News

U.S. Earnings Season – What’s Keeping Corporate America Awake at Night? 

10 February 2025

With the U.S. earnings season coming to a close it is worth considering the key themes mentioned in earnings calls. These themes highlight both key risks and opportunities and, as such, investors should be mindful how such dynamics may impact particular sectors and companies. And this is not just an equities story. It relates to bonds as well, and more so the more one moves down the ratings scale.

Goldman Sachs analysts highlighted three key themes emerging from this earnings season that are top of mind for corporate America: the impact of tariffs and an escalating trade war, the strength of the US dollar under the Trump administration, and the developments in artificial intelligence on their businesses.

As an example, in respect to tariffs, the US market has already illustrated marked differences in performance with respect to supply chain and sales exposures to impacted countries. Autos and companies with supply chain exposures to China and sales exposures to China, Canada, and Mexico have underperformed since 31 January.

  • The primary concern was tariffs. Trade war fears resulted in nearly half of all SP500 companies discussing tariffs during earnings calls.
  • The second concern with corporate America, according to the analysts, is a strong dollar: During 4Q, the trade-weighted US dollar strengthened by 6% driven by a combination of strong US economic growth, solid US asset returns, and the threat of tariffs.
  • The last theme that continued to dominate earnings calls was enthusiasm over AI, with 50% of companies mentioning AI during this quarter’s earnings calls. Many companies noted that AI has led to improvements in efficiency internally and for their customer base.
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US Q4 GDP misses expectations on lack of inventory building

30 January 2025

Summary: US GDP up 0.6% (2.3% annualised) in December quarter, below expectations; up 2.5% over year; Westpac: downside surprise due to pullback in inventory accumulation; US Treasury yields decline; rate-cut expectations barely move; GDP price deflator rate accelerates from 2.3% to 2.4%.

US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter.  At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter of 2020 sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery which lasted until 2022.

The US Bureau of Economic Analysis has now released the December quarter’s advance GDP estimate and it indicates the US economy expanded by 0.6% or at an annualised rate of 2.3%. The result was below the 2.6% (annualised) rise which had been generally expected as well as the September quarter’s 3.1% (annualised) increase. On a year-on-year basis, GDP expanded by 2.5%, down from 2.7% after revisions to the previous quarter.

“US GDP disappointed in Q4 2024, decelerating from 3.1% annualised in Q3 to 2.3%,” said Westpac senior economist Westpac Mantas Vanagas. “However, the downside surprise was solely due to a pullback in inventory accumulation, [with] domestic final demand growing 3.0% annualised, in line with the average of the prior three quarters and modestly higher than the long-term average prior to the pandemic.”

US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.

US Treasury bond yields declined by modest amounts along the curve on the day. By the close of business, the 2-year Treasury bond yields had slipped 1bp to 4.21%, the 10-year yield had shed 3bps to 4.52% while the 30-year yield finished 2bps lower at 4.77%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months barely moved. At the close of business, contracts implied the effective federal funds rate would average 4.31% in March, 4.225% in May and 4.16% in June. December contracts implied 3.88%, 45bps less than the current rate.

One part of the report which is often overlooked are the figures regarding the GDP price deflator, which is another measure of inflation. The GDP price deflator is restricted to new, domestically-produced goods and services and it is not based on a fixed basket as is the case for the consumer price index (CPI). These latest figures indicate the annual rate accelerated a touch from 2.3% in the September quarter to 2.4%.

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Sideways trend continues for Conf. Board sentiment index in January

28 January 2025

Summary: Conference Board Consumer Confidence Index down in January, below expectations; index remains in relatively stable, narrow range present since 2022; US Treasury yields rise moderately; expectations of Fed rate cuts soften slightly; ANZ: survey didn’t capture any effects from raft of presidential executive orders; views of present conditions, short-term outlook both deteriorate.

US consumer confidence clawed its way back to neutral over the five years after the GFC in 2008/2009 and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a relatively narrow band at historically high levels until they plunged in early 2020. Subsequent readings then fluctuated around the long-term average until March 2021 when they returned to elevated levels. However, a noticeable gap has since emerged between the two most-widely followed surveys.

The latest Conference Board survey completed in the third week of January indicates its measure of US consumer confidence has deteriorated, albeit to a level which is still above average. The latest reading of the Consumer Confidence Index registered 104.1 on a preliminary basis, slightly below the generally-expected figure of 105.6 and down from December’s final figure of 109.5.

“Consumer confidence has been moving sideways in a relatively stable, narrow range since 2022,” said Dana Peterson, Chief Economist at The Conference Board. “January was no exception. The Index weakened for a second straight month but still remained in that range, even if in the lower part.”

