April 20, 2023
Takeaways from the earliest Q1 reports reveal strength in high-income consumer spending and travel demand. Today’s DHI earnings report suggests that housing demand remains healthy, while disappointing results from POOL and CENT point to softening demand among middle-income consumers. Blow-out earnings from LVS in Macau fit other signs of a strong consumer recovery in China. TSM management points to a H2’23 trough in the semiconductor industry, while announced price cuts at TSLA and reduced guidance at MAN support the disinflation narrative. Aggregate earnings from Tech have been disappointing thus far as investors wait on AMZN, GOOGL, INTC, META and MSFT results next week.
Close: Fed officials sound intent on another 25bp hike at the May 3 meeting as recent data points slower growth, disinflation and early signs of softening labor markets. The Fed may have a dual mandate on paper, but price stability is far more important than maximum employment. The Fed was behind the curve on deciding when to tighten and will be behind the curve on deciding when to pivot. If history is any guide, the lag in Fed policy will soon create lower asset prices followed by tangible economic pain. Asset prices will recover before the economy does, and a Fed pivot to policy accommodation should be the opportunity to add equity exposure. A positively sloped 5/10 yield curve should precede a Fed pivot by several weeks. The 5/10 curve inversion reached a low of -36bp in early March, and price behavior now suggests that level was the bottom for the cycle. During past tightening cycles, a bottom in the 5/10 curve inversion preceded a bullish inflection point by 1-5 months.