Market Snapshot
briefing.com
| Dow | 34004.35 | -109.63 | (-0.32%) | | Nasdaq | 11131.33 | -65.33 | (-0.58%) | | SP 500 | 4002.88 | -17.19 | (-0.43%) | | 10-yr Note | 0/32 | 3.50 |
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| | NYSE | Adv 1209 | Dec 1714 | Vol 1.0 bln | | Nasdaq | Adv 1870 | Dec 2682 | Vol 5.4 bln |
Industry Watch
| Strong: -- |
| | Weak: Materials, Financials, Information Technology, Real Estate, Consumer Discretionary |
Moving the Market
-- Knee-jerk selling after FOMC decision came out
-- Digesting Fed Chair Powell's press conference
-- S&P 500 taking out its 200-day moving average and falling below the 4,000 level
-- Weakness in most mega cap stocks weighing on index performance
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Closing Summary
14-Dec-22 16:30 ET
Dow -142.29 at 33971.69, Nasdaq -85.93 at 11110.73, S&P -24.33 at 3995.74
[BRIEFING.COM] Today's trade started on a more upbeat note as market participants awaited the FOMC decision at 2:00 p.m. ET and Fed Chair Powell's press conference at 2:30 p.m. ET. A range-bound trade had the main indices modestly higher with the S&P 500 pushing past its 200-day moving average (4,032).
The initial positive bias was seemingly oriented around the hope that the Fed might throw the market a carrot today with its monetary policy outlook and that Fed Chair Powell would take a less assertive tone in his press conference.
The main indices had been sitting near their session highs right before the FOMC decision and the release of the updated Summary of Economic Projections. Things deteriorated quickly, however, in the wake of the decision to raise the target range for the fed funds rate by 50 basis points to 4.25-4.50% and the indication in the Summary of Economic Projections that the median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%.
Knee-jerk and instantaneous selling, which had the markings of some computer-driven programs, brought the main indices to their intraday lows just before the start of Mr. Powell's press conference. The S&P 500 for its part fell back below its 200-day moving average and the 4,000 level.
As Fed Chair Powell's press conference got underway, the market recovered somewhat despite Mr. Powell talking tough on the need to get inflation back down to 2.0%, saying it is going to take substantially more evidence to give confidence that inflation is on a sustained downward path and that the Fed expects to sit at its terminal rate for some time. He eventually added that, while he thinks the Fed's policies are getting close to the level of sufficiently restrictive, the Fed's focus is not on rate cuts; hence, there are not rate cuts in the Summary of Economic Projections for 2023.
At the same time that the stock market climbed off its lows, the Treasury market also rebounded from the selling it suffered immediately after the FOMC announcement and the U.S. Dollar Index came under renewed selling pressure. The 2-yr note yield, which jumped to 4.33% (from 4.19%), settled the session at 4.26%. The 10-yr note yield, which jumped to 3.55% (from 3.51%), settled the session at 3.50%. The U.S. Dollar Index fell 0.4% settling back to levels it was trading at right before the announcement.
The action in the stock, bond, and currency markets suggested that market participants don't think the Fed will have the runway to take off to a terminal rate that is north of 5.00%. The reason being is that there is an underlying expectation/fear that the lag effect of prior rate hikes is going to undercut the economy enough to pre-empt a move to the elevated levels envisioned in the latest Summary of Economic Projections.
That doesn't mean it is off to the races for the stock market because the residual implication is that economic activity will be weakened to such an extent by the prior rate hikes that earnings prospects will be greatly diminished; therefore, the willingness to pay a premium for every dollar of earnings will be diminished as well.
Only one of the 11 S&P 500 sectors -- health care (+0.1%) -- closed in positive territory. The financial (-1.3%), materials (-1.1%), and real estate (-1.0%) sectors were at the bottom of today's leadership pack along with the information technology sector (-0.9%).
Energy complex futures settled mixed. WTI crude oil futures rose 2.5% to $77.44/bbl and natural gas futures fell 7.9% to $6.40/mmbtu.
- Dow Jones Industrial Average: -6.5% YTD
- S&P Midcap 400: -12.1% YTD
- Russell 2000: -18.9% YTD
- S&P 500: -16.2% YTD
- Nasdaq Composite: -28.6% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index rose 3.2% following a 1.9% decline last week, with purchase applications up 4.0% and refinancing applications up 3.0%
- Import prices fell 0.6% in November after a revised 0.4% decline in October (from -0.2%). Import prices, excluding oil, fell 0.4% following a 0.1% decline in October. Export prices fell 0.3% in November following a revised 0.4% decline in October (from -0.3%). Export prices, excluding agriculture, fell 0.6% after a 0.3% decline in October.
