Business Investment Sustains Strong Momentum: Jan. 28, 2025

Stocks are recovering from yesterday’s AI induced debacle on the back of a continued surge in business investment following election day. And as investors witness momentum with capital expenditures, they’re also carefully analyzing fourth-quarter earnings and patiently awaiting results from mag7 members later this week as well as an update from the Federal Reserve tomorrow afternoon. Meanwhile, Treasurys are paring much of yesterday’s gains on a heightening in President Trump’s tariff rhetoric, which is sending the greenback, commodities and inflation expectations north. Furthermore, this morning’s consumer confidence figure posted a miss, as employment uncertainty, elevated costs and mounting price pressure projections weighed on household optimism. 

Capital Expenditures Surge Again

November’s surge in capital expenditures continued last month with the 3-month moving average rising at the fastest pace in over two years, marking a 28-month high. Nondefense capital goods orders excluding aircraft, a proxy for business investment provided in the monthly durable goods report from the US Census Bureau, rose 0.5% month over month (m/m) in December, exceeding the 0.3% median estimate but decelerating from the prior month’s 0.9% jump. From a broader perspective, however, overall durable goods purchases took a dive, dropping 2.2% m/m and missing the 0.6% projection while accelerating south from November’s 2% decline. The weakness stemmed from passenger airplane orders contracting 45.7% m/m amidst more modest decreases as follows:

• Computers and related products, 1.4% 
• Primary metals, 0.6%
• Communications equipment, 0.3%
• Automobiles and parts, 0.2%

Other categories that strengthened and the amount of their expansion included the following:

• Fabricated metal products, 1.2%
• Defense aircraft, 0.7%
• Other durable goods, 0.4%
• Electrical equipment, 0.3%
• Machinery, 0.2%

Consumer, Business Sentiment Trends Are Bifurcated

Business optimism and investment are trending upward, but household sentiments have moved the other way, albeit modestly, with this morning’s consumer confidence print adding further evidence to the bifurcation. Elevated prices and rising pessimism about employment and business conditions led to a miss in this morning’s report, as this month’s Conference Board’s Consumer Confidence Index retreated to 104.1, arriving beneath the anticipated 105.6 as well as the prior period’s 109.5. The present situation and expectations indices both contributed to the decline, decreasing from 144 and 83.9 to 134.3 and 86.5 m/m. An uptick in 12-month inflation expectations from 5.1% to 5.3% also led to a drop in folks believing that interest rates would descend. Moreover, not one of the five major components of the survey improved. 

Regional Fed Surveys Reflect Deceleration

A pair of regional Fed surveys pointed to a slower contraction in manufacturing conditions within the central bank’s Richmond district and a deceleration in services momentum for the Dallas district. The former gauge rose from -10 in December to -4 this month, but weaknesses in new orders, shipments and backlogs were countered by buoyant expectations about the future. For the latter indicator, lighter consumption, slower hiring and tall prices weighed on the headline. It fell from 10.8 to 7.4. Similarly, however, business optimism countered some of the sluggishness in other areas.

A Mixed Day for Earnings Reports

The strength of earnings reports this morning varied within manufacturing and consumer-focused segments as illustrated by the following fourth-quarter highlights:

• Boeing (BA) reported losses of $3.86 billion and $11.83 billion for the fourth quarter and full year. The quarterly loss per share of $5.90 was worse than the forecast. Revenue also missed expectations. The company has struggled with quality-control issues, aircraft crashes, and a machinist strike. This past summer, Boeing hired Kelly Ortberg as its new chief executive officer to right the ship. Ortberg says the company is making progress in stabilizing production, improving its culture and streamlining its business. 
• General Motors (GM) top- and bottom-line results substantially surpassed analyst expectations. Additionally, its guidance for various metrics was either in-line or above analyst expectations although CFO Paul Jacobson says the company’s outlook doesn’t include any impacts from potential tariffs or tax reform. While sales of electric vehicles and traditional internal combustion powered cars were strong last year, GM had special charges totaling $5 billion associated with operations in China and pulling the plug on its Cruise robotaxi initiative.
• Royal Caribbean Cruises (RCL) provided fourth-quarter results and full-year guidance that illustrated that strong post-Covid-19 travel demand hasn’t abated, with the company achieving record-booking volumes even after raising its prices. Royal Caribbean’s quarterly earnings per share (EPS) exceeded analyst expectations and revenue was in-line with forecasts. It anticipates profits to jump roughly 23% this year. 
• JetBlue Airways (JBLU) posted mixed results with its quarterly loss of $0.13 per share, lower than the -$0.35 anticipated by analysts; however, its revenue sank 2.1% y/y. Despite declining, revenue outpaced Wall Street’s expectation. The company said a metric used to measure pricing power called revenue per available seat mile this year ranged from a decline of 0.5% to an increase of 3.5% relative to 2024. That disappointed analysts who expected guidance of a 6.8% increase. JetBlue also expects costs per available seat mile, not including fuel, to expand by as much as 10% this quarter. More frequent inspections of Pratt & Whitney (RTX) Geared Turbofan engines will contribute to the higher costs.
• Kimberly-Clark’s (KMB) revenue dipped 0.8% y/y in the final quarter of 2024 and its EPS sank from $1.50 to $1.34. Revenue surpassed analysts’ expectations while earnings were roughly in-line with expectations. The company is well known for products such as Kleenex tissue, Huggies diapers and Scott paper products. Kimberly-Clarks’ North America net sales dropped 0.5% y/y. Beyond the US, sales of the personal care segment and the family care & professional segment dropped 3.1% and 1.2%.

