Intel is chipping its way back to health

Stocks rallied strongly yesterday spurred on by strong tech earnings. As the bulls ran, a weak economic number filled in some unknowns… creating yet more… unknowns.

Eco day. It’s Friday, it is springtime, so I am going to go light on you today. Perhaps a bit of light economics. How is that for an oxymoron? Unfortunately, I must, because yesterday and today are kind-of like ground zero for releases. It started with yesterday’s “Advance” release of Q1 GDP for the US. “Advance” means that is the Bureau of Economic Analysis’ first estimate of the all-important but lagging indicator. Remember Q1 ended on March 31^st. Anyway, the headline goes like this: the economy grew at an annualized quarterly rate of +1.1% which is slower than economists were expecting, lower than the prior quarter’s +2.6% growth, but it is still… um, growing at least. There you have it! Satisfied? Of course not, you want to know what is happening below the surface.

Well, it just so happens, that I will tell you, though you will probably not be surprised. Remember, at a high-level GDP is made up of consumer spending, investment, government spending, and net exports. Consumer Spending makes up roughly 2/3 of the GDP, which is why I probably use the words “consume” and “consumption” more than any others in my writing and analysis. Investment is the second largest contributor to the economy and that is largely driven by businesses. So, in order for the economy to be healthy those two groups must be pulling their weight. Both are discretionary, so spending habits tend to change along with sentiment. See where this is going? Ok, let’s just look at the numbers. Investment actually fell by -12.5%! That is controlled largely by business, and I am sure that you are not surprised given what we have been seeing in earnings this quarter and last. Companies are struggling to maintain earnings growth by spending less. Consumption, on the other hand grew by +3.7%. For some context, it grew by +1.0%, +2.3%, +2.0%, and +1.3% in the prior 4 quarters, going back. So, the consumers, you and I, carried the day… once again. Do you want to know where consumer spending grew the most in Q1? Why, it was in Motor Vehicles and Parts, which grew by +45.3% compared to +4.2% in Q4 of last year. Ouch! Ok, ok, so the final number breaks down like this:

Personal Consumption Expenditures (+2.48%) + Gross Private Domestic Investment (- 2.34%)  + Net Exports (+0.11%) + Government Consumption Expenditures (+0.81%)  =  Q1 Change in real GDP (+1.1%)

Now you know! So, what does that mean going forward. Since it is consumers who are literally keeping the economy growing, despite inflation and decreasing consumer confidence (reported earlier in the week), it is they… er, us who are in the hot seat. If we wince in the face of inflation and stop spending, we could end up with the dreaded stagflation. BUT we are not there yet. Inflation may not be shrinking as fast we would like, but it is slowing somewhat, and based on these numbers the Fed would probably be inclined to at least raise rates by another quarter point. Is our consumption sustainable? If consumption reverts to the mean of the last 4 quarters, it would be somewhere around +1.65% and if investment reverts, it would be at -3.45%. Just using quick math, you can see that the final number may be, well lower and perhaps negative. Based on this earnings season, companies appear to be ramping up their ”cost saving” measures, which means that investment is likely to continue to decline. Now, it takes at least 2 quarters of consecutive GDP contractions to be considered a recession, though NBER has the final say. Many leading economists, now even Fed economists are expecting a recession, albeit “mild” (in their words) in the second half of this year.

This morning, we will get some key economic numbers which will absolutely, most definitely, positively be considered by the FOMC next week. Personal Income and Personal Spending are both expected to have slowed from the prior period. In the Feds mind, “spending” contributes to inflation. Similarly, “income” also contributes to spending… more money = more problems. Finally, we will see the notorious PCE or Personal Consumptions Expenditures Deflator, which is the Fed’s favorite inflation gauge. It too, is expected to have moderated from the prior month. Now, I will release you back to your springtime Friday .

WHAT’S SHAKIN’ THIS MORNIN’

Amazon.com Inc (AMZN) shares are lower by -1.88% in the pre-market after it announced an EPS beat and slight miss on Revenues. Though the news was initially received as positive, the stock traded lower after Amazon’s admission that its cloud business growth may be slowing despite beating estimates with AWS in the past quarter. Potential average analyst target upside: +23.7%.

Intel Corp (INTC) shares are higher by +5.53% in the premarket after it surprised on EPS and Sales by +74.22% and +5.47% respectively. The company remains cautious but believes that it will experience a moderate recovery in the second half of the year when it will return to free cash flow positive. Dividend yield: 1.65%. Potential average analyst target upside: +5.1%.

ALSO, this morning: Chevron and Exxon Mobil beat EPS and Revenue estimates while Ares Management and LyondellBasell came up short.

YESTERDAY’S MARKETS

Stocks gained yesterday on positive tech earnings. The S&P500 climbed by +1.96%, the Dow Jones Industrial Average gained +2.57%, the Nasdaq Composite Index jumped by +2.43%, and the Russel 2000 Index advanced by +1.20%. Bonds pulled back and 10-Year Treasury note yields gained +7 basis points to 3.52%. Cryptos popped by +5.20% and Bitcoin advanced by +4.28%.

NEXT UP

• Personal Income (March) is expected to have increased by +0.2% after increasing by +0.3% in the prior month.
• Personal Spending (March) may have slipped by -0.1% after climbing by +0.2% in February.
• PCE Deflator (March) is expected to have slowed to +4.1% from +5.0% with the core number remaining unchanged at +4.6%.
• Next week: Lots more earnings in addition to PMIs, JOLTS Job Openings, Factory Orders, Durable Goods Orders, and the FOMC meeting will conclude on Wednesday. Check back in on Monday for calendars, details, and yes, more charts.