- Weekly EIA Crude Oil Inventories showed a 10.23 million barrel build after last week's draw of 5.19 million barrels.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: November Retail Sales (Briefing.com consensus -0.1%; prior 1.3%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 1.3%), weekly Initial Claims (Briefing.com consensus 227,000; prior 230,000), Continuing Claims (prior 1.671 mln), December Philadelphia Fed Survey (Briefing.com consensus -10.0; prior -19.4), and December Empire State Manufacturing survey (Briefing.com consensus -1.0; prior 4.5)
- 9:15 ET: November Industrial Production (Briefing.com consensus 0.1%; prior -0.1%) and Capacity Utilization (Briefing.com consensus 80.0%; prior 79.9%)
- 10:00 ET: October Business Inventories (Briefing.com consensus 0.4%; prior 0.4%)
- 10:30 ET: Weekly natural gas inventories (prior -21 bcf)
- 16:00 ET: October net Long-Term TIC Flows (prior $118.00 bln)
Market volatility continues
14-Dec-22 15:30 ET
Dow -224.52 at 33889.46, Nasdaq -110.00 at 11086.66, S&P -35.06 at 3985.01
[BRIEFING.COM] The market is still chopping around after Fed Chair Powell's press conference concluded.
Looking ahead to tomorrow, market participants will receive the following economic data:
- 8:30 ET: November Retail Sales (Briefing.com consensus -0.1%; prior 1.3%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 1.3%), weekly Initial Claims (Briefing.com consensus 227,000; prior 230,000), Continuing Claims (prior 1.671 mln), December Philadelphia Fed Survey (Briefing.com consensus -10.0; prior -19.4), and December Empire State Manufacturing survey (Briefing.com consensus -1.0; prior 4.5)
- 9:15 ET: November Industrial Production (Briefing.com consensus 0.1%; prior -0.1%) and Capacity Utilization (Briefing.com consensus 80.0%; prior 79.9%)
- 10:00 ET: October Business Inventories (Briefing.com consensus 0.4%; prior 0.4%)
- 10:30 ET: Weekly natural gas inventories (prior -21 bcf)
- 16:00 ET: October net Long-Term TIC Flows (prior $118.00 bln)
10-yr Treasury note pulls back from post-rate hike high
14-Dec-22 15:05 ET
Dow -109.63 at 34004.35, Nasdaq -65.33 at 11131.33, S&P -17.19 at 4002.88
[BRIEFING.COM] As Fed Chair Powell continues his press conference, the main indices are inching somewhat off session lows.
During Mr. Powell's remarks, he said "we think that the appropriate thing to do now is to move to a slower pace."
The 10-yr note yield is pulling back from its post-FOMC rate hike decision high. It was at 3.56% a short time ago but now sits at 3.51%. The 2-yr note yield remains near its intraday high at 4.26%.
FOMC raises rates 50 bps, as expected
14-Dec-22 14:30 ET
Dow -101.18 at 34012.80, Nasdaq -76.84 at 11119.82, S&P -19.21 at 4000.86
[BRIEFING.COM] The major averages got hit after the FOMC's rate decision. The benchmark S&P 500 (-0.48%) is still in second place, but about 53 points off this afternoon's highs. Shortly, the Fed unanimously voted to raise the target range on the federal funds rate by 50 bps to 4.25% to 4.50%, saying that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
Other key excerpts from the FOMC statement included that recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Further, the Fed's updated projections from its December meeting show the median expectation for rates in 2023 is 5.1%, sees inflation of 5.6% at the end of 2022, 3.1% inflation at end of 2023, and unemployment rate of 4.6% or higher by the end of 2023.
Yields across the curve moved higher following the FOMC decision with the yield on the benchmark 10-yr note now down about 8 bps to 3.545%.
Gold retreats ahead of FOMC decision
14-Dec-22 13:55 ET
Dow +251.57 at 34365.55, Nasdaq +87.01 at 11283.67, S&P +30.40 at 4050.47
[BRIEFING.COM] The major averages have perked up into the final two hours of trading on Wednesday, the tech-heavy Nasdaq Composite (+0.77%) squeaking into the lead ahead of the FOMC decision.
Gold futures settled $6.80 lower (-0.4%) to $1,818.70/oz, pulling back from multi-month highs as investors take a wait-and-see approach to the upcoming rate decision.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $103.54.
As a reminder, the FOMC will announce its rate decision at the top of the hour.
Page One
Last Updated: 14-Dec-22 09:04 ET | Archive
Market faces a big hump on this Hump Day
Today is Hump Day, but it's not an ordinary Hump Day. It is setting up to be an extraordinary Hump Day. That's because there will be an FOMC policy decision published at 2:00 p.m. ET and it will be accompanied by an updated Summary of Economic Projections that will include a new median estimate for the Fed's terminal rate. Fed Chair Powell will then follow with a 2:30 p.m. ET press conference to try to explain it all.