US Treasury bond yields rose moderately across the curve on the day. By the close of business, the 2-year Treasury bond yield had added 2bps to 4.22% while 10-year and 30-year yields both finished 3bps higher at 5.56% and 4.80% respectively.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened slightly, although one 25bp cut is still currently priced in along with a solid chance of another one. At the close of business, contracts implied the effective federal funds rate would average 4.325% in February, 4.295% in March and 4.25% in April. December contracts implied 3.84%, 49bps less than the current rate.

Consumers’ views of present conditions and the near-future both deteriorated. The Present Situation Index dropped from December’s revised figure of 144.0 to 134.3 while the Expectations Index declined from 86.5 to 83.9.

“The cut-off date for the survey was 20 January, so it didn’t capture consumer sentiment following the raft of presidential executive orders,” noted ANZ economist Sophia Angala.

The Consumer Confidence Survey is one of two widely followed monthly US consumer sentiment surveys which produce sentiment indices. The Conference Board’s index is based on perceptions of current business and employment conditions, as well as respondents’ expectations of conditions six months in the future. The other survey, conducted by the University of Michigan, is similar and it is used to produce an Index of Consumer Sentiment. That survey differs in that it does not ask respondents explicitly about their views of the labour market and it also includes some longer-term questions.

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“Stable but sluggish”; business conditions, confidence improve in December

28 January 2025

Summary: Business conditions improve in December; business confidence also improves slightly, still below long-term average; NAB: conditions remain strongest in services, noticeable improvement in retail; ACGB yields fall noticeably; rate-cut expectations harden; Westpac: paints picture of relatively stable but sluggish business conditions in Q4 2024; capacity utilisation rate rises to 82.8%.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s index then began to slip and forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 as the index trended lower. It hit a nadir in April 2020 as pandemic restrictions were introduced but then improved markedly over the next twelve months and subsequently remained at robust levels until recently.

According to NAB’s latest monthly business survey of around 300 firms conducted in the second and third weeks of January, business conditions have improved to a level close to the long-term average. NAB’s conditions index registered 6 points, down 3 points from November’s revised reading.

“Conditions remain strongest in services sectors,” said NAB Chief Economist Alan Oster. “But there was a noticeable improvement in retail conditions, which may reflect a pick-up in consumer spending at the end of 2024. We will have to wait and see whether this improvement is sustained over 2025.”

Business confidence also improved, albeit more modestly and only after a large drop in November.  NAB’s confidence index ticked up 1 point to -2 points, a reading which is well below its long-term average.  NAB’s confidence index typically leads the conditions index by one month, although some divergences have appeared from time to time.

Commonwealth Government bond yields fell noticeably across the curve. By the close of business, 3-year and 10-year ACGB yields had both lost 6bps to 3.84% and 4.45% respectively while the 10-year yield finished 5bps lower at 4.87%.

Expectations regarding rate cuts in the next twelve months hardened, with a February cut viewed as highly likely. Cash futures contracts implied an average of 4.265% in February, 3.97% in May and 3.70% in August. December contracts implied 3.555%, 78bps less than the current cash rate.

“While the NAB business survey update for October had given some hope that Australian businesses might be turning more optimistic in the December quarter, a deterioration November and only a small recovery in the latest survey for December painted a picture of relatively stable but sluggish business conditions in the last three months of 2024,” noted Westpac senior economist Mantas Vanagas.

NAB’s measure of national capacity utilisation increased from November’s reading of 82.4% to 82.8%, a level which is quite robust from a historical perspective. However, only four of the eight sectors of the economy were reported to be operating at or above their respective long-run averages.

Capacity utilisation is generally accepted as an indicator of future investment expenditure and it also has a strong inverse relationship with Australia’s unemployment rate.

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Fewer headwinds ahead for US economy; leading index declines in December

22 January 2025

Summary: Conference Board leading index down 0.1% in December, in line with expectations; CB: half of ten index components down, half up; US Treasury yields rise; rate-cut expectations soften; CB: signals fewer headwinds to US economic activity ahead.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. Post-2022 readings implied US GDP growth rates would turn negative but that has not been the case so far.

The latest reading of the LEI indicates it decreased by 0.1% in December. The decline was in line with expectations but in contrast with November’s upwardly-revised 0.4% increase.

“Low consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial claims for unemployment and a decline in building permits contributed to the decline,” said Justyna Zabinska-La Monica of The Conference Board. “Still, half of the ten components of the index contributed positively in December.”

US Treasury bond yields rose almost-uniformly across the curve on the day. By the close of business, the 2-year Treasury yield had added 3bps to 4.30%, the 10-year yield had gained 4bps to 4.60% while the 30-year yield finished 3bps higher at 4.82%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened slightly, although one 25bp cut is currently priced in along with a solid chance of another one. At the close of business, contracts implied the effective federal funds rate would average 4.325% in February, 4.30% in March and 4.27% in April. December contracts implied 3.95%, 38bps less than the current rate.

