Centerfin Collective Weekly

Weekly Update October 28th, 2022

Big tech earnings, Central banks hint at pause, Mortgage rates yet another headwind

Big tech earnings indicate we may be entering a new regime

Big tech announced earnings this week, which showed that they are not immune to the macro headwinds. The most startling one was Meta (Facebook), which showed a lack of discipline in spending and slowing growth, sending the shares down over 20% on Thursday. Meta was not an outlier; Alphabet (Google) also saw slowing growth, with revenue growing only 6% and YouTube revenue declining. Microsoft showed that PCs continue to be weak, but perhaps more surprising to investors was cloud growth was slowing more than anticipated. Amazon provided weak Q4 guidance, sending their stock down over 7% the following day. Apple remains the only stand-out so far. The bottom line of these reports was a wake-up call to investors that these companies are not immune to the macro as once thought. We continue to see a rotation out of tech and into small caps, value stocks, and defensive sectors.

Central banks hint at pause

This week, the European Central Bank (ECB) and the Bank of Canada (BOC) raised interest rates. The ECB increased rates by 75 basis points to 1.5%, and the BOC raised by 50 basis points to 3.75%; both were expected. What is more notable is that both banks indicated that the hiking cycle might be nearing an end. Markets have been very focused on whether or not central banks globally are close to finishing their hiking cycle. Clarity around this is a positive for sentiment. Next week we will hear from the Federal Reserve, which is expected to indicate the same.

Mortgage rates are yet another headwind to economy

The average 30-year mortgage rate rose above 7% this week, a level not seen in 20 years. The level of interest rates set by the Federal Reserve filters through to all lending markets, mortgages being a very important one. Most people don’t buy a home based on the actual price of the home but based on the monthly payment they can afford. Mortgage rates just twelve months ago were under 3%, allowing people to buy more expensive homes and serving as a huge tailwind to housing prices (up 16.9% in 2021). We are now experiencing the exact opposite. People looking to buy a home cannot afford the monthly payment at the current prices, and people looking to sell are not likely willing to come down in price. Real estate accounts for ~17% of the economy, so this will serve as yet another headwind going forward.