DATA DIVE - Rising rates = slowing growth

TABLE OF CONTENTS

• FOMC

• GROWTH

• PMIs

• HOUSING

• CONCLUDING THOUGHTS

• PREMIUM SUBSCRIPTION

FOMC

Let me start by saying that following a data-dependent process has once again proven to be a far superior strategy than chasing Charts and Narratives.

This remains one of my favourite cartoons so far.

After stating quite clearly on Sunday that the risk-reward favoured downside, the SPX declined -4%, post No Pivot Powell.

Anyone who has been reading this newsletter over the past few weeks, came into this latest FOMC prepared, did not chase, and most likely faded the highs.Congratulations if you executed when and where it mattered.

I will make a few brief comments about Powell's statement, before moving on to our usual Data Dive.

Powell quite clearly to pushed back against the notion of a Pivot and reinforced the point that the Fed is nowhere near thinking about easing yet.Slowing the pace of hikes is not easing, as I have stated many times before.The Fed still considers the greater risk to be that of doing too little, as opposed to doing too much.

The end goal for rates has now moved higher, to 5-5.25% by next spring.

Unfortunately, none of the journalists asked a single question about the Balance Sheet, which IMO is the most important piece of the puzzle. I suppose this goes to show the quality of financial journalism in general. Remember this the next time you are triggered by a Nick Timiraos article in the WSJ.

But enough of that, let us dig through some of the latest global data.As long as Central Banks continue to tighten monetary policy, Economic reality is going to continue to deteriorate, and do so at a faster pace.

GROWTH

Firstly a note on growth, after two quarters of negative growth, US GDP QoQ rose +2.6% between Jul-Sept.

However, this should not be misinterpreted as a positive.

In fact, Net Exports contributed +2.77% to GDP which rose +2.60%, in other words, the positive read is mostly a result of accounting practices and not of any real underlying growth.

As a reminder, the standard GDP formula = C + I + G + (X-I)= Consumption + Investment + Government Spending + (Exports - Imports)

See below a detailed summary of the various GDP Components shared publicly by Hedgeye. Hats off to Christian Drake, who warned about the like Net Export anomaly long before the official print.

Here you can see that Consumption, the real indicator of how the consumer is faring, slowed yet again.

Unsurprisingly consumer spending in the US slowed, Retail Sales QoQ to +1.4% from +2% previously.

Richmond Fed Manufacturing Activity Index fell to -10, its worse read of the year, driven in large part by a decline in shipping activity and volume of new orders.

Remember a few weeks ago I discussed how the price of containers from Shanghai to LA has declined -76% YoY and volumes are down by over -30% this year?

It looks like we are going from shortage to glut, something which is quite evident if you look at the inventories of many consumer discretionary companies.

Kansas Fed Manufacturing Index dropped to -22, the lowest level since the pandemic.

Looking abroad, in France GDP QoQ slowed to +0.2% from +0.5% previously.In the case of France, net trade was a drag, as exports grew less than imports, the opposite situation to the US.

In Spain GDP Growth rate QoQ slowed from +1.5% to +0.2%

GDP in Germany expanded by +0.3% compared to +0.1% in the previous quarter, largely driven by consumption expenditure which was better than expected.

Overall activity in Europe is slowing, and Economic Sentiment continues to deteriorate.

PURCHASING MANAGERS' INDEX

This week Global PMIs for October were released, and most are showing a contraction in industrial activity.*Note: a read bellow 50 equals a contraction

Euro Area manufacturing PMI declined from 48.4 to 46.4

German Manufacturing PMI declined from 47.8 to 45.1

Spain's PMI recorded the sharpest drop, from 49 to 44.7

Italian PMI dropped from 48.3 to 46.5French PMI dropped from 47.7 to 47.1

US Manufacturing PMI slowed to 50.4, just above contraction territory, where I suspect it will head over the next few months.

I think at this point there is little dispute around the fact that the global economy is slowing and heading towards contraction territory.The only point I would make is that the slowdown is likely to accelerate as we get closer into Q1 of 2023.

Employment thus far has remained strong, but I suspect this will be the next shoe to drop. Employment generally changes with a lag to economic activity.