“Moreover, the LEI’s six-month and twelve-month growth rates were less negative, signalling fewer headwinds to US economic activity ahead,” added Zabinska-La Monica. “Nonetheless, we expect growth momentum to remain strong to start the year and US real GDP to expand by 2.3% in 2025.”

Regression analysis suggests the latest reading implies a 0.6% year-on-year growth rate in March, up from the 0.5% year-to-February growth rate after revisions.

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December Westpac-MI leading index “a clear improvement”

22 January 2025

Summary: Leading index growth rate declines in December; Westpac: growth signal not particularly strong but a clear improvement on past two years; reading implies annual GDP growth of around 2.75%-3.00%; ACGB yields generally rise moderately; rate-cut expectations soften; Westpac: more positive growth signal still looks fairly tentative.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings spiked towards the end of 2020 but then trended lower through 2021 and 2022 before flattening out in 2023 and 2024.

December’s reading has now been released and the six month annualised growth rate of the indicator registered 0.25%, down from November’s revised figure of 0.33%. The index reading represents a rate relative to “trend” GDP growth, which is generally thought to be around 2.50% to 2.75% per annum in Australia.

“While the growth signal is still not particularly strong, it has shown a clear improvement on the persistently negative, below-trend reads recorded over the previous two years,” said Westpac Head of Australian Macro-Forecasting Matthew Hassan.

Westpac states the index leads GDP growth by “three to nine months into the future” but the highest correlation between the index and actual GDP figures occurs with a three-month lead. The current reading may therefore be considered to be indicative of an annual GDP growth rate of around 2.75% to 3.00% in the next quarter.

Treasury bond yields rose moderately across the curve on the day. By the close of business, 3-year and 10-year ACGB yields had both gained 5bps to 3.91% and 4.49% respectively while the 20-year yield finished 4bps higher at 4.91%.

Expectations regarding rate cuts in the next twelve months softened slightly, although a February cut is still currently viewed as more likely than not. Cash futures contracts implied an average of 4.27% in February, 4.005% in May and 3.775% in August. December contracts implied 3.64%, 70bps less than the current cash rate.

“Commodity prices and financial markets face significant risks around global trade and geopolitics,” Hassan said. “Meanwhile locally, the consumer and housing sectors face ongoing uncertainty about the timing and scale of a prospective interest rate easing. All up, the more positive growth signal still looks fairly tentative.”

The RBA’s November Statement on Monetary Policy GDP growth forecasts are slightly higher than Westpac’s latest numbers, which are 1.3% for calendar year 2024 and 2.2% for calendar year 2025.  The RBA forecasts GDP growth for the years ending December 2024 and December 2025 to be 1.5% and 2.3% respectively.

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Utilities, end of Boeing strike, boost US industrial output

17 January 2025

Summary: US industrial output up 0.9% in December, greater than expected; up 0.5% over past 12 months; ANZ: boosted by recovery in utilities output, end to Boeing strike; short-term US Treasury yields rise, longer-term yields hardly moved; rate-cut expectations soften; capacity utilisation rate rises to 77.6%, below long-term average.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021. However, production levels has largely stagnated since early 2022.

According to the Federal Reserve, US industrial production rose by 0.9% on a seasonally adjusted basis in December. The rise was greater than the 0.3% increase which had been generally expected and in contrast with November’s 0.2% contraction. On an annual basis, the annual growth moved back into positive territory, rising from -0.6% to 0.5%.

“The data were helped by a recovery in utilities output and an end to the Boeing strike . All sectors of non-durable manufacturing rose,” said ANZ economist Madeline Dunk.

Short-term US Treasury bond yields rose moderately while longer-term yields hardly moved. By the close of business, the 2-year Treasury yield had gained 5bps to 4.29%, the 10-year had added 1bp to 4.63% while the 30-year yield finished unchanged at 4.86%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened slightly, with one 25bp cut and a solid chance of another currently priced in. At the close of business, contracts implied the effective federal funds rate would average 4.325% in February, 4.30% in March and 4.26% in April. December contracts implied 3.955%, 37bps less than the current rate.

The same report includes capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. December’s reading increased by 0.6 percentage points after revisions to 77.6%, 2.4 percentage points below the long-term average.

While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.

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US Dec retail sales points to strong demand during fourth quarter

16 January 2025

Summary: US retail sales up 0.4% in December, less than expected; annual growth rate slows to 3.9%; ANZ: suggests strong growth in Q4; US Treasury yields fall; rate-cut expectations firm; higher sales in ten of thirteen categories; vehicle/parts sales largest single influence on month’s result.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0%. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent them into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit US households in 2021. However, growth rates have slowed significantly since mid-2022.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales increased by 0.4% in December. The result was less than the 0.6% increase which had been generally expected as well as November’s 0.8% rise after revisions. On an annual basis, the growth rate slowed from November’s revised rate of 4.1% to 3.9%.

