Dear Valued Clients and Friends –
Brian Szytel here with you today on a mixed day in stocks following the previous two positive days. In today’s missive, I unpack an important fresh read into PMI data, some earnings and sector analysis, and overall market perspective in today’s video podcast link you’ll not want to miss below.
- Futures opened last night about even, give or take 20 points, and stayed that way until early morning when we began moving lower and then, notably so, pointing to a down -150 point open.
- We opened down about -170 points but were down north of -250 after the first 20 minutes of trading. Around 11:45 EST, we had slightly better-than-expected PMI data released and fully recovered the morning losses trading sideways with a small upwards bias for the remainder of the trading day. We closed positive on the Dow but slightly negative on both the SP500 and Nasdaq.
*CNBC, DJIA, January 24th, 2023
- Dow: +104.41 (+.31%)
- S&P: -.07%
- Nasdaq: -.27%
- 10-Year Treasury Yield: 3.46%, down -5.6bps on the day
- Top-performing sector: Industrials up +.65%
- Bottom-performing sector: Communication Services -.69%
- WTI Crude Oil: $80.16/barrel, down -1.79%
Key Economic Points of the Day:
- A flash read today on US Composite PMI data showed a slight improvement over December, although still handily in contraction territory and the slowest since last October at 46.6 from 45 the month prior. Manufacturing PMI was little changed at 46.8, up from 46.2, with Services PMI at 46.6 from 44.7. Could the data in the chart below pick back up above 50 into positive territory before we end up registering an official recession this year? Of course, but that economic margin is about as thin as it gets right now. For what it’s worth, this PMI data point is what led to markets recovering after the morning initial sell-off and was a ‘less bad’ read following December – not so bad that we fear a recession is immanent but cool enough to back the ‘Fed will pause soon’ narrative.
- Interestingly enough, the flash PMI read today from the Eurozone actually showed it barely bump back into expansion territory from 49.3 last month to 50.2, although not sure I would call that robust.
- We are in the thick of Q4 earnings season, with 67% reported so far coming out ahead of expectations (which is lower than it has been at 77%). Earnings are expected to grow in 2023 by about 3.5%, but with revenue estimates only up 2.5%. I would be happy with any growth in earnings in 2023 over the prior year, frankly, and I am not holding my breath; the street has it right with some coming from margin expansion either with tighter financial conditions than we had a year ago.
- The Justice Department filed an anti-trust suit against Alphabet (Google) over its dominance (aka ‘monopoly’) in digital advertising.
- China’s population decreased for the first time in 60 years to 1.412b.
|The short answer is that it doesn’t, at least not directly. I also need to start off by saying that while I do believe the Fed raising rates has an asymmetric ability to decrease economic output then the Fed decreasing rates does to spur it (the post-GFC period in the US would speak to this, as would the last 40 years in Japan along with the negative rate experiment in Europe), but that neither has direct conclusive effects on inflation because inflation is ultimately driven by demand. For what it’s worth, I believe the current inflationary environment was more to do with a supply chain imbalance from the pandemic than with easy Fed policy directly. All this to say, higher rates mean higher borrowing costs, which in a vacuum would lead to lower demand for loans and a decrease in the velocity of money in the economy, and with lower growth, less demand for goods and services, resulting in lower prices as a result (deflation). On paper, it all makes sense, and in a Fed-dominated news feed these days, more so, but supply and demand paradigms are not created and destroyed by the Fed in any meaningful period of time; they are created and destroyed by larger fundamental forces.|
- David is back with you tomorrow on DC Today.
- We have crickets on the economic calendar for tomorrow before a meaty Thursday and Friday with jobless claims, PCE and goods orders.
- David was on Kudlow today talking about Recession Fears and DOJ Lawsuit against Google.
Send questions any time, and to any of you who are fortunate enough to be Eagles/49’r or Chiefs/Bengals fans out there – good luck this Sunday.
Brian T. Szytel
Deputy Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.