cass Freight said this in their January report released midday yesterday where m/o/m shipments were flat seasonally adjusted from December. “After a soft holiday season with inventories overstocked and imports falling sharply, the outlook remains cautious, but volumes are on a high plateau…The resilience of volumes partly reflects share gains by the truckload sector, particularly contract and dedicated freight currently, amid declines in less than truckload (LTL) and intermodal volumes.” 

As for implied freight rates, they fell 2.4% y/o/y in January but were unchanged m/o/m. Cass said “Freight rates are on track to fall 6-7% y/o/y in the next few months based on the normal seasonal pattern of this index.”

I’ll add this, a jump in inventories helped to goose Q4 2022 GDP and the drag it brings to Q1 will result in a negative GDP print most likely. 

With a 20 bps jump in the average 30 yr mortgage rate w/o/w to 6.39%, which we knew was coming as the 10 yr yield spiked, purchase applications fell 5.5% w/o/w and refi’s were down by 12.5% w/o/w. Versus last year purchases are down by 43% and refi’s by 76%. Housing is in a recession and will continue to be a damper on economic activity in 2023 as long as mortgage rates stay above 6%. 

Shifting overseas, the UK January CPI ‘slowed’ to a still very high 10.1% y/o/y down from 10.5% in December and that was 2 tenths less than expected. The core rate moderated to 5.8% from 6.3% and that was 5 tenths below the estimate. Producer prices were mixed where inputs fell m/o/m but rose for output charges. On a y/o/y basis, input PPI was still up 14.1% and output charges were higher by 13.5%. Gilt yields are trading down in response with the 2 yr lower by 8 bps but only after it jumped by 19 bps yesterday. The 10 yr yield is lower by 8 bps but rose 12 bps yesterday. With the broad dollar strength today, the pound is weaker but that is not helping the FTSE 100 which is flattish. 

The Bank of England still has a major inflation problem with its bank rate at 4% but inflation has peaked in the UK too and will continue to fall in the months ahead. 

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About Peter

Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.

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Disclaimer - Peter Boockvar is an independent economist and market strategist. The Boock Report is independently produced by Peter Boockvar. Peter Boockvar is also the Chief Investment Officer of Bleakley Financial Group, LLC a Registered Investment Adviser. The Boock Report and Bleakley Financial Group, LLC are separate entities. Content contained in The Boock Report newsletters should not be construed as investment advice offered by Bleakley Financial Group, LLC or Peter Boockvar. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. The views expressed in this commentary should not be taken as advice to buy, sell or hold any security. To the extent any of the content published as part of this commentary may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. No chart, graph, or other figure provided should be used to determine which securities to buy or sell. Consult your advisor about what is best for you.

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