Peter Boockvar

As an avid watcher of Cheers back in the day, I was sad to see the news on Kirstie Alley. A funny scene, //www.youtube.com/watch?app=desktop&v=1ymI7xjYPxU.

The Business Roundtable released its Q4 CEO Economic Outlook Survey which tracks cap ex, employment and expectations for sales in the coming quarters. The index fell 11 pts q/o/q to 73 and they said this “is the first time it has dipped below its long-run average of 84 since Q3 2020.” It still though remains well above the expansion or contraction breakeven of 50. Hiring plans fell 17 pts to 61, capital spending plans were down by 7 pts to 68 while those expecting higher sales in the coming 6 months declined by 8 pts to 91. The Roundtable said “The results signal CEOs remain cautious amid persistent domestic and global economic headwinds, including high inflation and the Fed measures required to tame it.” They are pushing Congress to restore “full and immediate expensing of American R&D investments this session and reforming the permitting system to expedite energy infrastructure projects.” The former is very possible, the latter is highly unlikely. 

CEOs forecast 1.2% GDP growth in 2023. To my continued worries about the direction of profit margins (going lower), CEOs were also asked to identify the greatest cost pressure facing their company. Forty-nine percent of Business Roundtable CEOs identified labor costs as the top cost pressure, followed by 15% who identified material costs and 14% who identified supply chain disruption costs. Other top cost pressures included energy and regulatory costs.” 

This is what VF Corp said in their press release yesterday announcing a new interim CEO but also lowered guidance. On the latter, “VF is revising its FY23 outlook largely to reflect the impact of weaker than anticipated consumer demand across its categories, primarily in North America, which is resulting in a more elevated than expected promotional environment as well as order cancellations in the wholesale channel to manage trade inventories. Also impacting the outlook, but to a lesser degree, are the higher than expected impacts from inflation on consumer discretionary spending in Europe and ongoing Covid related disruption in China.” Timberland, North Face and Vans are some of their brands. 

The Reserve Bank of Australia raised interest rates by 25 bps to 3.10% as fully expected. Governor Lowe said “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course…The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.” Inflation is expected to peak at 8% in Q4. They also acknowledged the lag of policy on economic activity. This modest approach to tightening policy is quite in contrast to the Fed which is steam rolling to at least a zero REAL interest rate. I applaud them for wanting to get there but I still have a big problem with the pace at which they are trying to. While there were no surprises, the 2 yr Aussie yield rose 9 bps but after falling by 20 bps in the prior 4 trading days. The Aussie$ is higher vs the US dollar as are most currencies. 

Keeping the Bank of Japan stuck on current monetary policy in the face of now 3%+ inflation is that wage growth is still anemic. Regular base pay in Japan rose 1.3% y/o/y in October vs 1.4% in September, 1.5% in August and .9% in July. Now with wage growth still rising below the rate of inflation, it should give the BoJ more reason to tighten but Kuroda doesn’t think like that. The 10 yr yield was unchanged but still hovering at just above .25% while the 40 yr yield was down 2 bps. The yen is higher after yesterday’s weakness which stemmed a 5 day winning streak previously. Kuroda’s term ends at the end of March 2023 and all eyes on whether policy will change as it has major implications for the world’s bond markets. 

German factory orders in October were better than expected and September was revised up to a less deeply negative print. This number was boosted by large scale orders, without which orders would have fallen by 1.2%. Domestic orders fell, offset by a rise in foreign ones, including within the Eurozone. This number is never market moving as it’s somewhat dated. Yields in Europe are falling as ECB economist Philip Lane, an uber dove who got the inflation story wrong in 2021, will likely want a 50 bps hike next week as he said today bizarrely that “a lot has been done already” in terms of rate hikes. They have their deposit rate at 1.50% with inflation at 10% and they are still reinvesting maturing bonds and he thinks they’ve already done a lot. The euro is higher and back above $1.05 vs the dollar. 

Rising rates in the UK is hurting their real estate market too. The S&P Global UK Construction PMI fell to 50.4 from 53.2. The estimate was 52. They said “Stalling house building activity contributed to the weakest UK construction sector performance for 3 months in November. Survey respondents noted that new residential building projects had been curtailed in response to rising interest rates, cancelled sales and worries about the economic outlook. Construction growth was largely confined to the commercial segment, but even here the speed of expansion slowed considerably since October as client confidence weakened in response to heightened business uncertainty. At the same time, a lack of new work to replace completed projects resulted in another fall in civil engineering activity.” With the fiscal policy being implemented by PM Sunak, the UK economy’s tough time will continue but assets are cheap there.