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Weekly Update 4/29/22:Corporate Earnings Continue to Roll In

Corporate Earnings Continue to Roll In; On Average Exceeding Expectations

  • Coca Cola, Microsoft, Visa, Check Point Technologies, Amgen, Carrier Global, and Stryker release earnings beating analysts’ forecasts on profits and revenues
  • Otis Worldwide releases earnings beating profit expectations and raised dividend 20.8%
  • Automatic Data Processing releases earnings beating profit and revenue expectations; company raises fiscal year guidance on strong labor market and solid execution
  • IBM raises dividend 0.6% after strong earnings report bring yield to 4.8%
  • Sysco raises dividend 4.3%
  • Apple raises dividend beats profit and revenue expectations; announces 5% dividend increase and $90 billion share buyback program
  • Raytheon releases earnings beating profit expectations and announces a dividend increase of 7.8%
  • UPS releases earnings solidly beating profit and revenue expectations and announces a doubling of their targeted share repurchases to $2 billion
  • Boeing misses profit and revenue expectations on defense division delays
  • CACI misses profit and revenue expectations but is optimistic on future growth
  • T. Rowe Price releases earnings missing estimates on tough first quarter market conditions
  • Celanese reports earnings soundly beating expectations and raises their fiscal year guidance

Domestic Economic News

Corporate executives are touting the strength of U.S. consumers in the face of surging inflation, assuaging mounting fears of recession. Bank CEOs kicked off earnings season with a consistent message that household finances and demand are in solid shape. Procter & Gamble Co., which counts Tide, Bounty and Pampers among its brands, has seen consumers reaching for premium-brand products. Bank of America Corp. and credit-card giant American Express Co. noted solid travel demand. Tractor Supply Co. Chief Executive Officer Hal Lawton was more pointed on the retailer’s April 21 earnings call: “Any talk of recession at this point is premature.” The state of American consumers, whose spending accounts for about two-thirds of the economy, has been up for debate in recent weeks, with some analysts expecting that decades-high inflation will sink demand and others anticipating it will remain robust. “From our card-spend data, we have seen a strong recovery in travel, entertainment and restaurant spending,” Bank of America CEO Brian Moynihan said last week. Even after accounting for the effects of the $1.9 trillion American Rescue Plan stimulus in March of last year, Moynihan said “we saw spending in the month of March 2022 on a comparable basis to 2021, 13% higher by dollar volume and we saw a 7.4% increase in the number of transactions. So both dollar volumes and numbers of transactions rose nicely.” Though wage gains broadly aren’t keeping pace with inflation, Americans’ average hourly earnings were up 5.6% in March from a year ago, the most since May 2020. Household balance sheets are healthy, bolstered especially by gains in real estate and the stock market. The household debt service ratio, which compares debt payments to disposable income, is well below the historical average.

Doubts about the economy’s prospects are creeping in, however. The latest Bloomberg monthly survey conducted in early April showed economists put a 27.5% chance of recession within the next year, up from 20% in March. The fastest inflation since 1981, prospects for more aggressive policy from the Federal Reserve, still-tenuous supply chains and Russia’s war in Ukraine have added to concerns about whether the U.S. economy can sustain the solid growth experienced over the last year and a half. For their part, Fed policy makers are poised next week to raise their benchmark interest rate by a half point. The central bank’s task is a tricky one -- tempering demand, and therefore inflation, while ensuring the economy doesn’t slip into a recession. While economic growth will slow this year, the “back half of 2023 and 2024 are when we could see really some of the effects of all the headwinds that are gathering really become too strong for the U.S. economy to weather,” said Sarah House, senior economist at Wells Fargo & Co. Come next year, the economy will be facing higher interest rates, slowing labor demand and a greater distance from the massive fiscal support seen in the pandemic, she said. For now, “consumers are still generally upbeat,” House said. “Nobody likes this inflation backdrop, but it’s not necessarily deterring a lot of consumers from spending, particularly when their job prospects are so good right now.”

U.S. consumer confidence eased in April as views on current conditions slightly worsened, offsetting more optimistic future expectations. The Conference Board’s index decreased to 107.3 from an upwardly revised 107.6 reading in March. The median forecast in a Bloomberg survey of economists called for a reading of 108.2. The group’s gauge of current conditions declined to 152.6, though remains well above pandemic lows. The expectations index improved to 77.2. “Concerns about inflation retreated from an all-time high in March but remained elevated,” Lynn Franco, senior director of economic indicators at The Conference Board, said in a statement. “Looking ahead, inflation and the war in Ukraine will continue to pose downside risks to confidence and may further curb consumer spending this year,” she said. Inflation -- running at the fastest pace since 1981 – is increasingly taking a bite out of paychecks, and more dollars are being spent on essentials like food, gas and shelter. While consumers are so far hanging tough and continuing to spend, some economists worry that demand will eventually slow to a point that could cause a recession. Inflation-adjusted spending data will be released Friday.

