The Weekend Edition # 120 - Rate Cuts and Mag 7

Welcome to another issue of the Weekend Edition and the last one for 2023!

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here's what we cover

• Market Recap - Hotter than Hot Jobs Data

• Macro - More on US CRE

• Earnings Season - EPS growth reversal

• The Week Ahead - Calendars

• Closing Thoughts - Not an Everything Bubble

Market Recap - Hotter than Hot Jobs Data

January 29 - February 02, 2024

It’s been such a busy week that I hardly know where to start. The biggest surprise, however, seemed to come at the end of the week with Friday’s jobs report. The Nonfarm Payroll report showed a whopping 353,000 jobs added in January. Moreover, the December payroll report was revised upwards to 333,000. That’s a revision of +117,000. Here’s the table from the BLS:

This saw a spike in bond yields because, with such a strong jobs report, rate cuts become a distant probability for March and perhaps even May. And it doesn’t matter whether you and I believe the numbers or not. We can debate the demerits of using lagging, faulty data but, even that doesn’t matter. What matters is whether the Fed sees this as plausible and they do.

The takeaway for this week:

• Rate cut bets are still moving markets and the Fed’s hints at a later rate cut are still receiving some skepticism

• Big Tech’s still got it. Sure, we saw Google sell-off after earnings on weaker ad revenue numbers, but overall EPS and Revenue growth remain quite solid. Apple missed on a number of different metrics (China, iPad, etc.) but, iPhone growth was far better than expected, and the -3% dip in price after earnings was recovered during the day.

Commodities

Tensions in the Middle East continue to rise and that’s weighing not only on oil but, other commodity prices as well. We had the OPEC+ meeting this week on Feb 1, but there were no new decisions made about quotas.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - More on US CRE

US Commercial Real Estate has been a big topic this week. After the New York NYCB bank, came out and guided to a loss in earnings because of their commercial real estate portfolio.

In its fourth quarter earnings report for 2023, New York Community Bank (NYCB) disclosed the impairment of two commercial real estate (CRE) loans, in addition to an uptick in provisions for loan losses. These strategic decisions have led NYCB to report a net loss of $252 million for the quarter. NYCB had taken over some assets & liabilities of Signature bank and this is what’s causing even more speculation.

But, let’s look at exactly what the bank said:

Furthermore, the bank has taken steps to maintain higher liquidity levels on its balance sheet, a move that, while prudent, necessitates increased reliance on wholesale funding. This approach is anticipated to adversely impact the bank's profitability throughout 2024. So, it’s not that the bank doesn’t have concerns weighing on them, this issue has likely been blown out of proportion.

In Friday’s Breakfast Bites, I quoted from the Goldman Sachs report:

“In our view, this episode is largely idiosyncratic; through a comprehensive analysis of bank financials, we conclude that delinquency rates in CRE loan books, albeit elevated, do not pose a systemic risk to the banking system.”

I fully appreciate that GS could be wrong here in their assessment and in times of a credit crisis, things can go wrong very quickly. Credit defaults can spread like a contagion, much like what we saw during the Great Financial Crisis in 2008. Most baks however, don’t go bankrupt from a credit crisis but, rather a run on the bank similar to what we experienced last March. When customers all line up to pull their money from a bank, that’s when it collapses. but, suffice to say that a credit crisis could lead to people losing faith in a bank and therefore, causing that run eventually. I am not saying that’s the case here but, that’s usually the sequence of events.

We’ve already seen some of this - with the smaller banks losing deposits to larger banks, as they are deemed “safer”. This however, has simply resulted in the need for smaller banks to increase rates.

According to JPM, the deposit betas for smaller banks have increased 0.3 to 0.4, compared to 0.05 to 0.15 for the likes of BofA and JPM. Deposit betas measure the sensitivity of a bank's deposit cost to changes in the short-term interest rate. For example, a deposit beta of 0.4 means that a bank raises its average deposit rate by 40 bps for a 100 bps increase in the short-term interest rate.

As for the loans, the banks are the largest lenders of Commercial Real Estate in the US and GS’ takeaway is that these episodes will lead to tighter credit standards, something that we’re already seeing in the Fed’s SLOOS (Senior Loan Officers’ Opinion Survey) report.

And then they lay out the following table noting that these levels of delinquencies are still largely contained and don’t pose a systemic risk.

Earnings Season - EPS growth reversal

Earnings Update from FactSet shows that we’ve seen a reversal in the EPS growth from negative to positive. Big tech earnings and oil are the major contributors.

From FactSet:

• After dipping to a year-over-year decline in earnings of -1.8% on January 19, the S&P 500 is now reporting year-over-year growth in earnings of 1.6% for the fourth quarter.

• Companies in the Financials sector, mainly in the Banks industry, accounted for most of this below-average performance relative to estimates.

• The Information Technology sector is the largest contributor to this increase in earnings, accounting for about $3.8 billion of the net increase in earnings of $16.0 billion. The positive earnings surprises reported by Microsoft ($2.93 vs. $2.77), Apple ($2.18 vs. $2.10), QUALCOMM ($2.75 vs. $2.37), and Intel ($0.54 vs. $0.45) have been significant contributors to the increase in earnings for the index during this time. As a result, the blended earnings growth rate for the Information Technology sector has improved to 19.8% today from 15.9% on January 19.

• The Energy sector is the second-largest contributor to this increase in earnings, accounting for about $2.8 billion of the net increase in earnings of $16.0 billion. The positive earnings surprises reported by Exxon Mobil ($2.48 vs. $2.20), Marathon Petroleum ($3.98 vs. $2.19), and Chevron ($3.45 vs. $3.19) have been substantial contributors to the increase in earnings for the index during this time. As a result, the blended earnings decline for the Energy sector has improved to -25.9% today from -31.7% on January 19.

• The Healthcare sector is the third-largest contributor to this increase in earnings, accounting for about $2.4 billion of the net increase in earnings of $16.0 billion. The positive earnings surprise reported by Pfizer ($0.10 vs. -$0.16) has been a significant contributor to the increase in earnings for the index during this time. As a result, the blended earnings decline for the healthcare sector has improved to -17.4% today from -20.8% on January 19.

The Week Ahead - Calendars

US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Not an Everything Bubble

Last week I made an appearance on the Arabic Bloomberg channel and I was asked whether we’re likely to see a Dot-Com type crash or not. 

My simple answer would be: NO. Of course, there are no certainties with the market but the situation we have right now is dissimilar on many levels. 

I don’t see us being in an everything bubble anymore. 2021 shaped up to be that way but, most of the market still hasn’t recovered from the 2022 sell-off. 

We’re seeing a handful of companies lead the market and for what it’s worth, they are delivering on earnings. Valuations may be sky-high (and I don’t like that part) but, these companies can grow into those valuations. 

Having said that, as yields come down, we will see more multiple expansion in the market and that’s when the rest of the market may catch up, while these companies will likely catch down a little. 

So yes, we will probably see a correction but, some of that will probably be mitigated by the rally broadening out to the rest of the market. 

In my opinion, a crash is a little far-fetched at this point. Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.