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Msg  72964 of 73301  at  1/31/2023 9:15:17 AM  by


The Launch Pad


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Daily market commentary
The Launch Pad
January 31, 2023
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Futures are up this morning as investors weigh the outlook for corporate earnings with earnings due from over 100 members of the S&P 500, while also remaining optimistic that the Fed will moderate the pace of rate increases as inflation slows. Despite January seeing some of the best returns for equities in months, signs of earnings pressure are complicating the picture as companies contend with a decline in consumer spending and economic uncertainty. On the economic front, the Fed is widely expected to raise rates by 25 bps tomorrow, slowing its pace for a second straight session. However, the market will be more interested in clues about further rate increases even as officials continue to push back against speculation that the central bank will cut rates later this year.

Canada’s economic output rose in November, with GDP rising 2.8% YoY in for the month. Despite the strong growth in November, preliminary data shows that the economy slowed down at the end of the year, growing at about half the pace of the previous quarter in Q4 2022. Increases in retail, utilities, and the public sector were offset by decreases in wholesale, finance, and oil and gas industries, showing that higher interest rates are starting to slow economic activity and weigh on consumption. Overall, the preliminary data for December point to annualized growth in Q4 of 1.6%, sharply down from a 2.9% pace in the third quarter, 3.2% during April to June, and 2.8% in the first three months of last year. The effects of the BoC’s aggressive tightening campaign are expected to drag growth to a halt this year, with economists seeing two quarters of small contractions in the first half of 2023.

Speaking of GDP, Eurostat figures just released showed the eurozone grew at an estimated annualized rate of 0.1% in the final quarter of 2022, better than the 0.1% forecasted contraction, but slower than Q3 growth rate of 0.3%. The WSJ noted this brings the Euro zone’s growth to 3.5% in 2022, higher than U.S. and China’s 2022 growth figures of 2.1% and 3% respectively, which is the first time since 1974 that the combined economies of the eurozone grew at a faster pace than China and the U.S. A closer look at the numbers saw a mixed picture; Germany and Italy GDP declined while France and Spain’s output grew. Outsized gains came from Ireland, home to many multinational corporations, which expanded 3.5% in Q4 alone. The mixed data comes ahead of the ECB’s interest rate decision on Thursday where markets have priced in a 50 bps hike.

China’s budget deficit jumped to a record 8.96 trillion yuan ($1.3 trillion USD) last year, larger than the previous record of 8.72 trillion yuan in 2020, when the economy was hit with the initial Covid outbreak. Finances quickly deteriorated last year due in part to the property slump, weakening global demand, and the Covid Zero policy, which severely damaged economic activity. Local governments were forced to pay hundreds of billions of yuan for the testing, quarantines, and lockdowns used to enforce the Covid Zero policy, only for the government to do a 180 a few months ago and scrap the program. The deficit puts local governments in China in an increasingly poor fiscal position and could make the central government reluctant to support the economy with fiscal spending after last year’s slump in growth.

Heigh-Ho Heigh-Ho, it’s back to the office we go. New data is showing that more than half of workers in major US cities went to the office last week, the first time that return-to-office rates crossed 50% of their pre-pandemic levels. An index of building occupancies in 10 major metro areas increased 0.9% to 50.4% in the week ended Jan. 25, a milestone for many companies who have pushed for more in-office attendance. It took longer than expected to cross this number as health concerns surrounding Covid-19 variants and workers’ reluctance to come back into the office continue to keep vacancy rates up. Call it the January effect for the return to the office too.

For royals fans and collectors, the Royal Canadian Mint has just released a $5 coin commemorating the late Queen Elizabeth’s 70-year reign, and is one of the first issued in a souvenir collection of precious metals that include silver, gold and platinum coins. They’re all meant to revisit seven decades of history by featuring “timeless emblems” of the Queen’s reign and more intimate portraits of the monarch “known to generations of Canadians,” according to the Mint. It’s made of 1/4 oz. pure silver and showcases a sparkling portrait of the Queen, in colour on what we’d call the “tails” side of the coin.

Diversion: This pilot deserves a raise.

