Visa & Mastercard’s “crystal ball”
Many look to the banks for economic guidance. In our opinion the major card network providers earnings tend to provide an equally useful window into the state of the world (and often less oblique).
Visa and Mastercard both reported and there’s two things to digest. The first is that the consumer continues to spend – Visa processed about $3.01 trillion of transactions, and Mastercard about $1.73 trillion. The second is that spending has slowed down – that $3.01 trillion of flows that Visa saw only saw about 1.7% growth YoY (Mastercard did better, growing +11%, but it’s a relative volume lightweight to the mighty Visa). This is significant! That’s a big slowdown from 16% YoY for Visa at the end of 2021; that’s 15% deceleration. It’s a little bit of data, however small, that the Fed’s mission to reduce inflation is starting to have some impact. We still think there’s more to go.
Mastercard’s management actually gives us an idea of where consumer spending is being driven from – and surprise, surprise – it’s the labour market:
We do expect consumer spending to hold up relatively well in this environment driven in part by the strong labour market. It is important to remember that we are coming off a year of strong growth as we lap the effects of the pandemic, and we expect our go-forward growth rates to moderate accordingly.” (emphasis ours).
And about the labour market — here’s the latest data, which suggests that initial jobless claims remain low. We’ve written about this before in the context of tech unemployment, but it’s worth keeping in mind that this remains the case and will keep driving consumer spending.
But is there a hope of a soft landing?
Powell and the Fed have their bout of hard data that tightening is working and the Fed’s meeting this week should be interesting. Note deflation in two core areas- services and services ex-housing. Housing and utilities remains stubbornly inflated, which gives us pause; on the other hand, housing ex utilities represents half the categories spending – and that has deflated well. The read-through here is that there is some slowdown and the question is, what will Powell do? Keynes wrote “when the facts change, I change my mind, what do you do?” and here is some data which suggests that the facts have changed. We think a 25 bps rate hike is likely and think the odds of a pause in rate hikes – with the hope of a soft landing – is far more likely than it was last month. This should drive equity markets higher further. The question remains, though, will that soft landing actually happen?
One last chart re: soft landings
Now here’s a chart of the 2006 cycle. Note the pause. Equities rose +20%. Note the aftermath. This is your reminder that cycles take time to play out, and pause is no guarantee of a soft landing. It’s hope of a soft landing. Like ACDC sang, “It’s a long way to the top if you wanna rock ‘n’ roll”
Other Misc. from last week
LVMH reported strong earnings – revenue increased 23 per cent to €79.2bn whilst net profit grew 17 per cent to €14bn. This is in stark contrast to peers like Richemont and Burberry, who have less exposure to the US and are more reliant upon Asia-Pacific. Luxury has remained incredibly resilient in the face of a recessionary environment — the read-through is obvious; those consumers who buy Louis Vuitton bags and Dior clutches haven’t been affected much, yet. It’ll be interesting to see if they are, and when they are. There is a myth that luxury is recession-proof. While it’s true luxury economics insulate companies somewhat – mostly because they command higher margins – luxury spending still fell during the ‘08 GFC. In other news, Kering appointed a new designer to Gucci, Sabato De Sarno, who comes from Valentino. This is a risk – De Sarno isn’t well known, and Gucci represents about half of Kering’s revenues (incidentally, this is why we stay well clear of Kering – too much reliance on one brand-of-the-most is a risk in itself). Kering is wanting to organise Gucci in a more structured way, and less around a star persona. We’re watching with interest, but we don’t have a dog in this fight. Overweight LVMH, no position Kering.
Upcoming earnings – big tech continues to weigh in
Alphabet, Amazon and Apple all report this week. Looking for signs of slowing traction in GOOG’s ad segment; looking to AMZN for cloud growth metrics and wondering if the Apple juggernaut will ever slow. Certainly, Apple suppliers have reported disappointing earnings – but they’re hardware. They’re the orange, and Apple is the juicer. Apple may yet surprise again.
We expect more losses at Amazon as job cuts and restructuring is accounted for. We’re not interested in this. We’re interested in underlying growth – is retail growing? How many Prime subscriptions are there? And of course, how is the AWS business going? MSFT reported better-than-expected cloud metrics so we are cautiously optimistic here.
Estee Lauder and Starbucks also report. EL had a disappointing quarter last go around, mostly impacted by China and supply chain disruptions. We’re looking closely for China data and expecting a slight sales rebound, as some of the reopening in China should reflect on the income statement. Starbucks again is a China story – the company’s second biggest market, after the US. We’re looking for growth metrics there and globally we’re looking for an indication of price elasticity – was there organic growth, or was growth driven by price increases? Our thesis has long been that there’s a “point of pain’ for consumers – at some point, the consumer has got to say “ok, that’s enough”. We didn’t see it last quarter with Starbucks, but we did start to see it with consumer giants like Proctor and Gamble and Unilever.
New Zealand Market Movers
The New Zealand market (NZX 50 Index, -0.02%) was mostly flat on Monday, as markets try to gauge the extent of Fridays’ flooding on Auckland and upper north island.
Tower (-3.5%) had initially fell lower but recovered earlier after notifying the market late in the afternoon so far it had received 1900 claims. TWR’s reinsurance cover kicks in for catastrophe cover at NZ$11.875m providing up to $934m in cover and providing tower with protection to this limit. Claim costs up to this amount are already set aside as part of TWR’s NZ$30m provision for large claims in the 2023 full year and guidance of Underlying NPAT of NZ$27m to NZ$32m and dividend of 6.5cps is still maintained.
Auckland International Airport was also a touch lower as flooding caused disruption to flight schedules.
Australia Market Movers
The Australian market (ASX 200 Index, -0.2%) fell marginally on Monday, with insurers IAG (-3.7%) and Suncorp (-2.0%) in a similar boat to Tower, dragging down the market. IAG has already received more than 5000 claims so far.
Europe Market Movers
European markets (Stoxx 600 Index, -0.2%) closed marginally lower on Monday with most sectors in the red, led down by Technology (-1.7%).
Both the Bank of England and the European Central Bank deliver their respective interest rate decision this week. The BoE is expected to raise UK interest rates from 3.5% to 4%, which would be its highest level since 2008. The ECB is similarly expected to hike its rate by 50-basis-points.
US Market Movers
US markets (S&P 500 Index –1.3%) have paused its January rally in time for the Federal Reserve’s latest interest rate decision due Thursday 8.00am (NZDT). Markets are expecting a 25-basis-point rate increase.
It is also the busiest week for corporate earnings, with McDonald’s (-0.6%), Apple (-2.0%), Meta Platforms (-03.1%), Amazon.com (-1.7%), and Alphabet (-2.7%) all set to update the market.
On Monday, Ford Motor Company (-1.8%) announced it will be increasing production and cutting prices (up to US$5,900) for its electric Mustang Mach-E crossover following industry leader Tesla’s (-6.3%) price cuts of up to US$13,000 for its Model Y.
What Markets will be Watching this Week (UTC +13)
Monday
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Tuesday
AU Retail Sales MoM
Wednesday
NZ Unemployment Rate
EU Inflation Rate YoY
US Mcdonald’s Earnings
Thursday
US JOLTS Job Openings
US Federal Reserve Interest Rate Decision
US Meta Platforms Earnings
Friday
UK Bank of England Interest Rate Decision
EU European Central Bank Interest Rate Decision
US Apple Earnings
US Alphabet Earnings
US Amazon.com Earnings
US Starbucks Earnings
US Estee Lauder Earnings
Saturday
US Non Farm Payrolls