Market 12/15: Fed's Williams' remarks and market confidence

Remarks by Fed official John Williams

New York Fed President John Williams: Fed "is not really talking about rate cuts" right now.

• (Only) if progress is made as expected, rate cuts will be "a matter of course".

Williams' remarks are only aimed at reining in the market because the market was too excited by Powell's remarks after FOMC.

• However, the market still doesn't fully believe Williams, 10-year T-bond yields only surged for 1h after Williams' remarks then fell back to yesterday's level.

  

• Market currently expects 6-8 rate cuts in 2024.

November PMI data indicates weak Q4 GDP growth potential

S&P Global's November preliminary PMI rose modestly from 50.7 in October to 51.0.

• Services sector improved from 50.8 to 51.3

• Manufacturing sector weakened to 48.2 from 49.4 last month.

• Based on the correlation between PMI and GDP, the PMI survey may forecast weak GDP growth in Q4.

  

  • However, Atlanta Fed recently raised its Q4 GDP forecast to +2.6% Y/Y.

• Based on the correlation between PMI and inflation: the PMI survey shows CPI will remain >2% (~3%), no significant change.

November industrial production recovers as striking workers return to work

US industrial production recovers modestly in November: +0.2% M/M, equivalent to -0.4% Y/Y:

• lower than forecast (+0.3% M/M),

• higher than previous month (October: -0.9% M/M, revised down from -0.6% M/M)

• Capacity utilization rate rises slightly to 78.8% (from 78.7% in October)

• Industrial output rises to +0.3% M/M in November (sharp rise from -0.8% M/M in October).

  • Compared to a year ago, output -0.8% Y/Y — ninth consecutive month of decline.

• This jump was driven by an increase in motor vehicle production as previously striking auto workers returned to work.

New York manufacturing index unexpectedly falls into “contraction” territory

• Empire State Manufacturing Survey (New York state's manufacturing survey) in December falls into contraction territory, much lower than expected: from +9.1 to -14.5,

  (expected +2.0).

• New orders fell 6 points to -11.3 — third consecutive month of declining orders

• Unfilled orders remained stable at -24.0, indicating continued significant decline in unfilled orders.

• Inventories index fell 14 points to -5.2, indicating inventories continue to be low

• Delivery times index fell 10 points to -15.6, the lowest in several years, a sign that delivery times are shortening.

• Number of employees fell 4 points to -8.4, the lowest in several months, indicating a slight decrease in employment.

Retail Sales Update: department store revenues show consumer spending slowing, but service demand remains high

Real department store retail sales fell in November to the lowest since February 2021.

• It seems the pandemic-era uptrend has ended — now heading to a long-term downtrend

• Inventory-to-sales ratio rose again in October, slightly higher than the long-term average (but still not back to recession peaks).

However, a few remaining indicators show that retail is still quite solid, especially restaurant and bar services:

• Y/Y nominal retail sales growth improved in November.

• Monthly change data over 3 months (3 month MA) in sales from restaurants/bars has improved, with November's increase being the strongest since January 2023.

Update on Costco's Q1 FY24 earnings

• Revenue +6% Y/Y to 57.8 billion USD (in line with expectations)

• Non-GAAP EPS: 3.58 USD (0.16 USD above estimates)

• Sales:

  • All markets: +3.8% Y/Y

  • US market +2.6% Y/Y

  • E-commerce: +6.1% Y/Y

• Cash dividend: 15 USD/share

• Immediately, the market reacted positively to Costco's optimistic earnings,

• FYI: In the previous quarter, Costco sold over 100 million USD in gold bars. 1 ounce gold bars typically sell out within hours of going on sale online.

Other news

1. Citigroup is shutting down its municipal business unit as part of efforts to improve profitability. This business is expected to cease operations by the end of Q1 2024.

2. Weibo is asking KOLs not to post negative content about the economy, a move that adds to concerns about domestic growth slowdown.

3. While the Fed and ECB are shrinking their balance sheets and withdrawing some liquidity from the market, the People's Bank of China (PBoC) is pumping more money into the market to prevent an economic collapse.

4. 30-year mortgage rates fall below 7% for the first time since July

5. Gas prices drop to lowest level since 2021

6. HCSC and Elevance compete to acquire Cigna Group's health care unit