Slowing employment will further reduce consumer spending which will filter through to earnings, and show up in the reports in Q1 and Q2 2023.

So if you are thinking of buying Consumer Discretionary companies because they are down -40% or more, remember that the worst, as far as consumer spending is concerned, is yet to come.

Heading into all of this the US Savings rate sits at an all-time low

Meanwhile Initial Jobless claims, despite being at historic lows are starting to tick up.

Sadly, the Fed appears to be hell-bent on destruction and is forcing the world to march with it.

Fear of letting inflation get entrenched, and complacency around a seemingly unbalanced labour market, are causing them to tighten more than I think is safe. But that is what it is, and not for us to decide. We can only act and react based on the facts, arguing about what is right or wrong gets us nowhere.

Post the latest round of hikes yields are rising againthis morning the US 2Y trade up to 4.7%, and is fast approaching 5%, where the Fed is headed.

HOUSING

One of the areas where the impact of higher rates is being felt the most is in housing.With 30-year mortgages rates in the US now north of 7.0%Sales have collapsed and prices are declining.

US Mortgage Market Index

US House Price Index decreased for the second month in a row in Aug, and there is no reason to believe this trend will not continue in Sept and Oct.

A while back I discussed the UK's housing market and how the resilience it had shown compared to the US was likely to fade very soon.

This has indeed proven to be the case with Nationwide reporting UK House Prices declined -0.9 MoM.

And the Bank of England just raised rates 75bps to 3% which will not help moving forwards.

As a reminder, the amount of mortgages that come due for refinancing in the UK accelerates over the next 3 quarters, which means that payments for homeowners will double compared to the rate they fixed in 2020.

What will this do to the British consumer's budget?

A similar story is true for both Australia and Canada, and is the primary reason why the RBA and BOC have slowed down the pace of their rate hikes.

I quote the Reserve Bank of Australia which says “more than a quarter of mortgage holders will be spending at least 30% of their income to repay debt if the central bank's key interest rate peaks at the level expected by investors in mid-2023”

CONCLUDING THOUGHTS

Unfortunately, most of my data dives so far appear to paint a picture of doom and gloom, but these are numbers, not opinions. The Global Economy is slowing.

Of course this is not going to last forever, and if we look far enough afield, towards 2024 and beyond, what we are doing right now is setting up easy comparisons for the eventual reacceleration in growth on the other side.

But we are not there yet, so I want to close this article out with one last word of caution.

Facebook, or META, has lost -75% of its value and in the process has erased 10 years' worth of growth.

I know many of you will be looking at this chart and probably want to buy the stock because it now looks cheap, at a discount, and great value.I get it, I too have that itching.

But I would argue this is recency bias, you are extrapolating past trends into the future.It will probably take a while for META to put its house in order, and we do not yet know if the Metaverse bet will pay off.

So while no one knows where the bottom ultimately is for META, this is not the kind of chart that reverses back to ATHs in 18-24 months, it could take years, if it ever happens.Nothing is a given.

I am not trying to make a specific call on the fate of META, but trying to make a more general point.

When you look at a lot of the major tech companies now trading at a discount, I want you to remember a few things:

• The Rate of change of user growth is slowing

• Advertising spend will be contracting for the next 2-3 quarters

• Meanwhile these companies will continue to burn cash

In a few weeks I will write an article on how I think long term investors should be using this bear market to position for the next bull market.

But in the meantime, I want to remind you that while Tech was the leader in this last cycle, it does not necessarily mean it will also be in the next.

Time is non-linear, things change, trends revert and all the while the market continues to cycle are recycle.Such is the nature of things.

PREMIUM SUBSCRIPTION NOTICE

This newsletter is now approaching its 10th week of publication, and in that time I have worked solidly to deliver high-level content and trading alpha to subscribers.

I hope you have found my work both useful and insightful and that you will be a subscriber for years to come.

This is my last free Data Dive and Sunday I will publish the last free edition of my Weekly Macro Note.

Starting Monday most of my articles will be sent to Premium Subscribers only.

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Thanks for reading,Antonio C Nobile

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