I am literally exhausted from the week. 

I have a short research call at 2:30 pm and another longer one at 3:15 pm. 

I hope during these chaotic times I have served as an anchor of support and sanity! 

Thanks very much for reading my Diary today and all week. 

Thanks to all the editors for helping me out over the last five trading sessions. 

Enjoy the weekend. 

Be safe.

Wolf Street on worsening inflation.

"There is nothing like price to change sentiment."

- The Divine Ms M 

And there is nothing like the end of a fiscal year for mutual funds to mark up their portfolios:

I am heading out to a late lunch.

Back in an hour.

I have taken a small initial short in Apple (AAPL) ($156.18) based on deceleration of the company's services businesses, the material outperformance and the likely emerging price elasticity of demand as it relates to the iPhone in the company quarters immediately ahead - especially the March quarter. 

More on Monday.

The reversal in the integrateds - (XOM) and (CVX) - is accelerating. 

I am pressing the shorts.

Housing continues to fall. 

From Peter: 

Pending home sales in September fell 10.2% m/o/m and that was more than double the estimate of a drop of 4%. That's the 10th month in the past 11 that has seen m/o/m declines and sales are down 30.4% y/o/y. The Northeast saw the biggest drop with a -16.2% m/o/m print.

The industry is certainly challenged by people who can't afford to buy, as we know, but also a supply issue from those that don't want to move out of their 3% mortgage rate. The NAR did some basic math in their press release with the new 7% mortgage rate, "On a $300,000 loan, that translates to a typical monthly mortgage payment of nearly $2,000, compared to $1,265 just one yr ago." While we know clearly what's influencing the housing market right now, the NAR said it well, "The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers."

I'll add again, the only question right now is to what extent do home prices fall from their peak or in some markets at least stop going up. In the S&P CoreLogic August home price index we saw a few days ago, home prices fell in every single city surveyed in their 20 city index m/o/m led by a 4.3% drop in San Francisco, a 3.9% fall in Seattle, a 2.8% decline in San Diego and 2.3% slips in LA and Denver.

These markets also saw 1-3.5% price drops in July. I think the biggest casualty of the housing recession will be more the pace of transactions, rather than pricing, and all the collateral impacts that brings for businesses and workers in carpet, flooring, paint, lumber, real estate brokerage, legal, etc...

On the weaker data, the 10 yr yield dipped below 4% again after trading above on the upside surprise to German CPI which is driving yields in Europe much higher. Maybe also helping, the one yr inflation expectations component in the 2nd reading of UoM consumer confidence was 5% from the 1st print of 5.1% even though that is still up from 4.7% in September.

Pending Home Sales

In times like this my highest priority is to my Limited Partners in my hedge fund, Seabreeze Capital Partners LP. 

As a result, it becomes hard at times to publish developing themes and company analyses on a timely basis - as I am making trading and investing decisions in a regime of heightened volatility. 

So, when things calm down I promise to deliver those columns. 

The good news is that I don't deal with a theoretical buy or sell list - I am practicing what I write!

(CVX) (short!) down on the day after being +$4 1/2.

(OIH) is starting to correct - following yesterday's intraday reversal down - while the integrated oils are up nicely. 

I am short both sub sectors of energy.

Also:

(UAL) , (DAL) and (HLT) are extended.

Keeping longs but selling some calls against core.

Banks have had a nice run and are starting to look a bit tired. 

I am selling some out of the money calls against some of my core positions. 

I would be a buyer down by about 5% percent or so from here.
__________ 

Long PNC, JPM, WFC, BAC, C, FITB, USB.

Short PNC calls, JPM calls, WFC calls, BAC calls, C calls, FITB calls, USB calls.

* On strength...

I have sold all of my (SPY) $382.66 and (QQQ) $274.68.

I have covered my QQQ short calls.

From Peter:

The PCE inflation stats for September were as expected with the m/o/m gains of .3% and .5% for headline and core. The y/o/y gains were 6.2% and 5.1% for each. As stated many times, PCE trails below CPI because of the different contributions from housing and medical care and also how the latter is calculated for each metric. Goods prices continue to decelerate, rising by a still robust 8.1% y/o/y but down from 8.6% in August, 9.6% in July and 10.6% in June. Services inflation in contrast rose by 5.3% y/o/y vs 5% in August, 4.7% in July and 5.1% in June.

