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Good afternoon,

The bond market is its hottest this century, with CPI, PPI and PCE all coming in hot despite Powell saying “disinflation” over 100 times in his last two speeches.

For the first time in over 15 years, investors can earn 5% to lend money to the U.S. government for one year. But if that’s not fun enough to rant about on your next bar hop, we’re also recapping Warren Buffett’s annual shareholder letter for your copy-pasting pleasure.

Let’s dive in.

Economy Heat Check

As of 2/24/2023 market close, unless otherwise stated.

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Bad News Briefings

Market movers like to bury bad news on Friday afternoon, so we've decided to excavate them.

• BNP Paribas sued in France for financing fossil fuels (CNN)

• TD Bank to pay $1.2B to end suit tied to ponzi scheme (BBG)

• Citigroup, M&G and Goldman Sachs join JPMorgan with ChatGPT crackdown (FN)

• Goldman expects $2.3B more in potential losses from legal disputes (Reuters)

• Tesla pauses rollout of driving software subject to US recall (BBG)

• Morgan Stanley joins $6B wealth manager in Texas (BBG)

• Citigroup bucks Wall Street trend to give CEO Jane Fraser a pay rise (FT)

DEEP DIVE: Mr. Market Down Bad on the Markets

This Saturday, Berkshire Hathaway released its 2022 annual report, including the much-anticipated letter from your grandfather’s favorite investor, Warren Buffett. We’ll let Jim Cramer stick to screaming about their financial results while you watch CNBC on mute.

Let’s recap everything you need to know about Mr. Market’s 2022 annual letter and his economic outlook.

Background on Buffett’s Investing Style

Buffett allegedly purchased his first stock on March 12, 1942. On that day, papers were filled with bad news about World War II, which America appeared to be losing. The market dropped 2%, but Buffett is known for consistently looking at the bigger picture.

This is a macro newsletter, not your sibling’s political Twitter timeline. But Buffett’s voting machine metaphor is an apt one for how he chooses to invest.

When markets behave like voting machines, they tend to ignore business fundamentals and are driven by speculation, sentiment, and other factors. Today, most of us (guilty as charged) are concentrating on inflation data, Fed minutes and the jobs report. They’re data points that have been periodically released for decades but no one cared about until last year.

Buffett used voting to show that the more you’re glued to the media coverage, you may make harmful short-term decisions due to the influence of the financial news. If you were bullish on SuperBowl ads last year, you would’ve had a lot of fun with FTX this year.

The tl;dr on Buffett’s strategy – load up on select picks with high yields during heightened fear, and get paid to wait for the bigger picture to unfold.

The Shareholder Letter Debrief

Berkshire itself delivered strong financial results, bolstered by the rising interest rate environment and a continued recovery from the pandemic. The famous insurance float grew to $164B, courtesy of its acquisition of Alleghany.

The annual letter, as expected and typical, included plenty of your standard clickbait “wisdom” FinTwit will inevitably put on inspirational graphics. It’s not shocking Berkshire remains a compelling stock pick, but it’s an interesting follow given it may be a clear beneficiary of any “flight to safety.”

Berkshire Hathaway Stock Price

For years Berkshire delivered mediocre returns relative to the broader market. But it is in volatile times (i.e. now) that its stock tends to perform best. Unlike high-flying tech stocks, or at least the high-flying tech stocks before this year, Berkshire trades very close to all time highs.

As a result, defensive investors consider Berkshire to be suitable, but not provide the aggressiveness needed to fully take advantage of the crash in tech stocks. The stock is up 8% since October, but with the market increasingly focused on near term profits, it might finally be time for Berkshire to see the multiple expansion that long term investors have long been waiting for.

Looking Ahead in 2023

So the annual letter included everything you’d expect year after year. Buffett wisdom, Buffett paying respect to his partner Charlie Munger, and Buffett’s inevitable back-patting.

If you think we are going a bit hard on the Buffett satire, here’s a quote he included from Charlie Munger the shareholder letter:

With Buffett now 92 years old, he is all too aware of the great attention placed regarding succession plans and the future of the company. He assured investors that Berkshire “will always hold a boatload of cash,” and that “future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money.”

So if you’re hoping that future Berkshire successors might be more aggressive in deploying insurance floats, your hopes are dashed, at least for now.

WEEK AHEAD: Signal to Noise

Next week’s market outlook and whether you should actually care.

