While I don’t think the news from the Bank of Canada was that much of surprise as their new rate is still at 4.5%, it was what Governor Macklem said in his press conference that highlights the fine line they and other central banks are trying to walk here. He said “We are trying to balance the risks of under and over tightening. If we do too little, the decline in inflation will stall before we get back to target. But if we do too much, we will make the adjustment unnecessarily painful and undershoot the inflation target.” But whether they are actually done yet or not, or whether the Fed has one or two more rate hikes left, I will emphasize AGAIN that just by keeping rates higher for longer is a continued form of tightening. Also, the BoC made clear in the first paragraph of their statement yesterday, “The Bank is also continuing its policy of quantitative tightening.” The 2 yr Canadian yield fell 8 bps yesterday in response to the statement after falling by 2 bps on Tuesday but it was up 20 bps in the three days before. The Canadian dollar is flat on the week.
Highlighting again my positive stance of the impact of the China reopening on not just their economy but the economies in all of Asia and many parts of Europe, and we shouldn’t think that the Chinese are going to be more reticent with their reopening compared to how the rest of the world behaved (no reticence), I mentioned yesterday that Macau said almost 72k visitors on Monday vs 50k on Sunday and 32.5k on Saturday. Today, according to Inside Asian Gaming, they had 90k visitors. //www.asgam.com/index.php/2023/01/25/golden-recovery-continues-as-90000-people-visit-macau-in-a-single-day/
With respect to stock market sentiment, it’s been mixed with what we’ve seen this week. Yesterday II said Bulls fell 1.4 pts w/o/w to 45.1 off the highest level in more than a year but Bears fell to 28.2 from 29.6 and that is the least since September. AAII today said Bulls fell 2.6 pts w/o/w to 28.4 after rising by 10.5 pts in the two weeks prior. Bears rose 3.6 pts w/o/w to 36.7 after falling by almost 20 pt since the end of December. The CNN Fear/Greed index closed yesterday at 64, smack in the middle of the ‘Greed’ category but still 11 pts below ‘Extreme Greed.’ Bottom line, while more bulls are showing up to the party in response to the good start to the year, tthere is nothing extreme here to give us help in making a contrarian call from here.
While many are still debating on the type of economic landing we’re going to have, I’m still going to express my concern that any slowdown can be drawn out because of a higher for longer cost of capital. Yesterday the US Architecture Billings Index rose to 47.5 from 46.6 but still 2.5 pts below 50 and their chief economist said “Despite strong revenue growth last year, architecture firms have modest expectations regarding business conditions this coming year. With ABI scores for the entire fourth quarter of 2022 in negative territory, a slowdown in construction activity is expected later this year, though the depth of the downturn remains unclear.”
To add to this, Sherwin Williams is down sharply pre market on their earnings miss and cut in guidance. They said in their press release, “we will not be immune from what we expect to be a very challenging demand environment in 2023. Visibility beyond our first half of the year is limited. On the architectural side, US housing will be under significant pressure this year. Slowing existing home sales and continued high inflation also will be headwinds. On the industrial side, we have already seen a slowdown in Europe, and the same is beginning to appear in the US across several sectors. In China, Covid remains a factor and the trajectory of economic recovery is difficult to map. The US housing slowdown also will impact some of our industrial businesses, namely Industrial Wood and Coil.” More resilience for them will be seen in end markets like “residential repaint, property maintenance, auto refinish, and packaging.”
I wanted to add some comments from a quarterly call of note, a company that reported numbers better than feared. Monro, the largest auto service store company in the countries with about 1,300 locations in about 20 states said this, “Similar to last quarter, broad based inflationary pressures on the consumer continue to affect customer purchasing behavior in the third quarter. We saw customers trading down to lower priced tire options. We actively repositioned our tire assortment to give our customers the right tire at the right price. We are staying relevant on opening price points to provide customers with more choice and greater value…We also saw stretched consumers continue making decisions to defer vehicle maintenance, which put pressure on sales in some of our key service categories. As a result, we chose to not fully pass through inflationary cost increases to an already stretched consumer. The voice of our customer has indicated that raising prices at a time when they’re struggling to accept them, would likely result in the immediate loss of a sale and has the potential to jeopardize a longer term relationship.” I bolded the CEO comments. The last comment is good for inflation trends, not so good for profit margins.
Elon Musk said this about demand in the Tesla call, “Thus far in January, we’ve seen the strongest orders year to date than ever in our history. We currently are seeing orders at almost twice the rate of production, so I mean that – that’s hard to say whether that will continue at twice the rate of production the orders that are high, and we’ve actually raised the Model Y price a little bit in response to that. So, we think demand will be good despite probably a contraction in the automotive market as a whole.” It did though acknowledge that lower prices elsewhere is helping to drive the demand growth. “So right price really matters. I think there’s just sort of a vast number of people that wanted to buy a Tesla car, but can’t afford it. And so, these price changes really make a difference for the average consumer.”
With inflation still rising faster than wages in the UK, the CBI retail sales index fell to -22 from -5. CBI said “Retailers began the new year with a return to falling sales volumes, as the sector continues to face the twin headwinds of rising costs and squeezed household incomes.”
CBI Retail index