Market 01/31: FED does not signal rate cuts after January FOMC

January FOMC: Fed does not signal rate cuts

Fed keeps benchmark rate at peak (5.25-5.50%) after today's January FOMC.

Fed's tone confirms no further rate hikes but is unclear on rate cut possibility.

Key points in FOMC Statement:

Fed will not cut rates until “more confident” (“Greater Confidence”) about the trend of inflation declining to 2%.
Fed will assess risks to the employment goal, to balance with the inflation objective.
Interest rate decisions will be based on: incoming economic data, evolving outlooks and balance of risks.
(Incoming Data, Evolving Outlook, Balance of Risks)
Fed is highly attentive to inflation risks (reacceleration) and states that economic outlooks are uncertain.

Economic growth “solid” (“solid pace”)

Job growth has slowed but remains high.

Overall, as Viet Hustler previously noted:

Fed is in the “wait and see” phase with economic data to ensure no “second wave” of inflation (inflation reaccelerating)
Fed will closely monitor employment data to balance risks between inflation and labor market (risk of rising unemployment due to recession).

Viet Hustler will have a deeper analysis on the direction of Fed's interest rate policy after January 2023 FOMC this weekend.

US Treasury debt issuance plan: increase average debt maturity

As Viet Hustler previously forecasted, Treasury's refinancing announcement:

Treasury will ramp up issuance of intermediate-term Treasuries (2-10Y), especially a large increase in 2-year and 5-year Notes to fund budget deficit.

Treasury will issue $121 billion in bonds, as predicted
- $54 billion 3-year Treasuries
- $42 billion 10-year Treasuries
- $25 billion 30-year Treasuries
Treasury increases auction sizes for all maturities except 20Y Note.
Buyback operations also conducted to improve liquidity

US public debt has relied heavily on T-bills recently (as government doesn't want to lock in high yields for long periods.)

T-bills ratio in US debt structure has exceeded the recommended 15-20% range

Q1 borrowing estimate reduced from $816 billion to $760 billion

Q2 borrowing estimate surprisingly low at only $202 billion

Coupon payments increased from $318B to $447B, indicating much higher yields than previous periods.

In fact, Treasury also confirms interest spending now exceeds the entire Defense Budget and will soon surpass Social Security budget

Viet Hustler's previous commentary: Demand for T-bills (short-term bonds) will soon decrease (3M T-bill yield has reached >5.3%), US Treasury will have to extend average maturity of current debt (i.e., Yellen will have to increase long-term debt issuance).
Related article: Liquidity ladders in the financial market.

ADP survey: job growth is slowing

ADP reports only an addition of +107,000 jobs in January (much lower than the forecasted figure +150,000 and the previous month's figure +158,000).

This is the second-lowest monthly increase since the drop in January 2021.

IT services is the only group with a decrease in jobs last month

On a non-seasonally adjusted basis, jobs in the manufacturing sector continue to trend down.

Wage growth slows, especially for those changing jobs

Wage gap between job switchers and those staying in their old jobs falls to historical low

Employee cost index Q4/2023 up +0.9% Q/Q, below expected +1% and down from +11% Q/Q previous quarter

It can be seen: new jobs below forecast + overall job decline trend in manufacturing industries + wage growth cooling = signs of a gradually loosening labor market.

However, ADP employment survey has been lower than BLS in 3/4 recent months.

WTI oil price continues to fall as inventories unexpectedly increase

Official data shows crude oil inventories increase (contrary to API report)

Cushing inventories decline for 4th straight week and distillate stocks decrease.

Summary of 2 reports:

API:
- Crude -2.5 million barrels (expected -800k)
- Cushing -2.0 million barrels
- Gasoline +600,000 barrels (expected +1.4 million)
- Distillates -2.1 million barrels (expected -800k)
DOE:
- Crude +1.23 million barrels (expected -800k)
- Cushing -1.97 million barrels
- Gasoline +1.16 million barrels (expected +1.4 million)
- Distillates -2.54 million barrels (expected -800k)

Government continues adding oil to SPR reserve (+892 thousand barrels) - 10th straight week of increase.

US crude oil production gradually recovering after the storm.

