Conflicting econ data
This week we received continued conflicting economic data, with manufacturing surveys deep in recessionary territory, while consumer data surprised to the upside. The Empire State manufacturing survey came in at -43.7, significantly worse than expected and a number not seen outside the brief period following the Covid-19 lockdowns. Later in the week we saw a negative reading of 10.3 from the Philly Fed manufacturing survey, also worse than expected. On the flip side, retail sales for December surprised to the upside, coming in at +0.6% versus expectations of +0.4%. Later in the week, consumer confidence came in at 78.8, significantly higher than expected and a number not seen since 2021.
- Economists and market prognosticators have been stumped by the resilience of the economy
- The recent manufacturing data has continued to be very weak and is considered a leading economic indicator
- On the other hand, consumer-related data (retail sales, confidence) has been very strong
- Given the economy is nearly 70% consumption, it makes sense to pay more attention to the consumer data in trying to understand recent trends
- With the labor market continuing to be tight, it is hard to see how these recent trends reverse course
- That said, we also saw peaks in consumer confidence directly preceding recessions
Biden’s anti-trust more harm than good
This week, the Biden administration won its case blocking the proposed merger of JetBlue with Spirit Airlines. The government’s antitrust case against the merger argued that consumers would face higher fares and fewer travel choices. Within a day, it was reported that Spirit Airlines was looking into restructuring options.
- While the anti-trust case versus the merger was concerned about the cancellation of routes and potentially higher prices for the consumer, the going concern of Spirit independently was not taken into consideration
- Airlines are notoriously bad businesses, which carry heavy debt burdens
- Spirit Airlines has over $1bn of debt that matures in 2025
- A restructuring could mean a similar reduction in capacity that the government was attempting to prevent
- In the worst case, a liquidation of the company could mean the loss of over 10,000 jobs and would almost certainly be worse for the consumer
Rates rise as some Fed officials walk back market
This week, several voting members of the FOMC, including John Williams and Chris Waller, spoke. Their tone and comments seemed to attempt to push back on the market’s hopes for as many as seven rate cuts this year. In response, the 10-year treasury rose from just under 4% at the end of last week to 4.15% at the end of this week. The 2-year treasury rose from 4.15% to 4.4% for the week.
- Ever since the Fed pivot in mid-December, interest rates across the curve have moved aggressively lower
- Prediction markets were signaling for as many as seven rate cuts for 2024, with some betting that they would begin as early as this month
- With only eight meetings for the Federal Reserve scheduled for the year, the market is anticipating that they cut at almost every meeting
- Our view has been that outside of an exogenous shock putting significant pressure on the economy, it would be hard for the Fed to cut as much as predicted