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On the last trading day before Christmas, market bulls are fighting to keep the rally alive. This morning’s weaker than expected inflation and new home sales data are proving supportive. Meanwhile, Nike’s revenue flop is adding to the list of companies that can’t grow the top-line. Investors are sick of hearing about efficiencies, productivity and margins amidst appetites that prefer growth. 

Consumers Switch to Goods

This morning’s Personal Income and Outlays report detailed a strong pace of consumer spending last month as shoppers shifted their spending from services to goods. Personal consumption expenditures (PCE) grew 0.2% month-over-month (m/m), missing expectations of 0.3% while coming in flat from the previous month. Adjusted for inflation, real consumption rose 0.3%, a tenth higher than October. Looking under the hood, real goods spending rose a sharp 0.5%, while real services spending gained just 0.2% during the period. Durable goods performed better than non-durables, with the former gaining 0.9% while the latter increased just 0.3%.

Wealth Effects and Labor Boost Spending

Higher wages and capital gains from higher stock and bond prices contributed to last month’s strong consumption. Indeed, personal income rose 0.4% m/m, in-line with expectations and better than October’s 0.2% growth rate. The boost in incomes provided households with budgetary flexibility, as the personal savings rate grew from 4% to 4.1% during the period.

PCE Inflation Helps the Fed

November inflation is old news, but the PCE Price Index did reflect a more optimistic outlook than the Consumer Price Index, which was released on December 12. PCE inflation fell 0.1% m/m, while core PCE inflation, which excludes food and energy, rose just 0.1%. Both segments beat expectations by a tenth of a percent while improving a tenth of a percent from October’s 0% and 0.2% figures. Goods drove the relief in prices, with costs dropping 0.7%. Prices for non-durables fell 0.9% while durables saw costs decline 0.4%. Services costs did increase 0.2% during the period though. These numbers are Fed friendly, with the core PCE inflation running at 1.9% and 2.5% when annualizing the previous 6 and 9 months.The unfriendly news, however, is that the volatile goods category and the stickier services segments have picked up this month, contributing to upside risks in next month’s inflation reports, a dynamic I’ve been talking about in many of my recent pieces.

Jets and Cars Propel Durables

In a separate report released at the same time, November Durable Goods orders rose a whopping 5.4% m/m, hotter than the 2.2% anticipated and recovering from October’s sharp decline of 5.1%. Driving the sharp increase was a recovery in passenger aircraft, with orders for new planes up 80.1% m/m. The computer and automobile segments also contributed to the m/m gain, albeit at more tempered speeds, increasing 3% and 2.8%. Core Capital Goods, which exclude defense orders and aircraft and serve as a proxy for business investment, rose 0.8% m/m, recovering from two consecutive months of decline.

Lower Rates Embolden Builders

Turning to the real estate sector, higher prices deterred buying activity in the new home segment last month. New home transactions dropped 12.2% m/m to 590,000 seasonally adjusted annualized units (SAAU), the lowest level since November of last year. Wall Street was looking for a number closer to 685,000 while October’s figure came in at 672,000. The median transaction price rose from $415,000 to $435,000, as lower interest rates strengthened builder confidence during bidding processes. This is the first cooler number for the sector in a while, with other indicators such as existing home sales and housing starts posting strong beats. It appears that inventories in the existing home market are poised to increase, with prospective buyers focusing their attention there.

Nike Disappoints Investors

In a familiar trend and similar to what FedEx, General Mills, and many others have experienced, Nike shares are getting hammered as the company announces pressure to its revenues and a new focus on cost cutting. The apparel player didn’t meet revenue projections for the second consecutive quarter with sales arriving at $13.39 billion, a 1% gain from $13.32 the same quarter a year ago and less than the $13.43 estimated. Focusing on efficiency, cost-cutting and margins, however, allowed the company to announce a profit beat with earnings arriving at $1.58 billion or $1.03 per share versus the $0.84 anticipated and the $1.33 billion and $0.85 per share from last year. Chief Financial Officer Matthew Friend blamed a strong dollar, weaker consumer demand, a sharp decline in orders from Beijing and other headwinds.

All I See Is Green

Market players are focusing on this morning’s favorable inflation report, with investors buying up almost everything on the last day of trading prior to Santa’s trip down the chimney. All major US equity indices are higher with the small-cap Russell 2000 Index leading; it’s up 1.2%. The S&P 500, Nasdaq Composite and Dow Jones Industrial indices are also higher by 0.4%, 0.3% and 0.2%. Sectoral breadth is terrific, with most sectors amidst a defensive tilt. Utilities and consumer staples are leading; they’re up 0.9% and 0.8%. Consumer discretionary is the only weaker segment on the day, weighed down by Nike’s gloomy outlook; the sector is down 0.5%. Treasuries are near the flatline, however, with yields on the 2- and 10-year maturities down 2 and up 1 basis point (bps) to 4.33% and 3.91%. The Dollar Index is down 15 bps to 101.64 on investor confidence that the Fed will cut in March. The greenback is up against the yen but down versus the pound sterling, euro, yuan, franc and Aussie and Canadian dollars. Crude oil is near the flatline as traders weigh headwinds stemming from the Middle Eastern conflict against Luanda deciding to leave the OPEC + cartel after 16 years. Apparently, Angolan leaders didn’t want to cut the nation’s oil production further, favoring hard currency now rather than loftier prices for the commodity. The ripple effects, specifically others leaving the cartel, is the main risk, as Luanda only produces about 1 million barrels per day and won’t make much an impact. WTI crude is trading at $73.90.

Happy Holidays

I wish everyone a Happy Holiday! Thank you for your audience in what’s been a terrific year. I look forward to an even better 2024.

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