As for what this means for Fed policy, they want the fed funds rate at least where the core PCE is and once they get to 4.25-5% by the end of the year they will be close, especially if core PCE moderates from here in coming months.

September income was a touch above expected when we include the upward revision for August. Personal spending was above the estimate, nominally, and could lead to a tweak up in Q3 GDP forecasts at the next revision. The savings rate was 3.1% from 3.4% in August and that is one tenth from matching the lowest since April 2008 which is worrisome considering the cost of living challenges many are experiencing.

Savings Rate

The Employment Cost Index for Q3 rose 1.2% q/o/q as expected and by 5% y/o/y. Most importantly, private sector wages/salaries were up by 1.2% q/o/q and 5.2% y/o/y and total comp including benefits were up by 1.1% q/o/q and 5.2% y/o/y. That y/o/y figure is about double the 20 yr average leading into Covid.

Bottom line to all of today's data, there is nothing we don't already know as CPI came out weeks ago and we know wage growth is trending at around 5%. US Treasuries are weaker today following the selloff in Europe where yields are spiking with 10 yr yields up about 20 bps in German, France and Italy. The selling accelerated after Germany said October CPI was up 11.6% y/o/y vs the estimate of up 10.9%. The m/o/m gain was 1.1%, double the estimate. The German 10 yr inflation breakeven is up 6 bps to 2.38% in response, the highest in a month.

Private Sector ECI y/o/y

As of 8:42 am:

View Chart »View in New Window »

Upside

- (DAIO) +20% (earnings)
- (EGHT) +13% (earnings, guidance)
- (JAKK) +13% (earnings, guidance)
- (PINS) +11% (earnings, guidance)
- (DXCM) +9.6% (earnings, guidance)
- (INTC) +7.0% (earnings, guidance)
- (ACGL) +6.0% (to join S&P 500, replacing Twitter)
- (CMLS) +5.5% (earnings)
- (GILD) +4.7% (earnings, guidance)
- (VRTX) +4.7% (earnings, guidance)
- (PFSI) +3.8% (earnings)
- (SKYW) +3.3% (earnings)
- (TMUS) +3.1% (earnings, guidance)
- (TEX) +2.5% (earnings, guidance)
- (XOM) +2.2% (earnings, guidance; raises dividend, affirms plan to buy back up to $30B in shares through 2023)
- (CVX) +2.1% (earnings, guidance)

Downside

- (DVA) -15% (earnings, guidance)
- (PTCT) -14% (earnings, guidance)
- (EW) -13% (earnings, guidance)
- (AMZN) -12% (earnings, guidance)
- (MPWR) -8.6% (earnings, guidance)
- (LHX) -6.1% (earnings, guidance)
- (ACIU) -4.5% (earnings)
- (COF) -4.4% (earnings)
- (ABBV) -3.9% (earnings, guidance; raises dividend)
- (ETSY) -3.9% (names Rachana Kumar Chief Technology Officer, effective Jan 1st, 2023)
- (ALRM) -3.7% (reports prelim Q3 revenue)
- (GNTX) -2.8% (earnings, guidance)
- (PCG) -2.5% (hearing 35M share block secondary being shopped)
- (NOV) -2.3% (earnings)
- (FSLR) -2.0% (earnings, guidance)

While Germany is expected to print a near 11% consumer price inflation rate y/o/y for October at 8am est today, France said its CPI was up 7.1% y/o/y, Spain's was up 7.3% y/o/y and to be followed by the full Eurozone figure on Monday of 9.8% as forecasted, some members of the ECB are already getting nervous after hiking by another 75 bps to 1.50% yesterday. That was hinted at by Lagarde at her press conference when she said the move was not unanimous (where a few wanted a smaller hike) as some are worried about the economic growth impact of the increases on top of an already weak economic situation in the region.

Governing Council member Francois Villeroy today said "We're not subscribed to what one calls jumbo increases. We're in no way obligated during our next meeting to reproduce the increase of 75 bps that we did in September and October."

