Uncategorized

Who? Kazuo Ueda is now who might get the job as the next governor of the Bank of Japan. I say ‘who’ because I’ve never heard of him even though he was a former BoJ board member. Deputy governor Amamiya, who was the leading candidate as of last week and was assumed to carry on with Kuroda policy with modest tweaks, supposedly didn’t want the job. Yields are rising and the yen is rallying in response but I don’t know if that is because Ueda is seen as possibly having a hawkish bent or because Amamiya didn’t take it. The 10 yr yield is stuck at .50% but the 9 yr yield was up by 3 bps to .55% and the 40 yr yield rose 5 bps to 1.84%. The yen is up by .5%. The Nikkei though did rally by 1/3 of a percent. Interesting times because yields are up around the world in response as it’s also combined this week with tough monetary talk from both ECB and Fed members. The US 2 yr yield is back above 4.5% and the 10 yr is at 3.71%. That 2 yr yield is the highest since November. 

With respect to the wage side which we’ve been reminded now many times that the Fed is honed in on it, yesterday the Atlanta Fed’s January Wage Growth Tracker saw a 6.1% y/o/y rise, the same pace as in December. For perspective, in the 20 yrs leading into Covid, this figure averaged 3.5%. If you were a ‘job switcher’, you saw a wage gain of 7.3% y/o/y vs 7.7% in December and that compares with the 20 yr pre Covid average of 3.8%. ‘Job stayers’ saw a wage rise of 5.4% vs the 20 yr average of 3.3% and that is up one tenth from the December print. The ‘low skill’ worker experienced a 6.6% wage boost and that is more than double the 20 yr average of 2.9%. 

Yes, wage growth seems to be plateauing but at a pace well above the pre Covid average. Combine this with higher interest expense for the floating rate part of the capital structure and certainly for any new debt taken on, and add in the slowdown in inflation which will slow revenue growth and you have the perfect cocktail for lower corporate profit margins. 

Atlanta Wage Growth Tracker

I’m hearing some now say we’ll have no economic landing and maybe so but as night follows day, a recession is a natural part of the economic cycle. My good friend David Rosenberg in his piece yesterday said “From my lens, we have had 11 recessions since 1950, and all followed an aggressive Fed tightening program that inverted the yield curve. That is the historical record. And we know that recessions typically begin either at the tail end of the Fed tightening program or after it is over.” And I’ll add, it just so happens to be the most aggressive tightening cycle in 40 years. No landing? 

Let’s get some earnings call comments on the consumer:

Paypal

In giving the numbers on revenue growth, “In a difficult macroeconomic environment with the overall growth of e-commerce continuing to slow…”

“As we look ahead to 2023…Our baseline assumption is that discretionary spend will remain under pressure and global e-commerce growth will be slightly positive y/o/y. That said, we are seeing signs that inflation is beginning to cool, and it’s logical to expect that discretionary spending vs non-discretionary spending will begin to increase. To be clear, we have not built any recent positive economic news into our forecasts.” 

Affirm

“Amidst increased macroeconomic headwinds, our fiscal Q2 had mixed results. Revenue was at the low end of our expected range, and adjusted operating income came in better than expected. On the other hand, gross merchandise volume was short of expectations, as was revenue less transaction costs.” 

More color on what they are seeing in discretionary spend, “We get a pretty good preview of what that looks like especially around Christmas shopping and Black Friday from our seats. Electronics were down about 11%. Homewares and sports equipment in particular were hovering in the negative high 30s. So there’s quite a lot of – I’m not sure what the right word to use, but folks are digesting the purchases they made during the pandemic. And I think those are not transactions that will disappear forever, but I think they’re probably going to remain muted for we expect at least a few quarters of that…There’s quite a lot of movement into things like consumables. And obviously food prices being higher does not help either to the acceleration point.” 

They still though are optimistic about delinquencies, in part because of their confidence in their business model. 

Expedia

“we continue to see that people are prioritizing travel over just about everything. If any of you have been traveling, I’m sure you’ve seen it, rates are still very high, demand is high, planes are full. So I think maybe it’s still in effect of Covid and people realizing there’s more valuable things to do with their lives. And they – it’s not just like revenge travel but it’s beyond that, like I want to keep traveling, I want to keep enriching my life.” 

They said this on China travel, “So China first, our biggest relationship there is outbound with Trip.com in China and then we had some small relationships and some offline travel relationships. It’s early days, there’s tons of interest. I’m sure you’ll hear this from other players, but there’s a lot of shopping going on, but it’s still fairly challenging for outbound travel between the political issues, between airlift, which is challenging and there’s still a lot of unique rules now getting in and out of China that the airlines are dealing with, making hard to fly direct and so forth. And then of course, you’ve got the issues of Russian airspace, with great issues with European airlift in China. So it’s going to take a little while to work itself out, but interest is very high.” 

With respect to China, they reported inflation stats for January. CPI was up 2.1% y/o/y as expected but PPI fell more than anticipated, by .8%. China of course is only just reopening so we’ll more relevant will be the number in quarters to come. They also reported aggregate financing data for January but because of the Lunar New Year holiday, it’s only best to combine it with February figures so I’m not going to bother listing here just the January data. 

The UK economy saw no q/o/q growth in Q4 but its economy still grew by .4% y/o/y. Specifically in December, its economy shrunk by .5% m/o/m, two tenths more than expected. As stated earlier on European bonds selling off, gilt yields are higher too. I’ve mentioned my bullishness on UK stocks over the past year and if you didn’t see, the FTSE 100 rose to a record high this week. We still like the UK listed oil companies in particular as they trade for half the value of its US peers.