Wentz Weekly: New Record, But Still Narrowly Driven By Few Names

Wentz Weekly Insights
New Record, But Still Narrowly Driven By Few Names

Recent Economic Data

• Retail sales, once again, came in stronger than expected for the latest month of data. Sales in December rose a better than expected 0.6% and capped off 2023 with a 5.6% increase for the year. Unlike much of the past year or two, real sales (inflation adjusted) are trending more positive, with real sales up 2.2% (after accounting for 3.4% inflation rate) over the past year. In December, 8 of the 13 major categories saw an increase in sales, led by online sales up 1.5%, clothing stores up 1.5%, general merchandise stores up 1.3%, vehicle sales and parts up 1.1%, and miscellaneous store sales up 0.7%. Declines were seen in health/personal care sales down 1.4%, gasoline sales down 1.3%, and furniture stores down 1.0%. Over the year, restaurants and bars, vehicle sales, electronics, and health/personal care sales all saw increases of over 10%. The weakest categories over the past year have been gasoline sales due to the drop in gas prices and furniture and building material stores due to the large drop in home sales.

• The Empire State Manufacturing survey index was a massive miss to the downside, with the index at -43.7 which was down nearly 30 points from last month. Outside the two months during the Covid lockdowns in 2020, this was the worst reading in history of the data series. New orders and shipments saw sharp declines, delivery times shortened with unfilled orders shrinking further, while employment declined modestly and the pace of input prices picked up somewhat. Optimism for activity over the next six months remained subdued.

• After a almost record low reading on the Empire State manufacturing index earlier in the week, the Philly Fed manufacturing survey index came in at -10.6, about the same levels as December and reflects activity that continues to contract, but not as severe as the New York region. The indicators for general activity, new orders, and shipments all remained negative, but did rise slightly in the month. Employment was little changed with employment levels steady while prices overall continued to increase at a modest pace. Expectations on growth remain subdued.

• Industrial production rose 0.1% in December, better than the small decline that was expected. The increase was due to a 0.1% increase in manufacturing, a 0.9% increase in mining, but offset from a 1.0% decline in utilities which is very correlated to weather conditions. Industrial production was up 1.0% in 2023, driven by mining that grew 4.3%, manufacturing that grew 1.2%, and offset by a 4.9% decline in utilities. Capacity utilization was 78.6%, slightly lower than expected and still lower than the historical average, but improving over the past year.

• Prices of goods/services imported to the U.S. were unchanged in December, following two consecutive monthly declines. Import prices are still down 1.6% from a year ago. Export prices fell 0.9% in the month, the third consecutive month of a 0.9% decline, bringing prices 3.2% lower from a year earlier.

• The housing market index, an index on homebuilder sentiment, rose to 44 in January, up from a very low level of 34 in December (an index level below 50 indicates contracting activity). The index on present sales improved to 48, up from 41, the index on future sales rose considerably to 57, up from 45, while the index on traffic of potential buyers remains depressed at 29, though up from 24. The index levels are still historically low, but a notable improvement from one of the most depressed months on record in December.

• The number of housing starts in December fell 4.3% to a seasonally adjusted annualized rate of 1.460 million, although 7.6% above the December 2022 levels. After a strong recovery after the pandemic, housing starts have declined and have now been trending in the 1.400 million range. The number of permits to build a new home rose 1.9% to an annual rate of 1.495 million, and 6.1% above the level from a year earlier. The data is similar for permits, where it has been trending in the mid to upper-1.400 million range after a strong post-pandemic recovery. the number of homes currently under construction has been relatively consistent around 1.680 million.

• Existing home sales fell 1.0% in December to a seasonally adjusted annualized pace of 3.780 million homes. On an annual basis, there were 4.090 million existing homes sold in 2023, the lowest level in almost 30 years (since 1995) and falling 19% from 2022 levels and 34% from 2021. Meanwhile, the median sales price reached a record high of $389,800, up 4.4% over the past year, due to the very limited supply of existing homes on the market. In fact, inventory of homes for sale fell 12% in the month to 1 million units as existing homeowners are preferring to stick with their low rates locked in during the pandemic and reluctant to switch homes and incur a higher mortgage rate. Existing homes sales are based on closings so this data reflects homes that went under contract in November when rates began to decline from multi-decade highs.