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Company news

United Parcel Service Inc. is forecasting sales that were below estimates as the courier grapples with a decline in package volume as shoppers return to stores and inflation cuts into spending habits. The outlook raises questions about the strength of delivery demand as e-commerce shows signs of softening. UPS also faces the prospect of higher labour costs as it approaches negotiations with the Teamsters to renew a five-year contract that expires on July 31.

EV price wars are heating up. Ford cut the starting prices on its electric Mustang Mach-E yesterday, by an average of 9% (roughly $4,500 USD), weeks after EV industry leader Tesla slashed its own prices. Despite the model already being unprofitable, the automaker said it hopes to offset further margin deterioration by boosting production 67% this year. The news comes as the market prepares for Ford to report fourth-quarter results and 2023 guidance. Investors will be watching for signs of weakening consumer demand and a tougher pricing landscape, either of which would mean lower profits this year for the automaker.

Maxing out. Boeing announce they will add a fourth assembly line to produce more 737 Max aircraft, as it tries to more quickly translate a backlog of orders into cash-generating deliveries of new planes. The line will be in an existing facility in Everett, Washington, where space is available because Boeing is shifting production of larger 787s to South Carolina and ending production of the iconic 747.

Brookfield Asset Management is in talks to take over the private equity secondaries business of Deutsche Bank AG’s asset management arm. Headlines are surfacing that negotiations are in final stages and a deal may get announced as soon as this week. Deutsche Bank’s DWS Group has been pitching its secondaries business, which raised an initial $550 million fund just over a year ago, to interested parties as part of a plan to pull back from areas where it doesn’t have sufficient scale.

Shares of semiconductors in Asia fell after South Korean chip giant Samsung Electronics saw its worst profit decline since the third quarter of 2014. Its fourth quarter operating profit fell to 4.31 trillion won, a 69% drop from the same period a year ago. This comes as global smartphone shipments plunged to a low not seen since 2013, marking the largest ever decline. Samsung announced it will continue capital expenditure in the upcoming year, in which it spent a total of 47.9 trillion won for semiconductors in 2022. The company was widely expected to pull back on further spending as global demand worsened.


Natural gas prices continue to fall, extending a string of recent losses to set a fresh 21-month low amid mild winter temperatures in parts of the U.S. Prices are now hovering near $2.73 per million British thermal units, below a key threshold of $3 broken on January 25. The latest decline adds further downward pressure to prices that are now more than 70% below all-time highs of $10.03 hit in August 2022. Even as Russia's war on Ukraine continues and the prospect of flows from Russian producers remains in flux, inventories are looking strong extending into next winter as well.

Base metals are lower as an anticipated rebound in Chinese demand after the Lunar New Year holiday seems to be on hold. Copper and zinc slid more than 1% as traders pared back bullish bets that drove a sharp rally in prices this month. Investors are weighing how quickly the world’s top metals consumer will recover after harsh coronavirus restrictions were unwound late last year. There are some indications a recovery is coming. China’s PMI showed the manufacturing and service sectors expanded for the first time in four months in January.

Fixed income and economics

The U.S. Treasury bond market is having one of the best Januarys in more than three decades, powered by a wave of momentum money. Investors seem to have to have forgotten the reasons that resulted in a tough 2022 for bonds - the Federal Reserve is expected to increase its benchmark interest rate by another half percentage point over its next two meetings, the job market remains tight, and inflation is still well above the central bank’s target, even if it’s come down from its peak. These risks looked to have been brushed aside as markets rushed to seize the opportunity on elevated Treasury yields ahead of a potential recession or steep economic slowdown. The world’s biggest asset manager Blackrock estimates that fixed-income ETFs have pulled in $30 billion so far in January, nearly twice as much as stock funds, marking the biggest outsized shift into bonds since July. The renewed appetite for credit isn’t just in ETFs. According to EPFR Global data compiled by Commerzbank AG Euro, funds specializing in safe company debt have already reversed the outflows suffered in 2022 when central banks’ fight against inflation triggered a downwards spiral for bond investors. Talk about FOMO.

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