Big tech props up U.S. stocks amid mixed economic data
A rally in tech megacaps drove the stock market higher, with traders assessing economic data that suggest the Federal Reserve still has a path to a soft landing — with officials set to further downshift their rate hikes next week.
The S&P 500 headed toward its highest since early December. Tesla Inc. led gains in the tech-heavy Nasdaq 100, with Elon Musk teasing potential for the carmaker to produce 2 million vehicles this year. International Business Machines Corp. weighed on the Dow Jones Industrial Average as its cash flow miss overshadowed a profit beat.
The U.S. economy grew faster than forecast into the end of 2022, but there were signs of slowing underlying demand as the steepest rate hikes in decades threaten growth this year. Sales of new homes rose for a third month in December, wrapping up an otherwise disappointing year in which soaring borrowing costs stifled demand and weighed on the economy.
- Fawad Razaqzada, market analyst at City Index and FOREX.com:
- “The weaker GDP print compared to the previous reading means the economy is slowing, but the above-forecast number will ease recession fears at the same time. They call this the ‘goldilocks’ scenario. It should be positive for risk assets, I would imagine, and judging by the reaction post the data, that’s how it is proving to be so far.”
- Ian Lyngen, the head of U.S. rates strategy at BMO Capital Markets:
- “Overall, it was a solid round of data that is consistent with the Fed continuing on with the steady quarter-point hikes at the next 2-3 meetings and then retaining a restrictive policy stance throughout the year.”
- Jeffrey Roach, chief economist at LPL Financial:
- “The Q4 GDP report will likely reignite conversations about the economy sticking a soft landing. Given the softer inflation data, the Fed will likely downshift the pace of rate hikes to 0.25 per cent at next week’s meeting. However, other recession indicators are flashing red so upcoming monthly data, especially on the labor market, will be key for investors.”
- Bill Adams, chief economist for Comerica Bank:
- “A slowing trend in real GDP — and more importantly, slowing inflation — is enough for the Fed to reduce the size of their rate hike at next Wednesday’s decision. The Fed is nearing the end of its rate hike cycle, which we forecast will conclude with a final quarter percentage point increase at the March decision.”
A team led by Deutsche Bank AG’s Binky Chadha is maintaining its view that the S&P 500 can rise to 4,500 by the end of the first quarter, 12 per cent above Wednesday’s close, before slumping amid an economic contraction. That’s even as the benchmark is headed for its best January since 2019.
“We view the rally as having further to go,” the strategists wrote. “While a number of leading indicators have fallen steeply, raising the alarm, there are several reasons for a continued pushing out of the timing of a potential recession.”
However, it appears many investors don’t have the appetite to chase the rally. Some 35 per cent of clients in a recent JPMorgan Chase & Co. survey said they plan to add to stock holdings in the coming weeks. That’s a hair away from a 33 per cent reading in late November that marked an all-time low.
- American Airlines Group Inc. expects profit this year to exceed estimates following a slow start, as steady demand for air travel keeps an industry recovery going into 2023.
- Southwest Airlines Co.’s operations meltdown last month will lead to a first-quarter loss as the fallout extends into 2023 from a fiasco that led to thousands of canceled flights and prompted a federal probe into its operations.
- Lam Research Corp., one of the three biggest providers of chip-manufacturing equipment in the U.S., is cutting about 7 per cent of its workforce to reduce expenses in a declining market.
- Dow Inc. plans to cut about 2,000 jobs as the chemical maker seeks US$1 billion in savings and confronts a flareup in energy costs that followed Russia’s invasion of Ukraine.
- Mastercard Inc. warned revenue growth would slow even faster than expected this quarter, stoking fears that inflation has put a damper on consumer spending.
- Comcast Corp. topped Wall Street profit estimates in the fourth quarter despite continuing to lose customers in its cable and broadband businesses.
- Earnings for the week include: American Express, Charter Communications, Chevron, HCA Healthcare (Friday)
- U.S. personal income/spending, PCE deflator, University of Michigan consumer sentiment, pending home sales, Friday
Some of the main moves in markets:
- The S&P 500 rose 0.6 per cent as of 10:26 a.m. New York time
- The Nasdaq 100 rose 1.4 per cent
- The Dow Jones Industrial Average rose 0.2 per cent
- The Stoxx Europe 600 rose 0.5 per cent
- The MSCI World index rose 0.6 per cent
- The Bloomberg Dollar Spot Index rose 0.1 per cent
- The euro fell 0.3 per cent to US$1.0888
- The British pound fell 0.2 per cent to US$1.2372
- The Japanese yen fell 0.5 per cent to 130.29 per dollar
- Bitcoin fell 2 per cent to US$23,127.32
- Ether fell 0.4 per cent to US$1,612.75
- The yield on 10-year Treasuries advanced five basis points to 3.49 per cent
- Germany’s 10-year yield advanced four basis points to 2.19 per cent
- Britain’s 10-year yield advanced five basis points to 3.29 per cent
- West Texas Intermediate crude rose 1.3 per cent to US$81.19 a barrel
- Gold futures fell 0.5 per cent to US$1,950.10 an ounce
US revises down last quarter's economic growth to 2.6% rate – ABC News
WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.
The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.
The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.
The report suggested that the economy was losing momentum at the end of 2022.
Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.
More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.
Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.
The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.
Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.
The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.
“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”
They added: “We expect a recession to hit in the second half of 2023.”
In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.
Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg
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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 Bloomberg
Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail
All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?
Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?
Here are some examples of the puzzling behaviour of economic statistics of recent months.
An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.
Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.
Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.
Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.
And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?
And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.
It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.
For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.
As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.
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