On the other hand, others want to keep on powering ahead. Governing Council member Muller said "It is quite clear that interest rates will continue to rise in the euro area in the near future. Interest rates are still rather low in historical comparison and do not yet have a clear restrictive effect on economic activity or price rises." Council member Simkus is pretty hawkish and said "Inflation is still strong" and "I have no doubt we'll have another increase, that is will have to be substantial." Sounds like he wants another 75 bps.

As does Peter Kazimir, another Council member, who said "We will pass through the neutral rate - regardless of where anyone currently sees it - like a runaway train. We need to get monetary policy into the so-called restrictive environment at least for a certain period."

The net result of all this talk, with the tough rhetoric offsetting the softer ones, has the German 2 yr bund yield up 17 bps after falling by 17 bps yesterday. The Italian 2 yr yield after falling by 30 bps yesterday is up by 18 bps today. The ECB will also be discussing QT but we were left with no more clues on when it will start in 2023.

What doesn't get enough discussion about the implications of rate hikes is what it is doing to the interest expense of governments, particularly the US. I've talked about higher rates for companies (particularly yesterday) and we know the mortgage rate impact too for households but government owed interest is skyrocketing. Here is a chart of the interest payments now being made by Uncle Sam, seen in yesterday's GDP report at a seasonally adjusted annual rate for Q3, now north of $700b. For perspective, for the fiscal yr 2023, the US government is expected to spend $773b on the military.

US Interest Payments as of Q3 at a seasonally adjusted annualized rate

On the day Tokyo said October CPI for this city rose 2.2% y/o/y, 2 tenths more than expected and up from 1.7% in September, Kuroda and the BoJ said they are going to keep on keeping on with easing. Also, the labor market is getting tighter there as the September jobs to applicant ratio rose to 1.34 from 1.32, the highest since March 2020 when it was at 1.39.

Kuroda said "The outlook report shows inflation in between 1% and 2% for 2023 and 2024. So at the moment we don't see a rate hike coming or an exit from policy." And of course he talks ZERO blame for the yen weakness as he said "YCC is a method of monetary easing, and I don't think it particularly impacts yen weakness. Past US-Japan rate differentials have hardly anything to do with dollar-yen moves if you put them on a chart."

Kuroda is either delusional or just a puppet for the Ministry of Finance who continues to need this low level of interest rates because of the extraordinary high level of debt they have. In response, the 10 yr JGB yield fell a touch under .25% and the 40 yr yield was down by 3 bps while the yen is weaker.

Before I get to some earnings call information, I just want to say that the curtain has come down on the mega cap tech stocks as a homogenous group that dominates everything in the market. Every bear market eventually gets to most stocks and the once untouchable end up being mere mortals. They are great companies but still subject to the same economic vagaries as everyone else.

Here were some important conference call comments from yesterday:

Amazon

"With the ongoing macroeconomic uncertainties, we've seen an uptick in AWS customers focused on controlling costs."

"As the dollar continued to strengthen during the quarter, the FX impact was higher than the 390 bps impact we had incorporated into our Q3 guidance. This represents a headwind of approximately $900m more than we initially guided to."

"The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend. As the third quarter progressed, we saw moderating sales growth across many of our businesses, as well as the increased foreign currency headwinds I mentioned earlier, and we expect these impacts to persist throughout the fourth quarter. As we've done at similar times in our history, we're also taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere."

Apple

"Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and Covid related impacts to our business do not worsen from what we are projecting today for the current quarter."

Overall, we believe total company y/o/y revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative y/o/y impact from FX. Second on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially y/o/y during the December quarter. Specifically on services, we expect to grow but to be impacted by the macroeconomic environment increasingly affecting FX, digital advertising and gaming."

"We were really pleased with the broadness of the iPhone strength last quarter."

AutoNation

"New vehicle demand remained strong in the quarter and although we ended September with slightly higher inventory levels as a result of increased y/o/y shipments, new vehicle inventory continues to be a constraint and we still remain at historically low days of supply."

"Used vehicle margins were down y/o/y, which frankly was to be expected because as you'll recall, last year we were in a highly unusual situation of appreciating used vehicle values, and today and through the quarter, used wholesale dynamics have largely returned to a more normalized pattern of depreciation."

