Stocks closed out the first week of 2023 in rally mode while U.S. Treasury yields and the dollar fell sharply after December’s employment report showed strong hiring and a historically low jobless rate combined with cooling wage growth, and the Institute for Supply Management’s services gauge showed a greater than expected slowdown. While headline jobs numbers pointed to ongoing strength in the labor market, the report also included signs of potential softening, including slowing wage growth. This opened the door for some bargain-hunting trades. Investors seized upon the data as indicating the Federal Reserve’s rate hikes may be succeeding in slowing the economy, and a sense that the central bank may not be able to take its target range for the Fed funds rate much higher before it decides to hit the pause button. The Dow Jones average surged 700 points and the S&P 500 added 87 on Friday, the best showing for the two benchmarks indices since November 30 and rising 1.5% for the week to snap a four-week run of losses. The Nasdaq jumped 264 points on Friday while advancing 1% for the week.
Tech layoffs are coming thick and fast as the industry pares back on staffing amid macroeconomic headwinds. The first waves occurred in the middle of last year, but are only growing in strength and numbers. Many companies hired too aggressively during the pandemic, and they are realizing that inflated payrolls and elevated costs are not holding up in the current business environment.
The latest: Salesforce (CRM) this week said it would cut 10% of its workforce, and close some offices, leading to $1.4B-$2.1B in charges for the company and around 8,000 layoffs. Amazon (AMZN) is also slashing its headcount – by over double that figure. The retail behemoth confirmed that 18,000 employees will get the axe, with the bulk of the roles due for elimination concentrated in the firm’s e-commerce and human resources organizations.
“The environment remains challenging and our customers are taking a more measured approach to their purchasing decisions,” Salesforce co-CEO Marc Benioff wrote in a letter to employees. “Amazon has weathered uncertain and difficult economies in the past, and we will continue to do so,” CEO Andy Jassy declared. “These changes will help us pursue our long-term opportunities with a stronger cost structure; however, I’m also optimistic that we’ll be inventive, resourceful, and scrappy in this time when we’re not hiring expansively and eliminating some roles.”
By the numbers: According to tracking website “layoffs.fyi,” more than 150K tech workers were fired in 2022, and that number is poised to grow this year. Companies in the industry that have shed employees include Airbnb (ABNB), Booking Holdings (BKNG), Carvana (CVNA), Cisco (CSCO), Groupon (GRPN), HP (HPQ), Lyft (LYFT), Meta (META), Netflix (NFLX), Peloton (PTON), Twitter, Uber (UBER) and Zillow (ZG). (151 comments)
After closing out a year in which the S&P 500 dropped nearly 20%, Wall Street extended its gloomy demeanor into the beginning of 2023, with stocks edging lower in the first session of the year. The Nasdaq Composite (COMP.IND) led the declines among the major averages, closing out Tuesday down 0.8%, while the S&P 500 (SP500) fell 0.4% and the Dow (DJI) finished fractionally lower. As mentioned in recent editions of Wall Street Breakfast, volatility is likely to remain a big theme for markets this year as economic uncertainty lingers and each data point becomes an opportunity for a clearer picture.
Commentary: “Markets stumbled into 2023 on the first trading day as the markets awaited Wednesday’s release of the December FOMC meeting minutes (see more below),” Marketplace author Andrew Hecht told Seeking Alpha. “The price action indicates that the market’s sentiment is for a continuation of hawkish squawking from the central bank. Meanwhile, industrial and agricultural commodity prices were mostly lower, while gold, silver, and platinum prices increased.”
Energy marked the worst sector performer on the session, falling 3.6% after crude oil dropped to around $77 a barrel, though tech was also a notable decliner. Six of 11 S&P segments finished the day lower, but futures linked to the benchmark index turned green overnight, and the question now is if that can hold.
Lowlights: Tesla (TSLA) suffered additional downward pressure on Tuesday, continuing a slide that forced the stock sharply lower during December. Hurt by a disappointing deliveries report, shares of Elon Musk’s EV maker plunged another 12% to set another 52-week low at $108 (TSLA has tanked 73% over the past year). Apple (AAPL) also staged a notable retreat, with shares slumping nearly 4% following a report that it might be cutting production levels of the MacBook and Apple Watch. The iPhone maker’s market capitalization dipped below $2T during the session, exactly a year after it first notched the $3T milestone. (28 comments)
The persistently tight labor market is playing into the Fed’s decision to continue raising rates, but at a smaller increment, according to the minutes of the FOMC’s meeting on Dec. 13-14. Last month, the Fed’s policymaking arm increased its key rate by 50 basis points to 4.25%-4.50%, a smaller increase than the 75 bps hikes it implemented in its previous four meetings. Officials also raised inflation expectations at their last gathering, with the median PCE inflation projection at 3.1% at the end of this year, up from the September projection of 2.8%.
