Well, we now have the AI economy and then everything else. A big question will be whether the capital spending taking place for chips, software and so on related to AI will reduce spend elsewhere or will be enough to lift cap ex in the aggregate.
I do want to point out something I’ve been watching closely and that’s been autos as they’ve been the last industrial sector standing in terms of growth as inventories have gotten rebuilt to something close to historical norms. If you didn’t see Analog Devices yesterday, whose stock fell 8%, they tempered guidance and specifically with their auto business after another strong quarter in this customer group. In their earnings call they said about their overall business, “After three years of steady growth, customers are beginning to adjust their forecasts and rebalance their inventories. This is most pronounced in Asia, while North America and Europe demand is moderating, but at a more measured pace. We expect this normalization of revenue will persist through the 2nd half of 2023…book to bill as we outlined last quarter remains below parity in all markets and our backlog due in the current quarter has returned to its typical coverage range…At the midpoint of our outlook, we expect industrial and auto to be down low to mid single digits sequentially.”
This is what Snowflake said after reporting a 50% rise in Q1 product revenue y/o/y, “We are however operating in an unsettled demand environment and we see this reflected in consumption patterns across the board. While enthusiasm for Snowflake is high, enterprises are preoccupied with costs in response to their own uncertainties.”
In terms of the cadence of the quarter, “We benefited from strong consumption in February and March. Starting in April consumption slowed after the Easter holidays through today…It is challenging to identify a single cause of the consumption slowdown between Easter and today. A few of our largest customers have scrutinized Snowflake costs as they face headwinds in their own businesses. For example, some organizations have reevaluated their data retention policies to delete stale and less valuable data. This lowers their storage bill and reduces compute costs.”
And we’ve heard from many companies, particularly in retail about how business softened as their quarter progressed and that was even the case in the pet business. Petco Health and Wellness, a stock we own, said in their quarterly call yesterday that “we saw a more cautious consumer beginning in the 2nd half of the first quarter, resulting from banking uncertainty and lower tax refunds, which continues to weigh on discretionary spend.”
I’ve talked before about my focus on the leveraged loan market because of the lower quality credits with all exposed to floating rate debt, offset by those that hedge. Yesterday the LSTA loan index closed at its lowest level since late March, though still remains well off its lows seen last year.
LSTA
This is what Fitch said in their negative outlook on the finances of the US government, “The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching X date. Fitch still expects a resolution to the debt limit before the X date. However, we believe risks have risen that the debt limit will not be raised or suspended before the X date and consequently that the government could begin to miss payments on some of its obligations The brinkmanship over the debt ceiling, failure of the US authorities to meaningfully tackle medium term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to US creditworthiness.”
Reputationally, this ain’t a good look but economically and market speaking with regards to paying bills it doesn’t mean much as long as the US has an electronic printing press to help us meet our obligations. The problem though is the cause of this negative outlook and that is the exploding size of our debts and deficits that may now matter in terms of the rates we will pay to borrow and what the value of the US dollar will be as this plays out.
Back on August 5th 2011 when S&P took away our AAA rating, the 10 yr Treasury yield actually fell in the weeks that followed. On August 1st, the 10 yr yield was at 2.75%. By the end of August it was at 2.22%. The S&P 500 had a more violent response, dropping almost 7% on the Monday after the ratings cut but a week later had recaptured that loss. Forgotten though was the market correction of almost 20% that was already taking place in response to the end of QE2 in March 2011. The Dollar index fell slightly in response to the downgrade in the month that followed.
In 2011 our federal debt was about 100% of GDP vs today at 124%. It was at 65% pre GFC.
According to Investors Intelligence, the Bull/Bear spread widened again with Bulls up 1.3 pts w/o/w to 46.5 and Bears fell to 23.9 from 24.7. No, not everyone is bearish. AAII today said Bulls rose 4.5 pts to 27.4 and that is the 2nd highest read when looking over the past 2 months but they still remain well below the Bears. Bears were unchanged at 39.7. The CNN Fear/Greed closed yesterday at 60 vs 67 one week ago and remains in the ‘Greed’ camp.
The Bank of Korea and the Indonesia central bank both kept rates unchanged as expected as others take a pause.
After seeing the drop yesterday in German business confidence, French business confidence dropped as well with its index down 2 pts to the lowest since April 2021.
French Business Confidence
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