I’m going to include here more company comments from the quarterly calls. If there is one underlying theme apparent, economic activity is modest, with some more optimistic than others, with macro challenges clear, confirming the hard data that we’ve seen, and companies are doing their best to both acknowledge that and laying out how they will maneuver thru. I will say though, the optimism of the credit card companies, Visa, Mastercard and American Express was standout interesting in that they are not seeing signs of slowing consumer behavior. Is that because more people are just using credit cards rather than cash because of the secular trends? More are using credit cards because their savings are depleting and both factors are sort of fooling the card companies into thinking everything is fine or is there a legitimate consistency to consumer spending that they believe is taking place instead? We’ll soon see.
Also, while we are seeing the downshift in inflation and some economists think it crashes down further from here, companies are still relying on price hikes, especially those who are trying to offset falling volumes and they are saying so on most of the earnings calls I’ve listened to. But, if companies lose this purchasing power at some point, well, that is where all the revenue growth was coming from.
SNAP:
“From our recent conversations with our partners, it seems like advertising demand hasn’t really improved, but it hasn’t gotten significantly worse either. I mean, obviously, the brand spend has significantly reduced like we saw in the quarter, but our direct response business continued to grow in Q4. And in general, it seems like our partners are just managing their spend very cautiously so that they can react quickly to any changes in the environment.
MCD:
They are another consumer driven business that is relying on price to drive revenue, though they still saw a rise in volumes. “We achieved full yr comp sales growth of 10.9% – guest count performance with 5% growth globally.”
“As we look ahead to 2023, macroeconomic uncertainties will persist, and we expect to continue to face headwinds. Our base case for a mild-to-moderate recession in the US and one that will be a little deeper and longer in Europe is unchanged from what we shared on our Q3 earnings call. We also expect inflationary cost to continue to pressure our margins…With significant inflationary headwinds across commodities, labor and utilities, our company operated margin percent will be hampered in the near term, and we expect full year 2023 company operated margin percent will be slightly lower than our quarter four results.”
WHR:
“During the 2nd half of 2022, we were in the midst of an unfavorable macro cycle. Short term consumer sentiment and demand continue to reflect recessionary concerns. At the same time, inflationary pressures remain stubbornly high. While the combination of demand down, cost up is historically rather unusual or at best temporary, it did impact our results negatively during Q4.”
“Looking ahead into 2023, we do expect the tail end of this negative macro cycle to be felt during the first few months of the year. We foresee macro headwinds to slowly turn into tailwinds as the year progresses. Needless to say, that it is difficult to predict the exact timing of the shift in the macro cycle, but we would expect this to happen towards late Q2 or early Q3.” Let’s hope.
CAT:
“Supply chain improvements enabled stronger than expected shipments, particularly in construction industries, and supported an increase in dealer inventories.”
With respect to their top line growth, “The increase was due to favorable price realization and volume growth, which included dealer inventory increases in growth and sales of equipment to end users.”
“While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our segments and we expect 2023 to be better than 2022 on both top and bottom line.”
“We currently expect to see a moderation of input cost inflation as the year progresses, and therefore, a corresponding moderation and price realization as move through the year. Price though should still more than offset manufacturing cost for the year.”
PHM:
“Despite the higher rate environment dominating the national conversation we saw buyer demand improve as the fourth quarter progressed and can confirm this strength continued through the month of January. We’ll have to see how things progress from here. But I think this improvement attach to the ongoing desire for homeownership that exists in this country.”
“Based on feedback from our sales offices, buyers have been responding to the decline in mortgage rates. Consistent with this idea, I would add that rate buy downs remain among the top incentives for our customers along with the decline in mortgage rate actions we’ve taken to help improve overall affordability appear to be gaining traction.”
“In the fourth quarter incentives increased to 4.3% of sales price. On a sequential basis, this is up from 2.2% on closings in the third quarter of 2022. Beyond just adjusting incentives and many of our active communities we have already introduced smaller floor plans to help lower future prices and associated costs.”
Mortgage apps by the way fell 9% w/o/w after the new year jump in the prior few weeks. Purchases dropped by 10.3% w/o/w and are lower by 41% y/o/y. Refi’s were lower by 7% w/o/w and by 80% y/o/y. If mortgage rates stabilize between 6-6.5% than maybe housing can steady too but no doubt at a slower pace because of the still challenging affordability issues.
Shifting gears overseas. Ahead of a likely 50 bps rate hike tomorrow from the ECB, headline January CPI for the Eurozone rose 8.5% y/o/y, down from 9.2% in December and below the estimate of up 8.9% but it was mostly due to a slowdown in energy prices in addition to consumer energy subsidies. Core inflation was higher by 5.2% y/o/y, the same pace seen in December and one tenth more than expected. It is that core rate that the ECB will be focusing on in terms of the potential stickiness of inflation and at a rate that is double where the deposit rate will be on Thursday, 2.5% after the rate hike. As a higher core rate offset the drop in headline, sovereign bond yields are little changed as is the 5 yr 5 yr inflation swap. The euro is higher as are stocks modestly. It will be really interesting this year seeing how the China reopening is going to infect the inflation trends.
While the ECB has barely raised rates, the impact on lending is already apparent. Yesterday the ECB said a net 26% of banks surveyed said they tightened company loan standards in Q4 2022. That is the most since 2011. They also said 74% of banks saw a drop in demand for home mortgages in Q4. A much higher cost of capital everywhere compared to what we’ve become used to over the past 10+ years is having an impact everywhere.
Ahead of the US ISM today we got a bunch of January manufacturing PMI’s from overseas. China’s private sector focused Caixin index rose a touch to 49.2 from 49. The shift with Covid helped but also created short term disruptions. Caixin said “The recent relaxation of Covid containment measures helped to ease pressure on China’s manufacturing sector during January. Output fell at the softest pace for five months, while the downturn in new orders also moderated. Nevertheless, there were reports that the pandemic and relatively subdued market conditions continued to impact customer demand and operations. Notably, staff absences contributed to a further drop in employment and a renewed rise in backlogs.”
South Korea’s PMI rose to 48.5 from 48.2, Thailand’s was up by 2 pts (tourism beneficiary) to 54.5, Vietnam’s rose by 1 pt to 47.4 and we also m/o/m gains for Indonesia and the Philippines. Declines from December were seen in India (after recent strength), Malaysia, and Taiwan (at just 44.3). We’ll certainly be watching closely to see how all these trend as China fully is back in the months to come. I’m pretty optimistic on the impact for the Asian region.