January 23rd, 2023

23 Jan January 23rd, 2023

Market Indexes:

Even though the holiday-shortened week started on a bullish note, this year’s impressive global risk rally fizzled out later in the week, and most stocks finished lower following two positive weeks. While cyclical issues gave back a large chunk of last week’s gains due to the mounting recession fears, the tech sector and small caps continued to show strength after leading the way higher over the past couple of weeks. The looming U.S. debt ceiling, the still-present risk of a global recession, and a few disappointing earnings reports all contributed to the selloff, but with an improving European energy outlook, easing inflationary pressures, and the Chinese reopening in mind, stocks might only be taking a breather rather than starting another leg lower.

Economic Data:

Slowing Economic (Retail Sales and Industrial Production) and Inflation (PPI) Data

December U.S. Industrial Production fell -0.7% M/M, which is good for an anemic +1.6% Y/Y growth rate

An aggregate, Q4 came in at an annualized SAAR of -1.7% Q/Q, which is the first quarterly decline since Q2 2020

• No surprise, housing, construction, and housing related supplies were the biggest negative contributors the overall index

November U.S. Business Inventories were up +0.4% M/M and +15.1% Y/Y, which brings the sales / inventory ratio back near the long run average of 1.35

• Interestingly, trade sales and manufacturer’s shipments (gauge for end market demand) fell -0.8% from October to November

December U.S. Retail Sales fell more than expected coming in at -1.1% M/M and +6.0% Y/Y -> the Y/Y growth rate was basically in line with November, but well below the 2022 full year growth rate of +9.2%

• We foresaw this slowing in retail sales in the U.S. Redbook Weekly Retail sales, which have been trending down and this morning came in at +5.0% Y/Y -> a new post pandemic low

Finally, we had a notable deceleration in December U.S. PPI coming in at +6.2% Y/Y, versus +7.3% last month and down ~+40% from its 2022 peak

• Similarly, Core PPI (less food, energy, and trade) decelerated to +5.5% Y/Y

• The primary contributor to this decline in Headline PPI was energy, which was down -7.9% M/M

U.S. Employment Data Remains Positive, While the Freefall in Housing Continues

Initial Jobless Claims ticked lower to +190K, versus +205K in the prior week and remain near cyclical lows

Continuing Claims increased slightly to 1.647MM, which is up meaningfully from the trough of 1.3MM in June 2022, but also remain near cyclical lows

• The labor market continues to be generally strong and is giving the Fed very little reason to veer from the “higher for longer” path

The U.S. Housing data over the last 24 hours continued to decelerate, although at a slower pace:

December Building Permits slowed to 1.33MM, from 1.351MM

December Housing Start slowed to 1.382MM, from 1.401MM

Finally, December Existing Home Sales slowed to 4.02MM SAAR, from 4.08MM in the prior month -> down -34% Y/Y

This is the 11^th straight month of declining Existing Home Sales and the lowest level since November 2010

• Higher interest rates continue to crush housing demand

Company Data:

Consumer Staples benefiting from lower Producer Prices: This week we took advantage of the recent pull-back in high-quality, consumer staples sector and established new positions in Hershey Company (HSY), and General Mills, Inc (GIS).  On Wednesday we saw in the PPI report that food manufacturing decelerated to 10.8% in December from 11.7% YOY in November.  On a two-year average basis, the PPI slowed by 30bps to 11.5%. Producer prices have decelerated from the highs in early 2022 but have continued to remain elevated. CPG price increases have widened the gap over cost increases leading to expanding gross margins.  Our outlook for food at home CPI continues to be well above consensus expectations in the 1H of the year.  Lancaster Colony, Hershey, General Mills, and Archer Daniels Midland, have all seen significant margin pressure from higher input costs including from cooking oils. 2023 will see margin recovery from price increases and falling input costs.