Market 02/29: PCE reinforces confidence in rate cut timing

PCE in line with forecasts despite fastest rise in 1 year

PCE report as expected, no surprises for the market

PCE - Fed's preferred inflation gauge, continues YoY decline as expected:

Headline PCE inflation rises +2.4% YoY (< previous 2.6%).
Core PCE inflation (core PCE) rises +2.8% YoY (< previous 2.9%).

Monthly (M/M) headline and core PCE growth highest in nearly 1 year: but still in line with forecasts

PCE inflation rises +0.3% MoM.
Core PCE inflation rises +0.4% MoM.

Services still driving inflation: rises +0.4% M/M ~ highest since 2022.

Super core services PCE (excluding housing) also rebounds after previous sharp decline, rises 3.45% YoY, 0.6% MoM.

Among them, health care costs and food and lodging services are leading the rise.

Income and Spending Survey (accompanying PCE survey)

Household income growth particularly high in January: +1% M/M mainly due to increased dividend income - seasonal factor.

Meanwhile, spending growth (driver of GDP growth) remains modest: +0.2% MoM

YoY spending growth also slowing compared to income.
- Mainly due to high consumer borrowing costs + slowing hiring + persistent inflation.

Government wage growth falls to 7.8% YoY from record high 8.8%.
Private wage growth also eases to 5.4% YoY.

However, January savings rate only edges up modestly to 3.8% (from 3.7%).

Market's positive reaction due to "no surprises"

Although Core PCE growth is high (m/m), the market still reacts quite positively because PCE growth is as forecasted.

Stocks up slightly, bond yields drop sharply early this morning:

PCE report further reinforces Fed's cautious stance on rate cuts.

Only 22.2% investors in the market currently believe that the Fed is likely to cut rates in May.

Number of predicted cuts down to only 3 times (compared to 6 times 2 months ago).

Initial jobless claims rise sharply

Initial jobless claims rose from 202,000 to 215,000 (> expected 210,000).

Weekly labor surveys are usually volatile - do not reflect the trend.

Continuing claims rise to 1.9 million, highest since November.
- Continuing claims have remained high for many weeks, reflecting the difficulty for the unemployed in finding new jobs.

Chicago PMI continues to decline

February Chicago PMI falls to 44 (< estimate 48 and 46 previous month).

Specifically:

Prices paid rising faster.
New orders + Inventories declining at a slower rate.
Production + Employment declining faster.

→ All component data show signs of contraction.

Pending home sales drop the most since August as mortgage rates rise

January pending home sales down -4.9% MoM (< expected 1.0%).

Pending Home Sales Index (PHSI) falls to 74.3 (from 78.1 previous).

Mortgage applications decline for fifth straight week, near lowest since 1995.

→ Expectations of continued high interest rates are the main reason pushing up home buying costs.

Earnings reports: Snowflake, Salesforce, Paramount, BestBuy

Snowflake ER: CEO retiring, stock plunges more than -20%

Number of customers: +22% YoY, reaches 9,437.
NRR (Net revenue retention): 131% (-4% QoQ).
Revenue: +32% YoY, reaches 775 million USD (> expected 14 million USD).
Non-GAAP EPS: 0.35 USD (> expected 0.17 USD).

FY25 product revenue guidance: +22% YoY, reaches 3.25 billion USD.

Other news:

CEO Frank Slootman (65 years old) will retire, new CEO: Sridhar Ramaswamy.

Snowflake stock plunges after earnings report.

Salesforce ER: Cuts revenue guidance despite earnings beat

Current remaining performance obligations (RPO): +12% YoY, reaches 27.6 billion USD.
Revenue: +11% YoY, reaches 9.3 billion USD (> expected 70 million USD).
Operating margin: 17% (+13% YoY).
Non-GAAP EPS: 2.29 USD (> expected 0.02 USD).

FY25 guidance:

Revenue: +9% YoY, reaches 38 billion USD (< expected 0.6 billion USD).
Operating margin: 20.4%.

Paramount ER: Streaming services strong growth

EPS: 4 cents (> expected loss of 1 cent).
Revenue: 7.64 billion USD (< expected 7.85 billion USD).
- Paramount+ streaming service reaches 67.5 million subscribers, up 4.1 million (contributing 69% of revenue) thanks to Top Gun: Maverick content.
Operating income: +122% YoY, reaching 404 million USD.

Previously, Paramount also planned to lay off 800 workers

Bestbuy ER: Layoff warning due to subdued demand

EPS: 2.72 USD (> expected 2.52 USD).
Revenue: 14.65 billion USD (> expected 14.56 billion USD).
- Sales down 5.1% QoQ.
- Online sales down 4.8% QoQ.

FY2024 guidance:

Revenue: ~ 41.3 - 42.6 billion USD (< previous 43.45 billion USD) due to sluggish consumer electronics demand.
- Consumers are more selective and cautious when purchasing consumer electronics amid rising inflation.
Sales expected flat or down -3%.
Expected to close 10 - 15 stores this year (closed 24 stores last year).

Other news:

SEC investigates OpenAI for allegedly misleading investors amid last year's chaotic Altman leadership situation.
Harvey Jones, Nvidia board member since 1993, sold 65,000 shares for a total value of 53 million USD.