Even so, Americans are experiencing one of the hottest job markets in decades, marked by low unemployment and high demand for workers that’s boosting wages. The economy probably had another solid month of job growth in April, according to a Bloomberg survey ahead of government data next week. Purchasing intentions retreated as interest rates have started to rise, Franco said. Vacation plans cooled, but there were greater intentions to buy big-ticket items like cars and appliances. Concerns about inflation retreated from March’s all-time high as lower gasoline prices provided some relief. The assessment of the labor market remained very favorable, and we expect labor optimism to outweigh inflation worries in coming readings. That leaves prospects intact for a strong recovery in spending on services like travel, entertainment and restaurant bookings. The survey showed intended domestic vacations falling, but foreign vacation prospects posted a sharp rebound.

Orders placed with U.S. factories for durable goods rose in March, pointing to sustained investment in business equipment that is helping drive economic growth. Bookings for durable goods -- items meant to last at least three years -- increased 0.8% in March after a revised 1.7% decline a month earlier, Commerce Department figures showed Tuesday. The value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, rose by a larger-than-forecast 1%. The median estimates in a Bloomberg survey of economists called for a 1% increase in all durable goods and a 0.5% gain in the core figure. The figures suggest sustained momentum in capital expenditures as the first quarter drew to a close. Companies are striving to enhance productivity against a backdrop of higher energy costs, shifts in supply chains and difficulty attracting skilled labor. “The solid increase in core orders suggests that businesses remain in good shape, and are still looking to bulk up machines and equipment to contribute to their bottom lines,” Jennifer Lee, senior economist at BMO Capital Markets, said in a note. At the same time, Russia’s war in Ukraine, rising borrowing costs as the Federal Reserve tightens monetary policy, and concerns about a slowdown in demand are introducing more economic uncertainty. Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product report, rose 0.2% in March for a second month. Prior to the durables report, the Atlanta Fed’s GDPNow estimate shows business investment probably increased at a solid pace during the period.

The U.S. merchandise-trade deficit widened unexpectedly to a new record in March as the value of imports dwarfed that of outbound shipments, reflecting a surge in inflation. The shortfall grew almost 18% to $125.3 billion last month, Commerce Department data showed Wednesday. The figures, which aren’t adjusted for inflation, far exceeded all estimates in a Bloomberg survey of economists. The ballooning trade deficit during the period is a key reason behind economists’ projections for a slowdown in economic growth during the period from the end of 2021. An improvement in the trade shortfall any time soon will be difficult as U.S. demand outpaces economic activity in many other countries around the world. Severe lockdowns by the Chinese government in an attempt to contain the coronavirus also muddies the near-term trade picture. The measures have crippled activity at ports and further strained already-tenuous global supply chains.

The U.S. economy unexpectedly shrank last quarter for the first time since 2020 as the trade deficit ballooned, adding to political headaches for President Joe Biden but unlikely to sway the Federal Reserve from hiking interest rates aggressively to combat inflation. Gross domestic product fell at a 1.4% annualized rate as surging imports and softer inventory growth more than offset otherwise solid consumer and business demand, the Commerce Department’s preliminary estimate showed Thursday. The print was below all but one estimate in a Bloomberg survey. The median projection was for a 1% increase. Together, net exports and inventories subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP. Still, real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components, increased an annualized 2.6%, an improvement from the 1.7% pace in the fourth quarter. On its face, the headline GDP figure was decidedly soft. But underlying details show still-solid household demand and business investment, corroborating comments about the economy from company executives during the current string of earnings calls.

U.S. inflation-adjusted consumer spending rose in March despite intense price pressures, indicating households still have solid appetites and wherewithal for shopping. Purchases of goods and services, adjusted for changes in prices, increased 0.2% from the prior month, following a 0.1% gain in February that was revised from a previously reported decline, according to Commerce Department figures Friday. The gain was driven by services, while merchandise buying dropped, signaling a shift in consumer behavior as pandemic concerns wane. The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, advanced 0.9% from a month earlier and 6.6% from March 2021, the most since 1982. Unadjusted for inflation, spending rose 1.1% from the prior month, while incomes increased by more than expected. The median forecasts in a Bloomberg survey of economists called for a 0.1% decrease in inflation-adjusted spending from the prior month and a 6.7% rise in the price index from a year ago. The figures show that even as consumer prices continue to grow at the fastest rate in decades, demand is strong enough to outpace inflation. A tight labor market and excess savings accumulated during the pandemic have helped Americans spend, despite inflation eroding wage growth and driving up the cost of living.

