On August 5th, 2021, a week after an FOMC meeting, Senator Joe Manchin penned a letter to ‘The Honorable Jerome Powell’ and wrote the following:
“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of QE…despite increasing vaccination rates to combat the virus and additional fiscal stimulus from Congress in the ARP. The record amount of stimulus in the economy has led to the most inflation momentum in 30 years, and our economy has not even fully recovered yet. I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford…But, now it’s time to ensure we don’t over prescribe the patient by further stimulating an already strong recovery and therefore risk our ability to respond to future crisis we are sure to face. I urge you and the other members of the FOMC to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response.”
How right he was and when trying to figure out when the Fed would end its monetary tightening I always thought it would be possibly timed soon after the letters from Congress would be sent to Powell instead focused on the employment conditions of their constituents.
This brings us to yesterday’s letter, one week before the next FOMC meeting, from Senator Sherrod Brown to ‘The Honorable Jerome Powell’ who wrote the following:
“It is your job to combat inflation, but at the same time, you must not lose sight of your responsibility to ensure that we have full employment…Monetary policy tools take time to reduce inflation by constraining demand until supply catches up – time that working-class families don’t have…We must avoid having our short-term advances and strong labor market overwhelmed by the consequences of aggressive monetary actions to decrease inflation, especially when the Fed’s actions do not address its main drivers. For working Americans who already feel the crush of inflation, job losses will make it much worse. We can’t risk the livelihoods of millions of Americans who can’t afford it. I ask that you don’t forget your responsibility to promote maximum employment and that the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate.”
How right he might be but both Senators did their best to neuter the Fed’s independence with the political pressure and I will now argue that after the November meeting rate hike of 75 bps and another one of likely 50 bps in December it will mark the end of the Fed’s rate hikes. And, we’ll see how far past that they get with QT.
The Bank of Canada by the way is expected to hike interest rates by 75 bps today to 4% and as other central banks continue to tighten as we debate when the Fed will be done, just maybe the dollar rally has ended if you believe as I do that the only reason for its rally has been interest rate and central bank differentials. The DXY is now down for the 5th straight day and just maybe my gold and silver trade can start working again. With respect to the dollar being down again but stocks too (a change in trend if sustained), it’s possible that we’ve fully entered phase 2 of the bear market where it becomes all about the trajectory of economic growth and earnings.
With another jump in the average 30 yr mortgage rate to 7.16% from 6.94% in the week before, purchase apps fell 2.3% w/o/w to the lowest since 2015 and are now down 42% y/o/y. Refi’s were flat w/o/w but lower by 86% y/o/y.
Purchase Apps
Here are some notable comments from company conference calls and/or press releases yesterday:
MSFT
Firstly, FX took off 500 bps in revenue growth. “In our consumer business, PC market demand further deteriorated in September, which impacted our Windows OEM and Surface businesses. And reductions in customer advertising spend, which also weakened later in the quarter, impacted search and news advertising and LinkedIn Marketing Solutions…Microsoft cloud gross margin percentage decreased roughly one point driven by sales mix shift to Azure and lower Azure margin, primarily due to higher energy costs…Azure and other cloud services revenue grew 35% and 42% in constant currency, about one point lower than expected, driven by the continued moderation in Azure consumption growth.”
GOOGL
“On the second quarter earnings call, we noted a pullback in spend by some advertisers in YouTube and Network, and these pullbacks in spend increased in the third quarter. In Search and Other, the largest factor in the deceleration in Q3 was lapping the outsized performance in 2021. In the third quarter, we did see a pullback in spend by some advertisers in certain areas and search ads. For example, in financial services, we saw a pullback in the insurance, loan, mortgage and crypto subcategories.”
On hiring, “As we noted on our second quarter call, our actions to slow the pace of hiring will become more apparent in 2023…In the fourth quarter, we expect headcount additions will slow to less than half the number added in Q3 (which was 12,765 people)…Within this slower headcount growth, next year, we will continue hiring for critical roles, particularly focused on top engineering and technical talent.”
GM
“As we move into 2023, we continue to see the dynamics between commodities and pricing as a natural hedge that should trend in similar directions, helping to maintain the earnings power of the company. We also continue to see strong demand for our products, and we’ll remain thoughtful in our approach to pricing…And as we said last quarter, we’re already taking proactive steps to manage costs and cash flows, including reducing some discretionary spending and limiting hiring to critical needs and positions that support growth.”
On credit quality, “our credit metrics are really still quite strong. Pre-pandemic, our net losses ran in the 1.5% range. So they’re less than half of that now at 70 bps. For several years running now, our portfolio is skewed more and more to prime consumers, and that’s defined as 680+ FICOs.” In contrast, “Our used car nonprime book is showing more normalization. And as always, we always look for targeted ways to improve our underwriting, and now is no exception. So that would be the area of most focus, the used car nonprime book.”
TXN
“During the quarter we experienced weakness in personal electronics and expanding weakness across industrial.”
V
“Payment volumes and processed transaction indexed to 2019 have been very stable in the US and globally for the past three quarters…Travel related cross border volumes were 18% above 2019…As we’ve said before, we are not economic forecasters. Clearly, there’s a high risk of a global recession, but we do not have a specific point of view on if, when, or the kind of recession we might have. For internal planning purposes, we are assuming no recession. Of course, we will stay very vigilant, closely monitoring our trends day by day.”
Likely helped by the drop in energy prices, consumer confidence in France in October rose 3 pts to 82 and that was 5 pts better than expected. As the ECB will most likely hike by 75 bps next week, along with the factors I mentioned above, the euro is rising for the 7th day in the past 8. Bond yields are higher and stocks in the region are mixed.