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<\/figure>\n\n\n\nAccording to the Bureau of Economic Analysis\u2019s report, personal spending was flat in March, losing momentum from the 0.1% gain achieved in February. The 3.7% consumption gain occurring in yesterday\u2019s first-quarter GDP report was driven by fierce activity in January as February and March personal spending numbers reflect a severely weakened consumer. In fact, January was the only month in which the rate of consumer spending growth exceeded the rate of inflation. On balance, the consumer lost momentum further in March and is likely to continue losing momentum as we progress through the year. The report also showed that personal incomes came in stronger than expected, up 0.3% m\/m versus the expectation for 0.2% and an unchanged pace from the previous month. The boost in income alongside the drop in spending resulted in the personal savings rate increasing 30 basis points (bps), or from 4.8% to 5.1%.<\/p>\n\n\n\n
This morning\u2019s Employment Cost Index points to compensation costs that continue to pose a problem for the Fed. Employment costs rose 1.2% on a quarter-over-quarter basis during the first quarter, accelerating from the previous quarter\u2019s 1.1% gain. On a y\/y basis, employment costs declined modestly from 5.1% in the fourth quarter of 2022 to 4.9% in first quarter of 2023. Again, progress is occurring, but at a speed that requires an abundance of patience.<\/p>\n\n\n\n
Investors Favor Cyclical Stocks Today<\/strong><\/h2>\n\n\n\nMarkets are modestly higher today, with cyclicals leading and tech lagging on disappointing earnings. The S&P 500 Index is up 0.4% while the tech-heavy Nasdaq Index is up 0.2%. Bond yields are down, led by the long end as recession fears heighten while Fed tightening expectations remain strong. Hawkish Fed expectations are propelling the Dollar Index, it\u2019s up 0.3% to 101.81. WTI Crude oil is up modestly, rising 0.4% to $75.04 a barrel, as a weakening demand outlook led to a sharp price correction this month.<\/p>\n\n\n\n
Consumers Back Away From Purchasing Goods<\/strong><\/h2>\n\n\n\nThe following quarterly results for Amazon and Columbia Sportswear Company illustrate how consumers are backing away from spending on goods.<\/p>\n\n\n\n
\n- Amazon posted $3.2 billion in quarterly profits or $0.31 earnings per share (EPS) for the first quarter compared to the net loss of $3.8 billion or $0.38 for the year-ago quarter. Earnings easily exceeded the analyst consensus expected EPS of $0.21. Amazon\u2019s revenue of $127.4 billion increased 9.4% from the year-ago quarter and exceeded the consensus expectation of $124.5 billion. Revenue growth was driven primarily by advertising and cloud services because the company\u2019s Amazon website sales were virtually flat y\/y, signaling consumers are tapped out on buying goods. Amazon expects its current-quarter net sales to increase to between $127 billion and $133 billion, a 5% to 10% y\/y increase.<\/li>\n\n\n\n
- Columbia Sportswear generated $46.2 million in earnings, or EPS of $0.74, a significant decline from the $66.8 million in earnings or $1.04 a share for the year-ago quarter. Analysts expected EPS of $0.88. However, revenue of $820.6 million climbed 7.8% y\/y. Rather than being driven by strong activity at cash registers, Columbia\u2019s sales growth was driven, in part, by supply chain improvements allowing the company to ship spring inventory in the first quarter, unlike in 2022, when supply chain problems caused a delay in orders. Earnings were hurt by the company resuming more normal levels of promotions compared to the year-ago quarter that had exceptionally low promotions. Selling, general, and administrative expenses (SG&A) also increased because of higher supply chain costs associated with elevated inventory levels. Columbia also occurred costs associated with a transition in third-party logistics and it also increased its investments in its direct-to-consumer channel.<\/li>\n<\/ul>\n\n\n\n
Sticker Shock May Be Kicking In<\/strong><\/h2>\n\n\n\nConsumers continue to flock to out-of-home dining but appear to be more price conscientious. In addition to dining out and enjoying other forms of entertainment, consumers are still splurging on travel, with the following examples illustrating these trends:<\/p>\n\n\n\n