Interest Rate Insight and the Fed

Against a backdrop of quicker inflation, the GDP figures will likely keep Federal Reserve monetary policy geared for a half-point hike in interest rates next week. Nonetheless, Fed officials need to balance that policy tightening with risks associated with building price pressures. Ten-year Treasury yields reversed an earlier decline, while stock futures and the dollar held onto gains after the GDP figures were released.

Impactful International News

China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to quash fresh outbreaks. The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. This also caused European bourses to decline, following through on the sell-off here in the U.S. last Friday, and here in the U.S. equity indices declined while high quality bonds rallied in early trading Monday morning. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.

“This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,” Junheng Li, JL Warren Capital founder and chief executive officer, said of the Shanghai lockdown during an interview on Bloomberg TV. “It’s a confidence crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.” “People really don’t know, what’s a clear path to get China out of this Covid situation,” Li said. Pressure is building as Xi prepares for a twice-a-decade leadership reshuffle later this year that’s expected to secure him a precedent-breaking third term in power. Maintaining Xi’s reputation for strong decision-making appears increasingly central to that process, even if it comes at the expense of the economic growth that has helped underline the Communist Party’s legitimacy since China started opening to the world more than 40 years ago. Economists surveyed by Bloomberg last week lowered annual growth forecasts for China to 4.9%, betting against the government’s official target of about 5.5%. Overseas investors offloaded 4.4 billion yuan ($7 billion) of stocks Monday, taking monthly inflows negative this month. The onshore yuan slumped to its weakest level in 17 months on concerns about rising capital outflows.

China’s outgoing premier, Li Keqiang, has in recent weeks called for a “sense of urgency” in implementing stimulus measures and -- according to one local newspaper report – urged entrepreneurs and experts at a forum last month to “tell the truth” and offer proposals rather than talking up achievements. Still, the party has increasingly signaled that “Covid Zero” is not one of the things up for debate, despite the emergence of the more contagious omicron strain. China is the world’s second largest economy and a significant market and supplier to several large U.S. companies so any slowdown in their economy will impact ours both directly and indirectly. We do hope they get through this latest virus surge relatively quickly.

There was good news on the China front released Friday which helped their equity averages in the overnight (their Friday) trading session. China’s top leaders promised to boost economic stimulus to spur growth and vowed to contain the country’s worst Covid outbreak since 2020, which is threatening official targets for this year. “We should waste no time in planning more policy tools and enhance the strength of adjustment in due course,” the Communist Party’s Politburo said Friday, according to a readout of a meeting of the leadership on state broadcaster China Central Television. Led by President Xi Jinping, the Politburo signaled its commitment to Covid Zero, a strategy that’s forced major cities like Shanghai to shut down, disrupted business operations and roiled global supply chains. Xi earlier this week highlighted infrastructure as a big focus for the government as growth comes under pressure, a pledge reiterated by the leadership meeting Friday. Authorities should “strengthen macro adjustments, strive to achieve full year economic and social development goals, and keep the economy running within a reasonable range,” it said. Leaders also vowed to guarantee “supply chains in key sectors” and smooth transport logistics, pledging to “positively respond” to demands from foreign-invested companies for a smoother business operating environment. The midday timing of the statement was unusual, since Politburo readouts are typically made public late in the afternoon or during the CCTV’s flagship evening news program. A lunchtime announcement gave markets an opportunity to react: The benchmark CSI 300 Index rose to its session high after trading resumed in the afternoon, gaining as much as 2.5%. The offshore yuan reversed its earlier weakness to strengthen as much as 0.65% at 6.6166 per dollar. UBS Group AG economist Tao Wang said while the statement didn’t hold any “big surprise on the upside,” it wasn’t disappointing either. “It made clear on where policy support is needed,” she said. “Property, infrastructure and the platform economy are of high concern to the market, and they are also sectors that can have a multiplier effect to drive economic growth.” The Politburo pledged to “strengthen infrastructure construction in an all-around way” and to support the housing market. While officials repeated the phrase that “houses are for living in not for speculation,” the government said it would also work to meet the demand for better quality housing and “optimize” the supervision on developers’ income from project pre-sales. There was also a small shift in language on internet platform businesses, a sign of possible easing of a regulatory crackdown on the industry. China’s top economic official Liu He in March called on regulators to “steadily advance and complete as soon as possible the rectification of large platform companies”. The Politburo vowed to “complete the special rectification of the platform economy,” without giving a timeline but dropping the phrases “steadily advance” and “as soon as possible.”

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