"New vehicle inventory in the Group is being appropriately managed, I think, with quarter end supply of just about 30 days. Mix, however, remains a key focus for us as we continue to see availability issues in the sub $20,000 price band, where inventory levels y/o/y are approximately 25% lower, which, as a result, despite continued strong demand in this part of the segment, I think, is restricting overall used vehicle volumes."

McDonald's

"As the macroeconomic landscape continues to evolve and uncertainties persist, we continue to consider a wider range of scenarios as we look ahead. As I've said before, our base case scenario going forward is that we expect to experience a mild to moderate recession in the US and one that will be potentially a little deeper and longer in Europe."

In Thursday's column, The Fed's Zero Interest Rate Policy Has Led to Poor Capital Allocation Policy by Many Firms and to Poor Investment Decisionsfrom yesterday, I pointed out that META bought back $42 billion of stock at an average price of $300/share. 

The only one that executed capital allocation as poorly as Zuckerberg was Cathie Wood - but it's close. 

However, there are lots of others (e.g., Seagate (STX) ) on the list - some of whom have been left with terrible balance sheets. 

The poster child of capital allocation has been Apple (AAPL) . But even Apple ended the quarter with $169 billion in cash and marketable securities - but its net cash was down to just $49 billion, the lowest since 2010! 

View Chart »View in New Window »

From yesterday: 

Oct 27, 2022 ' 10:10 AM EDT DOUG KASS

The Fed's Zero Interest Rate Policy Has Led to Poor Capital Allocation Policy by Many Firms and to Poor Investment Decisions

* More examples of the tide going out and exposing us to who is swimming naked

* Excessive monetary growth gave capital to the likes of Chamath Palihapitiya, Cathie Woods and Mark Zuckerberg

* And now we see the consequences

An extended period of low interest rates has contributed to poor investment decisions - remember the popularity of (COIN) , (CVNA) , (HOOD) , (PYPL) , Et al. - and even worse corporate capital allocation strategy as corporations were moved to buy their own shares high with "free money".

Regarding wrong footed corporate decisions: (META) has purchased over $42 billion of its own stock at an average price of about $300/share (META was recently trading at about $100/share).

Or look at Seagate (STX) which spent an extraordinary amount of money on buybacks, which are really retiring executive stock option exercises and supporting their stock price - instead of doing the right thing of cleaning up its balance sheet by deleveraging.

Now, with Seagate missing on earnings and the share price getting hammered ($115 to $50!), the company has no dry powder or inclination left to buy stock as, after buying over $400 million of stock in the prior quarter, and increasing the company's debt levels from $5.6 billion to $6.2 billion, Seagate has suspended its share buyback.

A larger point can be abstracted.

It never should have been as easy as it was to begin with - but that is what easy money created by The Fed and our government does.

When money is free, the money is sent to places that it should not have gone to - in an ARK (ARKK) inspired buying binge of overvalued tech stocks and on the buyback of overvalued company shares.

And the money has ended up, as it always does when cycles end, in money heaven.

Good stuff from my buddy Lance:

This is a valuable chart for short term traders:

View Chart »View in New Window »

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

This daily feature is like inside baseball. I try to show you and write about what I believe thoughtful hedge fund managers are looking at when they awake, setting the stage for their strategy in the day. The market is a complicated mosaic and the more info you have the better trader and investor you will be! (At the request of some subscribers I am streamlining this column this morning.)

* To put it mildly, yesterday was a busy day... and night!

* The markets suffered yesterday (and after the close) from the continued tech wreck of poor quarterly releases and weak guidance.

* A cautionary tale (as I noted over the last two days) has been a market that moved into overbought territory as measured by the S&P Oscillator (more on this below). This move to an overbought reading clearly broke out of the oversold condition that existed for the last few weeks. It was for this reason (and some others) that I was a steady seller into the early week strength. My columns/notes in my Diary clearly indicated that I had reduced my net long exposure Tuesday-Thursday. (Remember Wally Deemer's GM story; well, like General Motors, the tech stocks didn't die in vain! RealMoney (thestreet.com)I added back small after Thursday night's carnage -- buying dislocations in Amazon (AMZN) , Microsoft (MSFT) and others -- and if futures remain low I will be a buyer this morning.)