\n- McDonald\u2019s Corporation posted net income of $1.8 billion or $2.45 per share for the first quarter, up from the net income of $1.1 billion or $1.48 a share for the year-ago quarter. McDonald\u2019s first-quarter revenue was $5.89 billion compared to $5.66 billion for the year-ago quarter. It exceeded the analyst consensus expectation of $5.59 billion. Impressively, McDonald\u2019s same-store sales grew 12.6% y\/y, with U.S. restaurants benefiting from higher prices and increased traffic, but McDonald\u2019s CEO Chris Kempczinski said consumers appear to be curtailing their spending and pushing back against price increases, in part by ordering fewer items per meal.<\/li>\n\n\n\n
- BJ\u2019s Restaurants reported first-quarter net income of $3.48 million or $0.15 a share compared to $1.46 million or $0.06 a share for the year-ago quarter. Analysts expected $0.04 of net income per share. The company\u2019s first-quarter 2023 revenues of $341.28 million exceeded the consensus expectation by 2.74% and was up 14.2% from the $298.73 million in revenues from the year-ago quarter. Like McDonalds, BJ restaurants experienced strong restaurant traffic with comparable restaurant sales increasing 9% y\/y.<\/li>\n\n\n\n
- American Airlines reported net income of $10 million in the first quarter and adjusted EPS of $0.05. The EPS matched analysts\u2019 expectations. In the year ago quarter, American Airlines reported a negative net income of $1.63 billion, or $2.52 per share. Its recent quarter revenue of $12.19 billion fell short of the expected $12.20 billion but was up 37% y\/y as air traffic demand has increased substantially. The company is optimistic about growing demand for air traffic but says its future growth may be limited by delays in receiving new aircraft.<\/li>\n<\/ul>\n\n\n\n
Investors Look to Next Week\u2019s Fed Meeting<\/strong><\/h2>\n\n\n\n\nWith a 25-bp hike expected at next week\u2019s meeting and 28% odds of another 25-bp hike in June, the market will be looking to Chairman Powell\u2019s comments next week. As the Chairman approaches the mound, market players will be focused on how much more tightening is needed to subdue inflationary pressures.<\/p>\n<\/blockquote>\n\n\n\n
Collectively, the Fed\u2019s 475 bps of rate hikes and $400 billion of quantitative tightening alongside a contracting consumer during two of the last three months have failed to suppress price pressures to levels more consistent with the central bank\u2019s 2% target. With a 25-bp hike expected at next week\u2019s meeting and 28% odds of another 25-bp hike in June, the market will be looking to Chairman Powell\u2019s comments next week. As the Chairman approaches the mound, market players will be focused on how much more tightening is needed to subdue inflationary pressures. With risks tilted towards not doing enough, I expect Powell to deliver a message of higher-for-longer as he leaves the door open for more rate hikes. With yesterday\u2019s GDP reflecting a sharp deceleration from 2.6% to 1.1% on a q\/q basis, alongside a slowing consumer and persistent Fed in the present, odds of a recession during the second half of this year are high.<\/p>\n\n\n\n
The following quarterly results for Amazon and Columbia Sportswear Company illustrate how consumers are backing away from spending on goods.<\/p>\n\n\n\n
- \n
- Amazon posted $3.2 billion in quarterly profits or $0.31 earnings per share (EPS) for the first quarter compared to the net loss of $3.8 billion or $0.38 for the year-ago quarter. Earnings easily exceeded the analyst consensus expected EPS of $0.21. Amazon\u2019s revenue of $127.4 billion increased 9.4% from the year-ago quarter and exceeded the consensus expectation of $124.5 billion. Revenue growth was driven primarily by advertising and cloud services because the company\u2019s Amazon website sales were virtually flat y\/y, signaling consumers are tapped out on buying goods. Amazon expects its current-quarter net sales to increase to between $127 billion and $133 billion, a 5% to 10% y\/y increase.<\/li>\n\n\n\n
