Is “Bad News” Actually Bad Again?

It was a busy day for economic data, with it ultimately sending stocks and bond yields lower. So let’s get into all of it.

Overnight, the Bank of Japan surprised the market by making no changes to its yield curve range. Governor Haruhiko Kuroda said that it hasn’t been long since its December adjustment and that it will take time for measures to impact the market. As a result, it left its interest rate unchanged at -0.1% and reiterated it would maintain its dovish policy to support economic growth.

Japanese 10-year yields sat at the upper end of their range (0.50%), and the Japanese Yen fell more than 2% on the news. 💴

Eurozone inflation slid to 9.2%, its second consecutive decline, on the back of falling energy prices. With that said, the European Central Bank’s (ECB) policy rate is currently 2%, and most analysts expect the rate to head to 3% by the summer. ECB President Christine Lagarde was hawkish throughout December, stating that the bank has more ground to cover and is not pivoting or wavering but instead showing determination. 🌍

U.K. inflation also fell for the second straight month, from 10.7% to 10.5%. The Bank of England’s interest rate remains at 3.5%, with markets anticipating a rise to 4% at its February meeting.

In the U.S., producer prices fell 0.5% in December, well above expectations for a 0.1% decline. Driving the headline decline was a sharp drop in energy prices and softening in food prices. As a result, the core measure, which excludes food and energy, rose in line with expectations at 0.1%. 📉

Additionally, retail sales posted their biggest drop in a year (-1.1%). This is the second monthly decline in retail sales, as consumers pull back amid the economic uncertainty. Driving the decline were declining goods prices and holiday shopping being pulled forward in Q4 as retailers offered attractive discounts to lure shoppers. The cold weather the U.S. experienced also likely impacted sales as more people opted to stay home. 🛍️

Along with softening sales come rising inventories, with November seeing a 15.1% YoY increase in business inventories. The inventory-to-sales ratio rose to its highest level in two years.

U.S. industrial production also declined in December. The 0.7% decline was its second consecutive drop and steepest since September 2021. This data point adds to the mounting evidence that manufacturing activity has been softening. 🏭

Falling mortgage rates helped boost NAHB homebuilder sentiment for the first time in a year. However, some analysts believe the trough in builder sentiment was registered in December. Their thesis hinges on the fact that there’s still a structural housing deficit of 1.5 million units, and affordability will improve with falling rates and prices.

Lastly, there was some employment data worth noting. Amazon began a new round of layoffs targeting 18,000 people in its human resources and stores division. Meanwhile, Microsoft is laying off 10,000 workers due to “macroeconomic conditions and changing customer priorities.” ❌

Overall, lower inflation and weakening economic activity sent U.S. bond yields to fresh year-to-date lows. Despite the Fed’s hawkish rhetoric, the market is once again frontrunning the Fed in loosening financial conditions.

We’ll have to see how the various Fed members’ speeches impact the market ahead of their January 31 to February 1 meeting. And we’ll also have to distinguish if today’s “bad news for the economy is bad news for the market” shift is a trend change or a one-off situation. 🤷

That’s all for now, though. ⌛

Financial services earnings continue to come in, but transportation stocks were top of mind given today’s economic data. 🚚

On that note, JB Hunt Transport Services reported earnings and revenue that missed expectations.

The trucking giant saw sales rise 4% YoY to $3.65 billion, missing the $3.84 billion expected. Earnings per share (EPS) of $1.92 missed analyst estimates of $2.46. 📝

Excluding fuel surcharge revenue, its operating revenue fell 3% YoY. Driving that decline was a 27% decrease in volume in Integrated Capacity Solutions (ICS) and a 1% decline in Intermodal volume. The company’s operating income fell 13%, and its operating margin was 7.7%. 

Like other shippers, it’s experiencing shrinking volumes that are being offset by price increases. However, rising costs are eating at its margin and profitability.

Despite the weaker-than-expected results, $JBHT shares rose 5% today. 🤷

Aluminum company Alcoa is extending its decline after hours following a weaker-than-expected earnings report. 🏭

It reported Q4 earnings per share of $0.70, three cents worse than expectations. However, revenues of $2.7 billion topped expectations of $2.66 billion.

Driving the results was a 7% decline in third-party revenue, attributable to lower prices and shipments of alumina and aluminum. Average realized third-party prices were down 8% and 10%, respectively. Additionally, third-party shipments were down 2% and 3%, respectively. 🔻

The company generated roughly $118 million from operations and finished the quarter with a cash balance of $1.4 billion. It also paid a dividend of $0.10 per share, totaling $17 million.

Overall, investors remain concerned with how the economic slowdown will impact industrial companies like Alcoa. 

As a result, $AA shares were down roughly 4% after hours. 📉

Financial services firm Charles Schwab reported earnings and revenue that fell short of expectations. 👎

Earnings per share of $0.97 were below the $1.09 estimate. And net revenues of $5.5 billion fell short of the $5.6 billion expected.

Interest income rose 65% YoY to $3.8 billion, with net interest expense rising 534% YoY to $812 million. Trading revenues declined by roughly 10.5% to $895 million. Investor appetite for savings accounts and other fixed-income products helped bolster the company’s results. It also managed to add new clients in the quarter. 💰

$SCHW shares were down 2.53% on the news.

Discover Financial Services beat expectations, but the stock is falling sharply.

The company reported earnings per share of $3.77 vs. the $3.65 expected. And revenues of $3.73 billion beat the $3.668 billion expected.

Like other consumer banks, it increased its provision for credit losses by 42% to $883 million. It also saw its overall net charge-off rate (what the company believes it’s unlikely to recover) rise to 2.13%. 🔺

While the jump in loan growth helped its results, signs are mounting that consumers are struggling to cope with rising prices. Not only are they relying more on credit to maintain their lifestyles, but they’re having trouble making payments. And carrying balances with credit card interest rates at decade-plus highs is not a great thing over the long term. 💳

As a result, investors are looking past this quarter’s beat and ahead to the challenges ahead for Discover and other consumer banking businesses.

$DFS shares extended their decline after hours, falling another 6%. 📉