* In my column yesterday morning on the S&P s resiliency I explained the move of Ss over Ns (It was one of three mini openers that merit reading.) While lower rates buffered the S&P losses on Wednesday, Thursday's losses in both the regular trading session and after hours were not dulled by lower interest rates in the aftermath of Meta Platforms' (META) and Amazon's big misses.

* "All investment roads lead to interest rates" continues to be the market's mantra and the watchword of my investing faith. But rates moved to backstage as an influence as profit disappointments dominated the market's landscape.

* Away from the very short term -- goodbye TINA (There Is No Alternative), hello TATA (Treasuries Are the Alternative) -- bonds now are providing a reasonable alternative to stocks and, for the first time in years, bonds provide an opportunity for income and even some price appreciation after the biggest bond rout in history this year. I continue to believe that we are at the terminal stage of the rate advance. Indeed recent results at Microsoft, Alphabet (GOOGL) , META and many economically sensitive industrial companies signal renewed business weakness and reinforce my positive view on bonds. Fixed-income products remain especially compelling on a return basis for those who have low risk tolerance and don't want to be involved in the growing chaos, uncertainty and volatility in the equity markets. (I repeat this daily for a reason!)

* S&P futures were consistently lower overnight, bu, thus far have not fallen apart. Again, I am looking to buy weakness

* It is interesting to note that the VIX has barely moved Thursday and Friday and has dropped from the low 30s to 27 from three weeks ago. A still elevated VIX (implying daily moves of about 1 1/2%) is providing a lot of intraday volatility and opportunity for the facile investor and trader. However I want to again emphasize that more conservative investors should take action and reduce position sizes in order to lower portfolio risk (VAR). In other words, your portfolio's change in daily value is growing more extreme. One should adjust exposures in this market based on your risk appetite and risk profile. The last two days have been a lesson.

* I continue to be alert to signs of dollar funding stress with the three-month FRA/OIS spread widening. That said, the high-yield market has been stable in spreads price and yield.

* The UK and the European Union's economic and financial uncertainty and instability, punching above their weight -- of taming inflation on one hand and resuscitating economic growth on the other -- remain the concern du jour. As I have previously written, who would have thought several months ago that UK policy would be the tail that wags the US market's dog?

* Elevated global short-term interest rates remain a market hurdle and could be a restriction for meaningful gains from here; that has been my view for a while. Anyway, this results in me looking at UK gilt yields and the pound's value when I arise at 4 am, even before reading about the baseball playoffs (go Phillies!). This morning sterling was little changed and gilt bond yields were higher.

* The recent strength in global bond prices (lower yield) has reversed a bit this morning. The yield on the U.S. 2-Year Note was +5 basis points. The yield on the 10-Year was up by eight basis points, to yield 4.014%. The 10-year UK gilt yield was +7 basis points. I sold my (TLT) three days ago for a small gain.

* Currencies were stable this morning.

* Market inflation data have noticeably moderated, serving to soften labor and hard/soft commodities in recent months. As well, supply chain disruptions have moderated and the housing market has hit a wall. This morning most commodities were again lower.

The market (and money) never sleeps -- and neither do I, it appears!

I described the importance that overnight futures trading holds for me here. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures hold opportunities as they are (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

After the tech wreck on Thursday night, the S&P and Nasdaq futures were lower, but not appreciably so.

In recent weeks, during these volatile markets, I have kept a bead on volatility. In recent days the VIX has moved from the low 30s to 27.27 (-0.12 this morning). This has benefited my S&P straddle .

Gold has recently shown some life after being weak for months. However the precious metal is lower by $13 this morning..

This morning Brent oil is lower by $0.64 to $96.32/barrel. Late last week I started a small short in VanEck Oil Services ETF (OIH) and I added to the position yesterday at over $300 (I have shorted Chevron (CVX) and Exxon Mobil (XOM) on earnings blowouts this morning). Energy equities have materially outperformed the commodity as the momentum gang has glomed onto the sector, which has been the best-performing group this year in the S&P

Bond yields continue to represent the greatest risk to equities. As noted above, yields around the globe were higher this morning.