“While the rise in headline sales was lower than consensus expectations, control group sales [which are] used to impute real private consumption, rose at a faster than expected pace, up 0.7% month-on-month versus expectations of 0.4%,” said ANZ senior rate strategist Jack Chambers. “The data affirm that demand remained strong during the holiday season and suggests strong growth in Q4.”

US Treasury bond yields generally fell moderately across the curve on the day. By the close of business, 2-year and 10-year Treasury yields had both lost 3bps to 4.24% and 4.62% respectively while the 30-year yield finished 1bp lower at 4.86%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed a touch, with one 25bp cut  and a good chance of another currently priced in. At the close of business, contracts implied the effective federal funds rate would average 4.325% in February, 4.295% in March and 4.25% in April. December contracts implied 3.92%, 41bps less than the current rate.

Ten of the thirteen categories recorded higher sales over the month. The “Motor vehicle & parts dealers” segment had the largest single influence on the overall result after it increased by 0.7% over the month and contributed 0.13 percentage points to the total.   

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It accounts for around 17% of all US retail sales and it is the second-largest segment after vehicles and parts.

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Fuel prices drive US CPI up 0.4% in December

15 January 2025

Summary: US CPI up 0.4% in December, in line with expectations; annual inflation rate up from 2.7% to 2.9%; “core” rate up 0.2%, up 3.2% over year; Westpac: about half of increase attributable to energy component; US Treasury yields fall; rate-cut expectations firm; Westpac: solid improvement in pace of core services inflation; non-energy services again main driver of overall result.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March 2021. They then rose significantly before declining from mid-2022.

The latest US CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.4% on average in December. The rise was in line with expectations but up from November’s 0.3% increase. On a 12-month basis, the inflation rate accelerated from 2.7% to 2.9%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. The core prices index, the index which excludes the more variable food and energy components, increased by 0.2% on a seasonally-adjusted basis over the month, below expectations of a 0.3% rise as well the rises in the previous four months. The annual growth rate slowed from 3.3% to 3.2%.

“The consumer price index accelerated in December, rising 0.4% in the month, up from 0.3% in November,” said Westpac economist Jameson Coombs. “However, close to a half of the increase was accounted for by the energy component, which was driven by a 4.4% monthly increase in gasoline prices.”

US Treasury bond yields fell noticeably across the curve on the day. By the close of business, the 2-year Treasury yield had lost 9bps to 4.27%, the 10-year yield had shed 13bps to 4.65% while the 30-year yield finished 10bps lower at 4.87%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with another 25bp cut currently priced in. At the close of business, contracts implied the effective federal funds rate would average 4.325% in February, 4.295% in March and 4.255% in April. December contracts implied 3.93%, 40bps less than the current rate.

“Most of the monthly slowdown in core inflation was driven by core goods prices, while core services inflation was little changed on November’s pace, though this was still a solid improvement in the pace of core services inflation compared to the remainder of H2 2024,” Coombes added. “Crucially, the super-core inflation measure edged down to 0.2% from 0.3% in November.”

The largest influence on headline results is often the change in fuel prices. Prices of “Energy commodities”, the segment which includes vehicle fuels, increased by 4.3% and contributed 0.14 percentage points to the total. However, prices of non-energy services, the segment which includes actual and implied rents, again had the largest single effect on the total as they contributed 0.19 percentage points following a 0.3% increase on average.

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November industrial production rise no halt to ongoing downtrend

15 January 2025

Summary: Euro-zone industrial production up 0.2% in November, in line with expectations; down 1.9% on annual basis; German, French 10-year yields fall; expansion in three of four largest EU economies.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in 2016. Growth rates then fluctuated for two years before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 which then took over a year to claw back. Production levels since early 2023 have generally declined.

According to the latest figures released by Eurostat, euro-zone industrial production expanded by 0.2% in November on a seasonally-adjusted and calendar-adjusted basis. The result was in line with expectations as well as October’s upwardly-revised figure. However, on an annual basis, the contraction rate accelerated from October’s revised rate of 1.1% to 1.9%.

Long-term German and French sovereign bond yields both finished considerably lower on the day. By the close of business, the German 10-year bund yield had shed 11bps to 2.52% while the French 10-year OAT  finished 13bps lower 3.35%.

Industrial production expanded in three of the euro-zone’s four largest economies. Germany’s production grew by 1.3% over the month while the comparable growth figures for France, Spain and Italy were 0.2%, -1.5% and 0.3% respectively.

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