No sign of a pivot: Fed officials agreed that inflation remained “unacceptably high” and risks remained to the upside. While October and November data were “welcome reductions in the monthly pace of price increases,” it would take “substantially more evidence of progress to be confident that inflation was on a sustained downward path.” The pace of increases for prices of core services, excluding shelter, was also notable, while that factor is likely to “remain persistently elevated if the labor market remained very tight.”
“Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks of the inflation outlook remained tilted to the upside,” according to the minutes. They named such uncertainties as: China relaxing its zero-COVID policies, Russia’s war against Ukraine, and the effects of many major central banks firming policy at the same time. Stocks gave up their gains on the news, but closed the session slightly higher on Wednesday in a volatile trading spell.
Outlook: With risks to inflation remaining elevated, no participants expected that it would be appropriate to reduce the federal funds rate target range in 2023. That uncertainty also means the Fed will have to be flexible when moving policy to a more restrictive stance. There was also discussion about balancing the risks of not tightening enough, which would lead to surging inflation expectations, as well as the lagged cumulative effect of continuous policy tightening, which could lead to unnecessary cuts in economic activity. (29 comments)
Whether it’s dwindling savings or poorly stocked dealerships, the U.S. auto industry just had its worst sales year in more than a decade. Only 13.7M vehicles were sold in 2022, according to the research firm Wards Intelligence, marking an 8% decrease from the previous year and the lowest overall figure since 2011. Sales had even surpassed 17M vehicles for five consecutive years before the coronavirus pandemic erupted in early 2020.
Quote: “When we started the year off, the whole industry had projections all above 16M,” said Jack Hollis, head of sales for Toyota (NYSE:TM) North America. “It’s not all doom and gloom,” he added, noting that there were signs that supply chain snarls were easing and raw material prices were coming down.
However, Toyota did lose its sales crown to General Motors (NYSE:GM) in 2022. The Michigan-based auto manufacturer delivered 2.2M vehicles in the U.S. due to a strong performance in its full-size pickup and SUV segments (the categories made up over half of total sales for the full year). Moving forward into 2023, the automaker expects EV sales to rise substantially and promote continued growth.
Rising rates: Financing a vehicle is growing more expensive than ever for consumers, according to car shopping experts at Edmunds. 15.7% of new car buyers had a monthly payment of more than $1,000 last quarter – marking a record high for the industry – compared to 10.5% in Q4 of 2021 and 6.7% in Q4 of 2020. (84 comments)
OpenAI, the developer behind artificial intelligence bot ChatGPT, was reported by multiple sources to be in discussions to raise capital at a valuation of $29B. Venture capitalists are rushing in to profit from the viral technology, including firms like Thrive Capital and Peter Thiel’s Founders Fund. The transaction is being structured as a tender offer, where investors buy shares from existing holders, and would be double the $14B valuation the company received in 2021.
Snapshot: The deal is making waves in Silicon Valley, where many startups have prepared or seen big cuts to their valuations as investors pull back from new deals. The tender offer comes just a month after OpenAI released the newest form of its GPT-3.5 software. Following its launch, ChatGPT amassed 1M users in just five days, making headlines in the tech industry, just weeks after releasing image generation program Dall-E 2.
Microsoft (MSFT) is also eager to get some skin in the game (remember Tay from 2016?), holding advanced talks to increase its investment in OpenAI. In 2019, Microsoft even poured $1B into the startup and became its preferred partner for commercializing new technologies. Reports this week also suggested that it’s working on a version of Bing that uses the artificial intelligence software behind ChatGPT to close the gap with search engine leader Google (GOOG, GOOGL).
What is Generative AI? OpenAI is a leader in the field, which uses artificial intelligence to generate new original content, rather than analyzing or acting on existing data. Its product called ChatGPT uses natural language processing to generate responses to a user’s input, and can handle a wide range of queries. Examples include anything from essays and cover letters to lyrical music writing and solving complex math problems. (118 comments)
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