How the Fed Chair explains things will go a long way toward determining if the market can get over the hump with its fear of the Fed.
That's a big hump judging by the deep inversions across the Treasury yield curve, and it is a big ask of the Fed Chair to sound like a softie with the consumer inflation rate still north of 7.0% and average hourly earnings up 5.1% year-over-year.
The inability to sustain yesterday's rally effort had much to do we think with some angst that the Fed Chair will remain inclined to emphasize that inflation is still far too high, pointing to the stickiness of core services inflation and a tight labor market, and that the Fed has more work to do to bring inflation down to the 2% target.
That thinking could be codified in the Summary of Economic Projections with a 50-basis point increase in the median estimate for the terminal rate from 4.60% in September. The fed funds futures market is aligned more with a 25-basis point increase for the terminal rate estimate, evidenced by pricing in a 69.6% probability that the terminal rate will be 4.75-5.00% by mid-2023.
Of course, by now, the market must realize that what the Fed puts on paper is written in pencil since the forecasts are always subject to revision. Accordingly, if the Fed's median estimate for the terminal rate is higher than what the market expects, the response will have a lot to do with whether the market actually believes/fears the Fed is destined to go there.
That's where the tone and cadence from Fed Chair Powell will have an outsized impact today.
It is widely expected that the FOMC will vote to raise the target range for the fed funds rate by 50 basis points to 4.25-4.50%. There will be some added interest in whether that vote is unanimous. For what it's worth, the fed funds futures market places a 20.6% probability on a 75-basis points rate increase, according to the CME FedWatch Tool.
Regardless, the policy rate is going higher today, which also means rates on variable rate debt are going higher today, too, increasing repayment burdens for holders of revolving debt and installment payments for borrowers seeking new fixed-rate loans. That reality will be an inevitable drag on economic activity and it will be incorporated in the market's concerns about the long and variable lags of monetary policy on economic activity.
Those lags are a big hump for the U.S. economy and global economy. The ECB and Bank of England are holding policy meetings on Thursday and they are also expected to announce 50-basis point rate hikes in their policy rates.
The hump for now is the FOMC decision and the market is hesitating to climb over it, notwithstanding some encouraging Q4 and FY23 EPS guidance from Delta Air Lines (DAL).
Currently, the S&P 500 futures are down three points and are trading slightly below fair value, the Nasdaq 100 futures are down 17 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are up five points and are trading roughly in-line with fair value.
-- Patrick J. O'Hare, Briefing.com
REV Group is revving up today as strong RV pricing drives upside quarterly performance (REVG)
REV Group (REVG), a manufacturer of emergency vehicles, buses, and RVs, is trucking higher after topping 4Q22 EPS and revenue estimates and issuing a solid outlook for FY23. The upside results come amid lingering supply chain issues, especially in the chassis market, and ongoing weakness in an RV industry that's been beset by rising interest rates. Through a combination of price increases, effective inventory management and better-than-expected demand in the RV segment, and increased shipments of school buses, REVG overcame this challenging operating environment.
- When fellow RV maker Thor Industries (THO) posted blowout Q1 results on December 7, an encouraging signal for REVG's earnings report was revealed. THO, which owns the Airstream and Jayco brands, has ratcheted production lower this year to match the decelerating RV demand and to ensure that its dealers aren't put into a difficult inventory position.
- REVG, on the other hand, commented during its earnings call that it maintained its regular production schedule in Q3. However, the company was able to keep its production rate at a normalized level because dealer inventories of its brands (American Coach, Fleetwood RV, Holiday Rambler) remain about 50% below pre-COVID levels.
- This favorable supply situation, coupled with improving order rates towards the end of the quarter, supported positive price realization. Along with a favorable product mix, the higher prices led to a 19% yr/yr increase in net sales for the Recreation segment, and a 63% jump in adjusted EBITDA to $35.3 mln.
While the Recreation segment was the surprising star of the show, the Commerical unit also performed reasonably well in Q3, given the difficult climate.
- Increased shipments of school buses, terminal trucks, and street sweepers drove a 17% increase in revenue to $110.9 mln.
- Labor constraints, supply chain disruptions, and an unfavorable mix of transit buses caused adjusted EBITDA to slip by 42% to $5.7 mln, but REVG expects segment margins to trough in 1Q23 and for segment profitability to improve sequentially throughout the year.
The main sore spot for REVG was the Fire & Emergency (F&E) segment, which saw revenue decline by nearly 9% to $277.3 mln.
- Perhaps more so than the other two businesses, F&E was impacted by the supply chain issues in the chassis market. In order to reduce its exposure to third party suppliers, REVG launched a new commercial chassis platform this year that will leverage its Spartan Chassis business for the F&E portfolio.
