While Germany is expected to print a near 11% consumer price inflation rate y/o/y for October at 8am est today, France said its CPI was up 7.1% y/o/y, Spain’s was up 7.3% y/o/y and to be followed by the full Eurozone figure on Monday of 9.8% as forecasted, some members of the ECB are already getting nervous after hiking by another 75 bps to 1.50% yesterday. That was hinted at by Lagarde at her press conference when she said the move was not unanimous (where a few wanted a smaller hike) as some are worried about the economic growth impact of the increases on top of an already weak economic situation in the region. Governing Council member Francois Villeroy today said “We’re not subscribed to what one calls jumbo increases. We’re in no way obligated during our next meeting to reproduce the increase of 75 bps that we did in September and October.”
On the other hand, others want to keep on powering ahead. Governing Council member Muller said “It is quite clear that interest rates will continue to rise in the euro area in the near future. Interest rates are still rather low in historical comparison and do not yet have a clear restrictive effect on economic activity or price rises.” Council member Simkus is pretty hawkish and said “Inflation is still strong” and “I have no doubt we’ll have another increase, that is will have to be substantial.” Sounds like he wants another 75 bps. As does Peter Kazimir, another Council member, who said “We will pass through the neutral rate – regardless of where anyone currently sees it – like a runaway train. We need to get monetary policy into the so-called restrictive environment at least for a certain period.”
The net result of all this talk, with the tough rhetoric offsetting the softer ones, has the German 2 yr bund yield up 17 bps after falling by 17 bps yesterday. The Italian 2 yr yield after falling by 30 bps yesterday is up by 18 bps today. The ECB will also be discussing QT but we were left with no more clues on when it will start in 2023.
What doesn’t get enough discussion about the implications of rate hikes is what it is doing to the interest expense of governments, particularly the US. I’ve talked about higher rates for companies (particularly yesterday) and we know the mortgage rate impact too for households but government owed interest is skyrocketing. Here is a chart of the interest payments now being made by Uncle Sam, seen in yesterday’s GDP report at a seasonally adjusted annual rate for Q3, now north of $700b. For perspective, for the fiscal yr 2023, the US government is expected to spend $773b on the military.
US Interest Payments as of Q3 at a seasonally adjusted annualized rate
On the day Tokyo said October CPI for this city rose 2.2% y/o/y, 2 tenths more than expected and up from 1.7% in September, Kuroda and the BoJ said they are going to keep on keeping on with easing. Also, the labor market is getting tighter there as the September jobs to applicant ratio rose to 1.34 from 1.32, the highest since March 2020 when it was at 1.39.
Kuroda said “The outlook report shows inflation in between 1% and 2% for 2023 and 2024. So at the moment we don’t see a rate hike coming or an exit from policy.” And of course he talks ZERO blame for the yen weakness as he said “YCC is a method of monetary easing, and I don’t think it particularly impacts yen weakness. Past US-Japan rate differentials have hardly anything to do with dollar-yen moves if you put them on a chart.” Kuroda is either delusional or just a puppet for the Ministry of Finance who continues to need this low level of interest rates because of the extraordinary high level of debt they have. In response, the 10 yr JGB yield fell a touch under .25% and the 40 yr yield was down by 3 bps while the yen is weaker.
Before I get to some earnings call information, I just want to say that the curtain has come down on the mega cap tech stocks as a homogenous group that dominates everything in the market. Every bear market eventually gets to most stocks and the once untouchable end up being mere mortals. They are great companies but still subject to the same economic vagaries as everyone else.
Here were some important conference call comments from yesterday:
AMZN
“With the ongoing macroeconomic uncertainties, we’ve seen an uptick in AWS customers focused on controlling costs.”
“As the dollar continued to strengthen during the quarter, the FX impact was higher than the 390 bps impact we had incorporated into our Q3 guidance. This represents a headwind of approximately $900m more than we initially guided to.”
“The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend. As the third quarter progressed, we saw moderating sales growth across many of our businesses, as well as the increased foreign currency headwinds I mentioned earlier, and we expect these impacts to persist throughout the fourth quarter. As we’ve done at similar times in our history, we’re also taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere.”
AAPL
“Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and Covid related impacts to our business do not worsen from what we are projecting today for the current quarter.”
Overall, we believe total company y/o/y revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative y/o/y impact from FX. Second on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially y/o/y during the December quarter. Specifically on services, we expect to grow but to be impacted by the macroeconomic environment increasingly affecting FX, digital advertising and gaming.”
“We were really pleased with the broadness of the iPhone strength last quarter.”
Auto Nation
“New vehicle demand remained strong in the quarter and although we ended September with slightly higher inventory levels as a result of increased y/o/y shipments, new vehicle inventory continues to be a constraint and we still remain at historically low days of supply.”
“Used vehicle margins were down y/o/y, which frankly was to be expected because as you’ll recall, last year we were in a highly unusual situation of appreciating used vehicle values, and today and through the quarter, used wholesale dynamics have largely returned to a more normalized pattern of depreciation.”
“New vehicle inventory in the Group is being appropriately managed, I think, with quarter end supply of just about 30 days. Mix, however, remains a key focus for us as we continue to see availability issues in the sub $20,000 price band, where inventory levels y/o/y are approximately 25% lower, which, as a result, despite continued strong demand in this part of the segment, I think, is restricting overall used vehicle volumes.”
McDonald’s
“As the macroeconomic landscape continues to evolve and uncertainties persist, we continue to consider a wider range of scenarios as we look ahead. As I’ve said before, our base case scenario going forward is that we expect to experience a mild to moderate recession in the US and one that will be potentially a little deeper and longer in Europe.”
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.