• Monday: Eurozone Consumer Confidence (🐻)

• Tuesday: US Consumer Confidence (🐻); S&P Case-Shiller National Home Price Index (🐂)

• Wednesday: Worldwide Manufacturing PMIs (🐂); US ISM Manufacturing PMI (🐂); UK Halifax House Prices (🐻)

• Thursday: Eurozone Inflation (flash estimate, 🐂); Eurozone Unemployment Rate (🐻); US Initial Jobless Claims (🐻)

• Friday: Worldwide Services & Composite PMIs (🐂); Eurozone Producer Prices (🐂); US ISM Non-manufacturing PMI (🐂)

Signals 🐂

Case-Shiller National Home Price Index

The latest updates on home prices will become available on Tuesday. Index provider S&P Global will release its Case-Shiller National Home Price Index for December, while mortgage originator Freddie Mac will issue its House Price Index tracking prices of single-family homes.

Home prices, as measured by the Case-Shiller Index, are projected to have fallen 0.7% in December. That would mark the sixth straight month of deflation in prices. Year-over-year, the index is forecast to have risen 6%, decelerating from 6.8% in November and a peak rate of 21.3% in April of last year. This would mark the smallest annual increase since September of 2020.

In the most recent report for November, prices in Miami recorded the biggest annual increase at 18.4%. Guess that’s what happens when you get taken over by finance bros. Meanwhile, prices in San Francisco were down 1.6% from a year earlier. Makes sense, given tech’s mass exodus since the pandemic that’s seen San Francisco return to 2013 population levels. All 20 metro areas reported month-over-month declines in prices.

US & Worldwide Manufacturing, Services & Composite PMIs

February manufacturing, services and composite PMI data will be released globally following the flash PMI updates from major developed economies. Worldwide Manufacturing PMIs arrive early to the party on Wednesday, meanwhile Worldwide Services & Composite PMIs are fashionably late on Friday. The release schedule is the same for the US, with the US ISM Manufacturing PMI out on Tuesday and the US ISM Non-manufacturing PMI out on Friday.

Early indications from the flash PMIs pointed to easing global recession fears, as major developed economies showed signs of reviving economic growth in February. Specifically, recession fears can be seen fading in the eurozone and also in the UK.

That being said, even though the US stabilized, it was concerning to see some heating up of inflation. Moving forward, it will be of continued interest to observe where else in the world there are signs of persistent, elevated inflationary pressures. For all you weather chasers, analysts will be following whether service-driven improvements in the US and European PMIs could be attributed to warmer than usual weather.

As a bonus for eyes focused on APAC, Japan and Australia data continues to disappoint. Lackluster demand continues to remain an issue for the wider APAC region, even after the easing of pandemic restrictions in mainland China. The PMI data for the latter will be a major release of the week, but also watch out for the manufacturing PMI for the ASEAN bloc.

Eurozone Inflation (flash estimate)

This Thursday, a first flash estimate of Eurozone inflation for February will be published. In January, inflation already unexpectedly fell significantly to 8.5% from 9.2% (year-over-year). The main reason for this decline was the rapidly decreasing dynamics of energy prices. Not to be outdone, the dynamics of food prices continued to increase slightly while core inflation stabilized at 5.2%.

Due to the unchanged declining dynamics of energy price inflation, economists expect a further decline in inflation in February. Now a year since war broke out in Ukraine, which caused a massive increase in March oil prices, the downward pressure of energy prices on inflation are expected to intensify again this March.

It’s not all bad news – or expectations, at least. Economists anticipate only a gradual decline in food price inflation and core inflation. Developments in agricultural commodities point to a gradual easing in food prices in the coming months. Food inflation dynamics are, therefore, expected to decline in the near future.

The further path of core inflation will show whether there are areas where price pressure could possibly last longer - especially in services, which are strongly dependent on domestic wage developments. Based on data available so far (3Q22), there is no substantial acceleration in labor costs yet. On the contrary, employees suffered considerable real wage losses in 2022. It remains to be seen whether this will be partially made up for in 2023. For the time being, no wage price spiral in the Eurozone is yet visible in the data. Since inflation should fall steadily in 2023, we believe that the pressure in wage negotiations will also ease in the future.

Eurozone Producer Prices

Encouragingly, producer prices, which play a role as a leading indicator for goods inflation, have been on a declining trend in the Eurozone for some time. Now that the supply chain problems have largely been solved, the supply situation for Eurozone companies has improved sustainably.

For example, inflation for cars already lost momentum in January. In tourism, where inflation rates were above-average until the end of 2022, a slightly declining inflation trend has been observed since December.

