I wrote on Monday, “after getting another 75 bps hike, the 4th straight one to that finally achieved 4 handle, they’ll go in smaller increments thereafter with likely 50 bps more in December. In order to avoid seeming more dovish as to dilute what they are trying to do, Powell will likely say that the destination might end up being the same, regardless of the pace of hikes from here and that anything between 4-5% is possible and thus leaving open the door of more rate increases in 2023 even if smaller in size.” Dear Jay, mission accomplished and we also learned something new about you. You’re not afraid of over tightening because you think any damage done will be resuscitated by rate cuts thereafter. Easier said than done. I’ll be wrong on the thought that December will be the last rate hike but I don’t think by much. The fed funds futures in May 2023 is right now sitting at 5.17% and the 2 yr yield is now at 4.72% and we’ll see if banks finally start raising rates on savings accounts off near zero.
Taking a different approach than the Fed and now more in line with the RBA and BoC, the Norges Bank in Norway raised interest rates by only 25 bps to 2.50% instead of by 50 bps that was expected. They said they will hike again in December but “The outlook is more uncertain than normal. The future policy rate path will depend on how the economy evolves.” We’ll hear from the BoE at 8am est.
Also not wanting to repeat the steps of the Fed, ECB governing council member Visco today said he “doesn’t think the ECB should react as the Fed has done.” With a rate of just 1.75% and no QT in place, that is certainly clear. European bonds are selling off in sympathy with US Treasuries. Asian bonds were weak too.
Malaysia’s central bank raised rates by 25 bps as expected to 2.75%.
Here are a few anecdotes from some company conference calls on topics I believe very relevant.
With regards to the labor market, Cheesecake Factory said this, “On the staffing front, applicant flow remained strong. In fact, we had over 350,000 applicants during the quarter. We’re also starting to see our best-in-class attrition rates fall below prior year levels.” On cost pressures, “For the third quarter, along with the broader restaurant industry, we continue to face higher inflationary headwinds than we anticipated.” One of those factors was “higher utilities and building maintenance, which totaled approximately $5mm or $.10 of eps in the quarter and accounted for the majority of the variance to expectations in other operating costs.”
Estee Lauder blamed China and the travel restrictions there, also “the tightening of inventory by some retailers in the US, and “the far stronger US dollar” for its earnings guide down. Specifically on inventories, they cited it was “due to concerns about slower traffic.” From here, “As we enter fiscal 2023, we took strategic pricing to mitigate higher than normal inflation, both the magnitude and speed of currency movements experienced thus far combined with inflation have further suppressed our expectations for the balance of the year.”
C.H. Robinson, the large freight broker:
“On our 2nd quarter earnings call in late July, I talked about a deceleration in demand that we were expecting to see in the 2nd half of 2022 in three large verticals for freight, including weakness in the retail market and further slowing in the housing market. We’re now seeing those expectations play out with slowing freight demand and price declines in both freight forwarding and surface transportation markets.”
With respect to stock market sentiment, the recent rally resulted in a sharp drop in Bears according to AAII. They dropped by 12.8 pts after the 10.5 pt fall in the week before. At 32.9, that’s the least since mid August. Bulls rose to 30.6, the most since mid August, higher by 4 pts and for the 3rd straight week. Investors intelligence yesterday said Bulls slipped a touch to 35.8 from 36.9 but Bears fell too by 1.2 pts to 37.3. Bottom line, the extreme bearish sentiment seen in September that was a nice contrarian backdrop for the rally since is no longer here.
AAII Bears
Ahead of the US ISM services report later we saw more from overseas. China’s October Caixin services PMI fell to 48.4 from 49.3. The weakness is simply due to the aggressive covid rules and how it’s made it almost impossible to run a business in China. Hong Kong’s PMI rose 1.3 pts m/o/m but is still below 50 at 49.3.
Singapore remains a bright spot in Asia as its PMI was 57.7 from 57.5 in September. S&P Global said “growth momentum has yet to taper at the start of the fourth quarter, even as domestic covid cases rose in the early half of October. Faster business activity growth was underpinned by solid demand conditions. This included foreign demand that improved at a visibly sharper rate.” India’s services PMI, another country that is a bright spot, rose to 55.1 from 54.3.
The UK October services PMI was revised up by 1 pt to 48.2 which is still below 50 for the 3rd straight month and the weakest since January 2021. Political upheaval, inflation, particularly energy costs, and the higher cost of capital are the obvious reasons.