- Columbia Sportswear generated $46.2 million in earnings, or EPS of $0.74, a significant decline from the $66.8 million in earnings or $1.04 a share for the year-ago quarter. Analysts expected EPS of $0.88. However, revenue of $820.6 million climbed 7.8% y\/y. Rather than being driven by strong activity at cash registers, Columbia\u2019s sales growth was driven, in part, by supply chain improvements allowing the company to ship spring inventory in the first quarter, unlike in 2022, when supply chain problems caused a delay in orders. Earnings were hurt by the company resuming more normal levels of promotions compared to the year-ago quarter that had exceptionally low promotions. Selling, general, and administrative expenses (SG&A) also increased because of higher supply chain costs associated with elevated inventory levels. Columbia also occurred costs associated with a transition in third-party logistics and it also increased its investments in its direct-to-consumer channel.<\/li>\n<\/ul>\n\n\n\n
Sticker Shock May Be Kicking In<\/strong><\/h2>\n\n\n\n
Consumers continue to flock to out-of-home dining but appear to be more price conscientious. In addition to dining out and enjoying other forms of entertainment, consumers are still splurging on travel, with the following examples illustrating these trends:<\/p>\n\n\n\n
- \n
- McDonald\u2019s Corporation posted net income of $1.8 billion or $2.45 per share for the first quarter, up from the net income of $1.1 billion or $1.48 a share for the year-ago quarter. McDonald\u2019s first-quarter revenue was $5.89 billion compared to $5.66 billion for the year-ago quarter. It exceeded the analyst consensus expectation of $5.59 billion. Impressively, McDonald\u2019s same-store sales grew 12.6% y\/y, with U.S. restaurants benefiting from higher prices and increased traffic, but McDonald\u2019s CEO Chris Kempczinski said consumers appear to be curtailing their spending and pushing back against price increases, in part by ordering fewer items per meal.<\/li>\n\n\n\n
- BJ\u2019s Restaurants reported first-quarter net income of $3.48 million or $0.15 a share compared to $1.46 million or $0.06 a share for the year-ago quarter. Analysts expected $0.04 of net income per share. The company\u2019s first-quarter 2023 revenues of $341.28 million exceeded the consensus expectation by 2.74% and was up 14.2% from the $298.73 million in revenues from the year-ago quarter. Like McDonalds, BJ restaurants experienced strong restaurant traffic with comparable restaurant sales increasing 9% y\/y.<\/li>\n\n\n\n
- American Airlines reported net income of $10 million in the first quarter and adjusted EPS of $0.05. The EPS matched analysts\u2019 expectations. In the year ago quarter, American Airlines reported a negative net income of $1.63 billion, or $2.52 per share. Its recent quarter revenue of $12.19 billion fell short of the expected $12.20 billion but was up 37% y\/y as air traffic demand has increased substantially. The company is optimistic about growing demand for air traffic but says its future growth may be limited by delays in receiving new aircraft.<\/li>\n<\/ul>\n\n\n\n
Investors Look to Next Week\u2019s Fed Meeting<\/strong><\/h2>\n\n\n\n
\n
With a 25-bp hike expected at next week\u2019s meeting and 28% odds of another 25-bp hike in June, the market will be looking to Chairman Powell\u2019s comments next week. As the Chairman approaches the mound, market players will be focused on how much more tightening is needed to subdue inflationary pressures.<\/p>\n<\/blockquote>\n\n\n\n
Collectively, the Fed\u2019s 475 bps of rate hikes and $400 billion of quantitative tightening alongside a contracting consumer during two of the last three months have failed to suppress price pressures to levels more consistent with the central bank\u2019s 2% target. With a 25-bp hike expected at next week\u2019s meeting and 28% odds of another 25-bp hike in June, the market will be looking to Chairman Powell\u2019s comments next week. As the Chairman approaches the mound, market players will be focused on how much more tightening is needed to subdue inflationary pressures. With risks tilted towards not doing enough, I expect Powell to deliver a message of higher-for-longer as he leaves the door open for more rate hikes. With yesterday\u2019s GDP reflecting a sharp deceleration from 2.6% to 1.1% on a q\/q basis, alongside a slowing consumer and persistent Fed in the present, odds of a recession during the second half of this year are high.<\/p>\n\n\n\n