For 2023, economists currently forecast a decline in the inflation rate to 5.6%. Due to the base effects from the outbreak of war in March last year (which triggered massive oil and gas price increases, discussed above), the downward inflation trend could accelerate with this March.

Noise 🐻

Eurozone Consumer Confidence

Euro area consumer sentiment strengthened for the fifth month in a row to its highest level in over a year, preliminary data from the European Commission showed last Monday. The final results are set to be released, along with the monthly economic sentiment survey data, today.

Despite the successive improvements over the past few months, Euro sentiment remains well below its long-term average. In other words, don’t go too crazy over EUR/USD.

Economists aren’t getting too excited, either. The flash consumer confidence index for the Eurozone climbed to -19.0 from -20.9 in January – in line with economists' expectations. The latest reading was the highest since February of last year, when it was at -9.4.

US Consumer Confidence

According to last Friday’s consumer confidence report from the University of Michigan, US confidence improved for a third consecutive month. This was boosted by an improved short-run outlook for the economy. Tomorrow, the next US Consumer Confidence report will reveal just how rosy that outlook may be.

For reference, UMich's headline consumer confidence index for the end of February edged up to 67.0 points, against a preliminary print of 66.4 and 64.9 points at the end of January. Large increases in sentiment were said to come from consumers with larger stock holdings.

Overall, UMich’s February reading was supported by a 12% improvement in the overall economic outlook in the US. That being said, all other index components were essentially unchanged. So don’t hold your breath for any groundbreaking data this Tuesday that will say much different.

UK Halifax House Prices

According to Nationwide, a Halifax competitor, UK house prices have fallen for four months in a row. From October to January inclusive, the annual rate of price growth collapsed from 14.3% last March to 1.1% in January.

Meanwhile, Halifax said house prices were stable in January but fell in each of the previous four months, and it put the annual rate of price growth in January at 1.9%. Its latest report, which comes out this Wednesday, will reveal how far and how fast prices may continue to go down.

Halifax previously forecasted that average UK prices will fall by about 8% this year. If accurate, that means the average property price would be back at roughly April 2021 levels. Nationwide is far more realistic pessimistic, suggesting prices may “edge lower” by no more than 5%.

To be fair to Halifax, estate agent Savills has forecast that the average UK house price will fall by 10% this year. It expects growth to resume in 2024 as affordability pressures gradually ease. Meanwhile, investment bank Nomura is among the most downbeat: last month it forecast a 15% fall in UK house prices by mid-2024.

Eurozone Unemployment Rate

When Powell isn’t searching for synonyms to “soft,” he can most likely be found bashing his head against a wall over unemployment – or the lack thereof. The same can’t be said for Europe.

Influential ECB board member, Isabel Schnabel, said last week that a 50 bps hike in the ECB's key interest rates next month is all but inevitable. There is no sign yet of a broad disinflation process starting in the Eurozone. That’s in stark contrast to Powell's assessment of the U.S. situation after the Fed's policy meeting in December.

Eurozone unemployment is expected to increase slightly in the first half of 2023 as the economy slows further, economists say. Still, the deceleration in economic activity registered in the second half of 2022 hasn't so far led to a significant increase in joblessness.

What does this mean for its markets? Euro interest rate markets are now pricing in expectations that the ECB's rates will rise to their highest in the 24-year history of the euro later this year. The Euro managed modest gains against the US Dollar on Friday, helped in part by news that the Eurozone economy managed some growth last month.

Initial Jobless Claims

Not much to see here until next week, folks. The calendar turns to March on Wednesday, and the rule of thumb is that non-farm payrolls come on the first Friday of the month. So why is the jobs report scheduled for March 10 instead of March 3?

The short answer is that the rule of thumb is wrong. The slightly-longer answer is that it's because February is the shortest month, so there's not enough time to prepare.

The full answer is that the Bureau of Labor Statistics releases non-farm payrolls on the fourth Friday following “the week containing the 12th of a given month,” which in March's case will be the 10th of the month. So, because February 10th also fell on a Friday, that only leaves three Fridays in between. That’s not enough time to prepare the report for the BLS, none of whom, evidently, worked in banking.

So instead it falls on March 10.

That puts the Fed in a tricky spot, as there will only be a few hours between the 8:30 am ET release of the report and the blackout period beginning at midnight ahead of the March 22 FOMC. That should make for an interesting day.

It's still early, but the consensus so far is +195K jobs with a range of 150-215K.

Meme Bank

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