Ahead of the big bank earnings tomorrow, here is what the tiny $84mm market cap Bank of South Carolina said in their earnings press release yesterday (thanks Sam Rines for the heads up), “Although we are ahead of 2022 first quarter results, we are behind in our profit plan for the first three months of this year. This outcome is the result of precipitous increases in our deposit costs to meet the intense competition amongst banks, brokerages, and the US Treasury. Although loan interest income has increased, our margins remain thin. The potential for further rate increases by the Federal Reserve is uncertain.” Expect to hear a lot more of this in the weeks to come.
There is a lot of coverage of the Fed minutes and the ‘mild recession’ the Fed staff is predicting in the back half of 2023. Well, if you don’t think there will be at LEAST a ‘mild recession’ then you are in the No Landing camp which I believe is a pipe dream. Thus I believe the Fed staff was being at least honest and we’ll see if conservative in calling for a ‘mild recession.’
If the Fed does want cover from the inflation stats in keeping rates unchanged in May, which I think they will, the Atlanta Fed’s Sticky CPI, which allows parses the CPI stats, saw a moderation to 4.7% from 6.8% in February and 6.3% in January. The Sticky Core slowed to 4.5% from 6.9% in February and 6.2% in January.
Sticky CPI y/o/y
Fastenal, a great industrial products proxy said this in today’s earnings press release with regards to their higher unit sales in Q1, “This was due to further growth in underlying demand in markets tied to industrial capital goods and commodities, which more than offset a modest contraction for construction supplies.” The call is not until later but I’m sure auto and aerospace helped their ‘industrial capital goods’ business. They also said March sales were “weaker than previous months” and why the stock is trading down pre-market.
With respect to inflation, “The impact of product pricing on net sales in the first quarter of 2023 was 290 to 320 bps compared to Q1 2022. The increase reflects carryover from broad pricing actions taken in the prior year designed to mitigate marketplace inflation for our products and services…Spot prices in the marketplace for many inputs remained below prior year levels, though in many cases they were at or above levels experienced in the Q4 2022.”
On wages, “Employee related expenses, which represent 70% to 75% of total operating and admin expenses, increased 4.4% in Q1 of 2023 compared to Q1 of 2022. We experienced an increase in employee base pay due to higher average FTE (full time employed) during the period and, to a lesser degree, higher average wages.”
Shifting to Delta, this is what they said about business travel. “Small and medium business bookings stepped up in the March quarter to fully recovered versus 2019 levels. International corporate sales accelerated sequentially to approximately 90% recovered to 2019 levels, ex China. Domestic corporate sales in the March quarter were approximately 85% recovered to 2019 levels. Recent corporate survey results indicate that 96% of companies expect their travel will increase or stay the same sequentially in the June quarter.” We’ll wait for the call to hear about leisure trends and booking patterns.
The euro/yen heavy DXY is just a few pennies from a one yr low and gold is knocking on record highs. There is a Reuters story that “ECB policymakers are converging on a 25 bps hike in May, even if other options remain on the table and the debate is not yet settled, according to five sources with direct knowledge of the discussion.” They’ve already hiked 50 bps at the prior six meetings bringing their deposit rate to 3%. The euro has already broken out to a one yr high vs the USD.
Gold
This was interesting from the National Association of Realtors on Tuesday in a piece titled “Cash Rules.” “Since October 2022, the share of buyers purchasing their home without a mortgage has been more than 1/4 of the market…While the Spring of 2022 saw a similar share of all cash home buyers, one needs to look to 2014 before seeing similar shares.” In 2014, mortgage rates were in the low 4% range but obviously buyers now are trying to avoid a 6.5% mortgage rate. Here is an interesting chart from them showing the generational breakdown of who is paying cash and it’s not a surprise. They also said “When looking at the buyers who are able to pay all cash, it tells a bleaker story and a story of those who hold the cards in the housing market and those who do not.” //www.nar.realtor/blogs/economists-outlook/cash-rules
According to Investors Intelligence, and as of Friday, we keep losing the Bears as they fell to just 24.3% from 25%. Bulls held steady at 48.7% vs 48.6% last week. The more fickle AAII survey though saw a 7.2 pt drop in Bulls to 26.1 after jumping by 10.8 pts last week which was the highest since mid February. Bears though were little changed at 34.5, falling to the lowest since mid February as those Bulls went into the Neutral category. The CNN Fear/Greed index closed at 63, smack in the middle of the ‘Greed’ category. It’s up from 58 one week ago and just 26 one month ago.
China’s exports in March were dramatically better than expected with a 14.8% y/o/y rise vs the estimate of down 7.1%. Exports to within Asia and Europe led the way. Imports shrunk by 1.4% y/o/y but that too was above the forecast of a decline of 6.4%. While China faces plenty of challenges, its full reopening is a really big deal after 3 years stuck with hand cuffs.
Australia, a China economic proxy, saw a job gain in March of 53k, almost 3x the estimate of 20k. Their unemployment rate held at 3.5%. In response, bond yields are higher as is the Aussie$.