The US consumer is feeling worse about the outlook, and the rate at which employers were forced to pay up for labor in Q4 was slower than economists expected.
That’s a favorable conjuncture for markets in the current environment. A near six-point drop on the Conference Board’s gauge of expectations pointed to tepid demand going forward, and when considered with a below-consensus read on the Employment Cost Index, you could make a case that Tuesday’s data argued for cooler inflation outcomes.
Or at least that was one interpretation, as traders looked ahead to the February FOMC decision. The market-implied probability of another 25bps hike at the Fed’s March gathering dropped below 80% following the release of the ECI figures which, you should note, included elevated 12-month increases on key wage and salary aggregates that were nowhere near consistent with 2% inflation.
Hawkish spin aside, though, it made sense that markets would trade the headline ECI print bullishly. It was cooler than expected, after all, and it’ll almost surely get a mention from Jerome Powell on Wednesday. As for the confidence data, The Conference Board said consumers were “less upbeat about the short-term outlook for jobs [and] expect business conditions to worsen in the near-term.” That sounds bad, but we’re in a “bad news is good news” regime currently, or at least until there’s concrete evidence of a recession. Although purchasing plans for durables were “steady,” fewer Americans planned to buy a home. Inflation expectations did rise a bit in the survey, but those figures aren’t watched as closely as the University of Michigan inflation gauges.
Margins continue to dominate the earnings discussion. Caterpillar missed on the bottom line for the first time in nearly three years in part due to currency headwinds. At McDonald’s, Q4’s operating margin was nearly 200bps short of estimates — a below-consensus guide for 2023 didn’t help. Margins came up at least 20 times on the McDonald’s call. CEO Christopher Kempczinski said the company expects ongoing pressure from “inflationary costs.” “In this environment, we must maintain our disciplined approach to pricing,” he added.
“We think margin pressure is what will drive the downside we are expecting in 2023 earnings — as inflation falls companies will struggle to cut costs as quickly as pricing power erodes,” Morgan Stanley’s Mike Wilson remarked. “We have already seen margin trouble for a number of companies that have reported Q4 earnings and we only expect the issue to heat up as we move further into the year.”
Exxon, meanwhile, raked in almost $13 billion in profits last quarter, according to results released Tuesday. That came on the heels of a near $20 billion haul in Q3, the largest for Exxon in 152 years of corporate history. All told, adjusted profit in 2022 was almost $59 billion, a record.
Unlike Chevron, Exxon declined to wow investors with another big buyback announcement. “I think we’ve taken a very balanced approach,” CFO Kathy Mikells said, on the call, in response to a question from Evercore’s Stephen Richardson. “We ended up distributing about $15 billion in dividends and $15 billion in a share repurchase program [in 2022],” she added. “So, ensuring that we just have sustainable growing competitive dividends and efficiently returning cash to shareholders… that’s how we think about it.”
As far as buybacks go, Big Oil is fully aware of how Joe Biden “thinks about it” — he doesn’t like it. Last week, the White House ripped Chevron for the company’s decision to up the ante with a $75 billion repurchase plan. “For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it,” the administration chided, addressing Chevron directly. Like Exxon, Chevron enjoyed a record-breaking year in 2022. Profit more than doubled.
“We’ve demonstrated our commitment to a reliable and growing dividend and further sharing our success through the share repurchase program with up to $35 billion in cumulative repurchases in 2023 and 2024,” Exxon CEO Darren Woods told analysts on Tuesday, reiterating the company’s existing guidance on buybacks. Perhaps merely reaffirming previous plans will spare Woods any additional political blowback.
In any event, with the exception of the ECI figures (which are an input in Powell’s decision calculus), all of the above was just noise ahead of this week’s marquee events, which begin Wednesday with JOLTS and the Fed meeting.
On that note, I’ll leave you with two short excerpts from Rabobank’s Michael Every. Consider the passages below in the context of sharing the wealth, shifting geostrategic concerns, would-be competitors to USD hegemony and the investor class’s prayers for a return to a macro regime that’s conducive to low rates and ever more market-friendly monetary policy.
Last week I noted famed economist Schumpeter, seen as always favoring “creative destruction,” ended up arguing for a quasi-‘Christendom’ corporatism to deal with problems of economic imbalances, based on the Catholic principle of Quadragesimo anno put forward by Pope Pius XI in 1931 — to no effect at all, as we saw from 1939-45. On that note, Friday saw economist Mariana Mazzucato (‘For the Common Good’), argue we should follow the call of the current Vatican in a similar light: “Tackling our biggest challenges and reversing the undue concentration of wealth and power will require a fundamental change in political economy. Currently, the principle of the common good is seen as merely a corrective for the current system’s excesses, but it should be the system’s primary objective.”
Despite having argued for years that political economy and “-isms” were going to be the next big thing, I am in no way projecting that the change described above is going to happen anytime soon, or at all: Would that it could. Yet project this: Would a return to big Fed rate cuts make things relatively better or worse in that regard? Geopolitically, the answer is also clear: Higher rates are a US weapon — yet, oddly, one the market expects to soon be holstered.
Shouldn’t big oil be thanking Biden and his Bidenflation for their record profits? I thought he was the guy responsible for the high gas prices?
This whole things emphasizes the point that you can’t rely on a business to conduct themselves ethically given the opportunity to leverage something like the destruction of tens of thousands of innocent civilians to hike up oil and gas prices. And you certainly can’t rely on media outlets to report on the unethical price increases honestly and not leverage that data point to attack their political opponent.
Everyone is a George Santos when it is convenient for them to be. 😉
No, Biden was the guy who fiddled away the strategic petroleum reserve in a hopeless attempt to lower prices. The thing is, production at Exxon is not going to rise materially in the next decade or two, especially with Biden’s restrictions on drilling. Oil isn’t a lake any of us can pump whenever we want. When I graduated from college the Saudis had nearly a trillion barrels of reserves. Now they are down to a bit more than 200 billion (maybe much less), an 80% drop. About the time they took Aramco public they reported a large increase, perhaps to pump the stock. That’s a lot but right now the world uses roughly 100 bil bls a year. World provable and recoverable reserves are generally pegged at 1.5t tril bls (that’s fifteen years worth). Some analysts have said the US has 3 tril bls of shale oil but production total would tend to belie that number. Oilprice.com shows a 150 bil bl decline in 2021 alone, a 10% drop. Prices will be going up steadily for the next 50 years, no matter who’s in charge of what. One of my favorite old folk-type songs was: “There ain’t no more cane on the Brazos, my boy … They done ground it all to molasses….” We done burned all that oil and now it’s soon to be gone.
The Every excerpt is provocative and raises some interesting points.
I think the Biden administration and most democrats would prefer a return to big Fed rate cuts to maintain the status quo. With my background, I can’t fully interpret how Higher rates are a US weapon, but it seems to me that higher rates bring us closer to a credit event which leads to instability which leads to even more people on the side of the burn it all down GOP.
I think the fed funds rate can be used to turn the screws on our competitors – not sure how all the effects of rates interact but I think basically higher interest rates and stronger dollar make other economies and their currencies weaker which has the effect of making the dollar seem dominant. So far the US is outperforming the competition in this environment. Go us.