WTI oil price continues to decline as inventories rise

Soft data continues to worsen with Chicago PMI down

Trend in 'soft' economic data (survey data) shifting from extremely optimistic to pessimistic disappointment. (Especially recent PMI survey data).

January Chicago PMI falls to 46 vs estimate 48 & previous 47.2

Specifically:

New orders decrease at slower rate; in contraction zone (below 50)
Employment decreases at slower rate, in contraction zone
Inventories decrease at faster rate, in contraction zone
Worse still, prices paid index continues to rise.

Earnings update: Alphabet, Microsoft, AMD, Mastercard, Boeing and Novo Nordisk

Alphabet ER: Google ad revenue disappoints

Revenue +13% Y/Y to $86.3B (beat expectations by 1 billion USD)
Operating margin 27% (+4pp Y/Y)
EPS 1.64 USD (beat expectations by 0.04 USD)
Google ads:
- Revenue $65.52B, below estimate $65.94B
YouTube ad revenue +16% to $9.2B.

Google Cloud:
- Revenue +26% Y/Y to $9.2B.
- Operating margin 9% (+12 pp Y/Y)

Stock plunges after earnings report as:

Google ads revenue disappoints
YouTube operating costs expected to rise significantly in 2024 as Alphabet applies AI to ad and cloud services

Microsoft ER: Azure cloud growth stronger than expected

Revenue +18% Y/Y to $62.0B (above estimate $0.9B)
Gross margin 68% (+2pp Y/Y)
Operating margin 44% (+5pp Y/Y).
EPS $2.93 (above estimate $0.16)
Revenue from Azure and other cloud services +30% Y/Y (above estimate 27.7%)

AMD Q4 FY23 earnings

Revenue +10% Y/Y to 6.2B USD (above estimate 0.1B USD)
Gross margin 47% (+4pp Y/Y).
Operating margin 6% (+8pp Y/Y).
Non-GAAP EPS $0.77 (in line with estimate).

Lisa Su - CEO AMD: “Demand for our high-performance data center products continues to grow”

Q1 FY24 guidance:
- Revenue ~$5.4B (below estimate $0.2B).

Mastercard Q4 FY23 earnings

Revenue +13% Y/Y to 6.5B USD (above estimate 20M USD)
Operating margin 51% (-3pp Y/Y).
Non-GAAP EPS $3.18 (above estimate 0.1 USD)
Excluding FX impacts:
- Revenue +11% Y/Y
- Total transaction value +10% Y/Y
- International transactions +18% Y/Y
- Switched transactions +12% Y/Y

ER Boeing Q4 FY23

Revenue: $22.018B in Q4, +10% Y/Y
Operating income: From loss of -$345M in Q4/2022 to +$283M
Net loss: Reduced to -$30M from -$663M prior
Commercial airplanes:
- Delivered 157 airplanes in Q4, total 528 for the year
- Backlog over 5,600 commercial airplanes worth $441B.

ER Novo Nordisk Q4 FY23: market cap reaches over 500 billion thanks to outstanding business results

Revenue up 31% and 36% at constant exchange rates to 232.3 billion kroner (33.71 billion USD).
- Full-year sales of Wegovy: 4.5 billion USD, of Ozempic: 14 billion USD - accounting for over 54% of total revenue of nearly 34 billion USD
Operating profit up 37% in kroner, to 102.6 billion kroner.
Novo Nordisk becomes the second European company with a market cap of 500 billion USD

Other news

Breaking: Shares of New York Community Bank, $NYCB - the bank that acquired Signature Bank, down 40% after announcing earnings.

NYCB to cut dividend by 70% to meet BASEL III capital requirements.
They also reported a loss of 260 million USD in Q4
Not all banks are thriving thanks to BTFP like JPM, many small banks really need BTFP.
(Viet Hustler's analysis on bank moral hazard and BASEL III requirements)

PayPal is starting a major layoff:

This layoff will affect 2,500 employees ~ 9% of the workforce.
PayPal has laid off 4,500 employees from last year to now
Notably, this layoff announcement comes 2 weeks after PayPal CEO announced it would “shock the world”.