• The number of unemployment claims filed the week ended January 13 was 187,000, a decline of 16k from the prior week with new jobless claims now at the second lowest level since the late 1960s (the pandemic low was September of 2022 of 182,000). The four-week average fell 5k to 203,250. Meanwhile, the number of continuing claims was 1.806 million, down 26k from the prior week and falling back to October lows. The four-week average was 1.848 million, down 14k from the prior week.

• Mortgage rates fell to the lowest level since last May, with the average prime 30-year mortgage rate standing at 6.60% last week, according to the Freddie Mac weekly mortgage survey. This is down from the cycle and multi-decade high of 7.79% in October. With Treasury rates lower and the Fed expected to lower rates sometime in 2024, the average mortgage rate is expected to fall back below 6% this year.

Company News

• A federal judge has decided to blocked JetBlue’s planned acquisition of Spirit Airlines due to anticompetitive concerns, coming after a lawsuit from the Department of Justice to stop the merger. The judge said the deal would drive up airfares for price-sensitive consumers by taking a discount carrier out of the market. The companies argued the combination would help them grow and compete better with larger rivals. The merger would have created the fifth largest airline. Some now believe Spirit may look for another buyer or, more likely, will file for Chapter 11 bankruptcy. A WSJ report said Spirit Airlines will explore options on how it could address its finances and is looking to refinance its debt and not engage in a restructuring. The company’s short term debt includes about $1.1 billion in debt due September 2025.

• Shares of iRobot fell about 40% after a report was released that EU regulators are planning to block Amazon’s planned acquisition of the company. The WSJ report said the European Commission met with Amazon representatives on Thursday to discuss the transaction and was told the deal would be rejected. This comes a couple days after a report said Amazon refused to offer concessions to EU regulators to try to appease them. US regulators were also said to have concerns about the acquisition.

• According to reports by the New York Times, using information from Apple’s China website, Apple is beginning to cut the price of its iPhones by up to $70, equal to about 6% to 8% discount, in China due to weaker consumer demand and increasing competition from other smartphone makers. Separately, other reports say Apple will begin selling versions of its Watches without the blood oxygen measurement feature which followed lawsuits against the company over a patent dispute with Misimo. The Court told Apple it will implement an import ban which means the company must stop selling its Watches that include the blood oxygen feature.

• Job cuts – Wayfair announced it will cut about 13% of its workforce, equal to about 1,650 employees. Macy’s is reported to be cutting 3.5% of its workforce, equal to about 2,300 employees, along with closing five additional stores.

• A month after cutting its electric vehicle production by 50%, Ford said it will cut its production of EVs even further and shift that production to the production of its all gas Bronco and Ranger lines.

Other News

• The government was set to run out of funding for some agencies January 20, then fully run out of funding February 2 when it would have to “shut down,” but late last week another stopgap bill was passed to keep the government funded for another several weeks, allowing it about another six weeks to negotiate a longer-term solution. The new deadline is March 1, then March 8 when it would see a full shutdown if no deal were made. The January 20 deadline came after a previous stopgap deal was passed late last year.

• Container shipper Maersk said that weather disruptions at northern European ports and the diversion of vessels away from the Red Sea is causing congestion at many container terminals, and it is asking customers to pick up container units as quick as possible to support fluidity at the ports. It added the disruption to global shipping is expected to last at least a few months and asked customers to prepare for complications to persist and for a possible significant disruption to the global shipping network. A separate report from Bloomberg said traffic through the Suez Canal dropped to the lowest level since the 2021 blockage.

• The Biden Administration said it would cancel another $4.9 billion in student loan debt for some 74k borrowers. Those affected include those who were in the income-driven repayment plan and public service loan forgiveness plan who had at least 10 years of payment or service in a public job. The Dept of Education has now announced a cumulative total of $136 billion in student loan forgiveness for about 3 million borrowers.

• Fed speak:
• Fed Governor Chris Waller said we are within “striking distance” of the Fed’s 2% inflation target and downplayed the market’s aggressive pricing of rate cuts this year. He said the Fed can cut rates this year if inflation does not show signs of rebounding, but there was no reason to cut rates as quickly as the Fed has done in the past and it should be done “methodical and careful,” adding there is risk that rate cuts could be delayed further if the economy does not moderate as expected.
• Atlanta Fed President Raphael Bostic said he does not see the Fed cutting rates until at least the third quarter, and emphasized that progress on inflation moving lower could stall if the Fed cuts rates too soon.

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