Australia Business Conditions Improve

Australian businesses strengthened their views of economic conditions in December and sentiment has almost returned to the long-term average as depicted by data from the National Australia Bank (NAB). The uptick was an improvement from the decline in November. During 2024’s final month, the bank’s conditions gauge climbed 3 points to +6. Improvements occurred in most sectors with the retail group entering positive territory but still trailing other categories. It was the first positive reading for the retail category since November 2023. Conversely, conditions are the strongest in the service sector. Also in December, business confidence climbed 1 point to -2, well below the long-term average. Confidence in the retail sector exhibited the largest gain while mining and construction experienced the most significant declines.

Singapore Manufacturers Fetch Higher Prices

Singapore’s producer prices for goods reversed a four-month y/y decline in December and recorded a 2.3% y/y increase, according to the Singapore Manufactured Product Price Index (SMPPI). In November, the benchmark fell 4.0% y/y. On a m/m basis, the SMPPI climbed 5.8% during the last month of 2024 after having advanced 1.6% in November. The m/m gain was driven by a 6.8% increase in non-oil items with the petroleum category dipping 0.1%. Price gains were led by the machinery and transport category with higher prices for electrical equipment. In a related matter, import prices fell 3.6% y/y but climbed 1% m/m. Export prices descended 3.1% y/y while strengthening 0.6% m/m.

Equities Stage a Comeback

Equities are taking back roughly half of yesterday’s losses as market participants look ahead to critical corporate earnings results, the Fed meeting and incoming economic data later this week, including GDP, the Employment Cost Index and the central bank’s preferred inflation gauge. But a return to aggressive rhetoric on the trade front from President Trump is weighing on Treasurys while propping up commodities and the greenback.

All major domestic stock benchmarks are trading north with the Nasdaq 100, S&P 500, Dow Jones Industrial and Russell 2000 indices up 1%, 0.7%, 0.5% and 0.1%. Sector breadth is tilted to the downside, however, with just 4 segments moving higher and led by technology, communication services and financials; they’re up 1.5%, 0.5% and 0.2%. Utilities, real estate and energy represent today’s laggards; they’re losing 2%, 0.8% and 0.8%. Turning to fixed-income, currencies and commodities, a lift in tariff concerns is weighing on bond performance, with the 2- and 10-year Treasury maturities changing hands at 4.22% and 4.58%, 3 and 4 basis points (bps) heavier on the session. There is a $44 billion offering of 7-year notes this afternoon, by the way. Pricier borrowing costs are helping the US tender, with the Dollar Index up 48 bps as the greenback appreciates versus all of its major counterparts, including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian contemporaries. Increasingly fearful of disruptions to global commerce, commodity investors are bullish, resulting in gold, crude oil, silver and copper gaining 0.6%, 0.4%, 0.4% and 0.2%.

The Uneven Impact of Tariffs and Geopolitics

Today’s bifurcated market action reflects how Trump bumps can affect different asset classes in distinct ways. Recent increases in Trump’s tariff threats include imposing meaningful across-the-board levies well in excess of 2.5%, with some anecdotal evidence pointing to 20% as the potential number. Meanwhile, Mexico and Canada may be served with import duties of 25% as soon as this Saturday. Against this backdrop, nervousness has been building in Latin America following President Trump’s quarrel with Colombia’s President Gustavo Petro, as the latter acquiesced to receiving deportees after being dealt with a 50% tariff warning. Finally, an increase in international agreements with Washington will serve to ease borrowing costs, stabilize the greenback and provide a supportive environment for equities. More clashes, on the other hand, will offer just the opposite, dealing investors with Trump bumps. 

ForecastEx Weekly Pick

Chief Strategist Steve Sosnick and Senior Economist José Torres like the “Yes” Forecast Contract for final fourth quarter US GDP growth coming in above 1.9%. While we will receive a preliminary view of the result this Thursday, this contract settles on March 27 when the final figures are released. The “Yes,” currently priced at $0.67, pays out a dollar if correct.

Source: ForecastEx

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