Gravitas: FOMC

February 03, 2023 | Michael Newton


The Newton Group Insights

The FOMC in a nutshell - as expected. The decision of +25bps to 4.50%-4.75%. They are also maintaining the guidance for “ongoing increases” and a soft commitment to at least two further hikes. But then a Q&A followed with much more dovish (less worried about inflation) undertones. Powell repeated he does not think they can or will cut rates this year. So we’re set up for a 25bp hike in March (assuming no collapse in jobs before then), updated inflation forecasts signaling a faster fall in inflation, and a likely pause while the Fed waits to assess if disinflation is evolving in line with market expectations. What does that mean for USD? It will still be the highest yielder in G10 come March (unless the RBNZ surprises with 75bps). The two big unknowns on the inflation front are: (1) whether and when disinflation will start and (2) how inflationary will China’s reopening turn out. Industrial metals have rallied but oil is down since early November. So still many unanswered questions. The recent retreat in market yields is giving a boost to equities. However, many of the near-term headwinds remain in place, suggesting that we still need to be on guard for surprises in 2023 - both positive and negative.


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Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(-) Apple (AAPL-US) shares fell as it didn’t meet earnings or revenue forecasts, with the company weighed down by iPhone production issues as well as a strong dollar. Owned in Core and US Portfolios.

(-) Amazon (AMZN) fell as it did beat revenue expectations, but its chief financial officer said he expected slower growth rates in the new few quarters for AWS, its cloud division. Owned in US and Opportunity Portfolios.

(-) BCE (BCE-T) A mix coming out of BCE Q4 results, with consolidated revenues and EBITDA both up y/y but slightly missing RBCCM estimates and a slight miss on adjusted earnings. Wireless postpaid net additions beat estimates at +155K, missed on ARPU growth at +0.5%, and strength was seen in internet where BCE continues to dominate. Management increased the dividend by 5.2% and full year guidance came in as expected with CAPEX a small notch higher. BCE yields 5.8%. Owned in Core and Cash Flow Portfolios.

(+) Estee Lauder (EL-US) reported a beat on revenue and earnings. Net sales decreased 17% year-over-year (organic net sales decreasing 11%) driven by weakness in China due to extended Covid lockdowns. By segment, Fragrance and Hair Care led the growth thanks to rising category penetration and improved distribution. The outlook for FY2023 was lowered, reflecting tempered expectations for the return to growth in Asia. Long term, we believe EL to be a quality compounder driven by key trends such as the rise of the global middle class, the rise in the Chinese consumer, and a channel shift to e-commerce globally. Given continued resilience in consumer travel spending, and the recent lifting of China's Covid policies, we think the stock can continue performing. Owned in US Portfolio.

(-) McDonald’s (MCD-US) shares dipped after McDonald’s reported its latest quarterly results. Although the fast food company’s earnings and revenue beat expectations, management cautioned that rising cost pressures are likely to continue in 2023. Owned in US Portfolio.

(-) Starbucks (SBUX-US) While US trends remained solid, China remained a headwind and drove the 1FQ miss. Early signs amid the China reopening are encouraging, but recovery may not be linear and could take longer than expected. No change to overall guidance. Owned in Core and US Portfolios.

Weekend Reading

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ESG Themes for 2023 RBC Capital Markets' Sustainable Finance Group provides an overview of three key themes that we believe will define progress on ESG matters in 2023. RBC SUSTAINABLE FINANCE

LIV Golf: A Look At The Past, Present, And Future Of The Saudi-Backed League LIV Golf took the sports world by storm last year. The Saudi-backed golf league handed out more than $250 million in prize money. They signed some of the world’s top golfers, including Phil Mickelson, Dustin Johnson, and Cameron Smith, and they spent $800 million on the first season — while receiving little-to-no revenue in return. HUDDLE UP



“We have to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.”


-Howard Marks