The S&P Oscillator finally moved positive last Friday, at 0.16%, after being in the range of -3% to -4% for about 10 days. It closed on Monday at 1.79% and gapped to 4.16% at Tuesday's close. Wednesday it climbed further to 5.59% and this morning it stands at 5.30%. As noted, with the emerging overbought I have stepped off the accelerator of adding to equities and have put on the brake over the last three days a bit as the oscillator has been a good short-term trading tool over the last few months.

Cryptocurrencies have inched higher in recent days but are lower this morning (by $400) to $20,200. Like gold, I continue to have zero interest in any cryptos.

S&P futures peaked at -8 and bottomed at -45. At 6:34 am ET futures were -24 handles.

Nasdaq futures peaked at -49 and bottomed at -170. At 6:36 am ET futures were -117 handles.

Here is a synopsis (link) of some of my columns I believe were important, or in the event you were out yesterday. The principle intent is to review the logic of my market moves and other factors:

Three good ones (I think!):

I Am So Old I Remember When People Cared About Cathie Woods' Trades RealMoney (thestreet.com)

Why the S&P May Be Resilient Despite the Tech Wreck Doug Kass: Why the S&P 500 May Stay Resilient Even in the Face of a Tech Wreck - RealMoney (thestreet.com)

The Fed's Zero Interest Rate Policy Has Led to Poor Capital Allocation Policy by Many Firms and to Poor Investment Decisions RealMoney (thestreet.com)

Reduced Exposure RealMoney (thestreet.com)

Three Stocks on A Roll RealMoney (thestreet.com)

This next section provides transparency and a further record in memorializing my good and bad investments. Frankly, there are a lot of disingenuous actors who smile and get away in the business media with disastrous recommendations of individual stocks and in piss poor market projections.

Here are some of my trades for Thursday: 

* Reduced Exposure

DOUG KASSOct 27, 2022 2:15 PM EDT

I continued to reduce my net long exposure today. 

* Sold PINS (I am a moron!) 

* Oct 27, 2022 ' 09:55 AM EDT DOUG KASS

Today's Trades

Added to (META) (small at $98.98), (MSFT) $229, (GOOGL) $93.59.

Shorted (small at $301) (OIH) .

* Oct 27, 2022 ' 05:33 PM EDT DOUG KASS

Buying the After-Hours Whoosh

I purchased the whoosh lower in the after hours in Alphabet (GOOGL) , Microsoft (MSFT) , Amazon (AMZN) , (SPY) and (QQQ) . 

* In Friday's premarket trading I am shorting CVX $181.50 and XOM $110 on blowout EPS.

Thursday, October 27, 2022

Don't Hold Your Breath for a Fed Pivot

Third quarter GDP growth at 2.6% is only a very small piece of good news. Unexpectedly strong, and probably temporary, export growth boosted GDP growth by 2.8% and, absent this effect, there would have been a small contraction. Housing declined by 26.4% annualized, slightly worse than expected, which pushed growth GDP down by 1.4%.

A deeper look at the report yields two takeaways. First, business investment, which is often the next domino to fall after housing, held up better than expected. Equipment, for example, grew at an encouraging 10.8% annualized rate. Second, combining the GDP report with data on employment and capacity utilization suggests that labor productivity grew only around 0.3% (official estimates are not yet available). We expected 1% growth. This is bad news for upcoming inflation data and further reason why investors shouldn't hold their breath for a pivot from the Fed (more on this later). Labor productivity will recover within the next two years. If weak 3Q2022 productivity growth suggests that this recovery may not happen until next year, then today's data may ironically reduce the risk of a 2023 recession.

Figure 1: Core Capital Goods (blue) versus Pre-Pandemic Trend (red)

The week's worst news is October core capital goods showing a 0.7% m/m decline. This drop is concerning because it is the first direct evidence on how well fourth quarter business investment, which closely follows core capital goods, is holding up. There are some important caveats. Core capital goods remain above their pre-pandemic trend, some decline was to be expected, and it is a noisy series where transitory declines are common. Even so, the bad capital goods report trumps the decent GDP data, and we are upgrading our own odds of a recession through 2023 from 35% to 40%.