- Moving forward, a greater percentage of fire equipment will be built on this platform than ever before.
- Additionally, REVG developed a product roadmap across the Fire group brands that will enable the standardization of subassemblies.
Overall, REVG's Q4 results were better-than-feared, but, more importantly, FY23 is shaping up to be a stronger year as bookings strengthened and as the company exited Q4 with a record backlog of $4.2 bln.
Delta Air Lines expects to fly above macro-related headwinds in FY23 on strong demand (DAL)
Following a turbulent day for airline stocks that featured United Airlines' (UAL) blockbuster 787 Dreamliner order with Boeing (BA) and a sharp jump in oil prices, Delta Air Lines (DAL) had upbeat news to share this morning, issuing a bullish outlook for 4Q22, FY23, and FY24. For each of these periods, DAL guided EPS well above expectations with operating margin improving from 10-12% in FY23 to 13-15% in FY24.
At the core of this brightening outlook is a robust and resilient demand environment for domestic air travel and building momentum for corporate and international travel. Additionally, while DAL capitalizes on that strong demand, it expects non-fuel unit costs to decrease by 5-7% in FY23, even as the airline boosts salaries for pilots and flight attendants.
- This expectation for an easing of costs is key because constrained capacity and the associated rise in unit costs have acted as a major headwind for DAL and other airline stocks this year. Despite the remarkable recovery and upswing in the air travel industry, DAL, UAL, and AAL are down by 11%, 5%, and 24%, respectively, on a year-to-date basis.
- Further illustrating the issue, DAL comfortably beat Q3 revenue estimates, but it fell short on EPS as Cost per Available Seat Mile (CASM) surged by 43% due to higher labor expenses and staffing shortages that caused it to cut back on its flying schedule.
Looking out to 2023, though, DAL sees a full restoration of its network materializing, enabling it to spread its costs out across more available seats.
- For some context, the company's Q4 capacity is expected to be down by 8-9% compared to 2019 levels, after declining by 17% in Q3.
- At the same time that capacity is normalizing, ticket revenue should continue to grow at a healthy clip, fueled by ongoing strength for premium products (Delta One Suites, Premium Select Seats), corporate sales, and international flights. In Q3, corporate sales recovered to 80% of pre-pandemic levels, while trans-Atlantic flights saw a 12% increase in revenue.
DAL's forecast for 15-20% revenue growth and margin expansion in FY23 also has positive implications for free cash flow and its debt reduction plans. Specifically, the company is targeting free cash flow of $2.0 bln next year, with that number doubling to $4.0 bln in FY24. As the company uses this cash flow to pay down debt, it anticipates a return to investment grade metrics in the near future.
Given the cloudy macroeconomic backdrop, it's hard to say that it's only clear skies ahead for DAL and its counterparts. However, cracks in this stunning recovery story have yet to emerge and today's update from DAL only solidifies the notion that air travel is relatively immune to the economic headwinds.
Lennox Int'l heads lower today as investors are a bit cool to its FY23 guidance (LII)
Lennox Intl (LII -1%) offered a bit of a mixed first glimpse into what to expect for 2023. The HVAC equipment giant guided this morning to FY23 adjusted EPS of $14.25-15.25, with core revenue growth of +0-4%, which excludes the impact of the planned divestiture of its European operations. The mid-point of the EPS guidance was a bit below analyst expectations. However, we wonder if all analysts have removed its European business from their models, which accounts for about 5% of total sales.
- As such, we view the FY23 EPS guidance as generally in-line, maybe a bit light. However, it was not nearly as bad as it could have been given that LII expects residential volumes to be down in 2023, primarily driven by the new home construction slowdown. Lennox's goal is to still deliver revenue growth, margin growth, and EPS growth. Lennox expects residential unit softness to be overcome by better pricing, mix and productivity gains. In the nearer term, Lennox says it expects to close out 2022 on a strong note, even though Q4 is seasonally its weakest quarter of the year.
- It is worth noting that Lennox recently hired a new CEO. Alok Maskara took the helm on May 9, 2022. He previously served for five years as CEO of Luxfer Holdings (LXFR), an industrial company focused on advanced materials. There, he spearheaded the company's transformation, including making several acquisitions and joining partnerships while driving profitability.
- The new CEO said recently that there will not be massive changes, but investors can expect some tweaks. Probably the biggest tweak so far was Lennox's recent decision to explore strategic alternatives for its European commercial HVAC and refrigeration businesses. This was not a giant step, but at 5% of total revenue, this was pretty significant. Lennox wants to focus on North America, where it feels it is best positioned for revenue growth and its profit margin targets. Another tweak will be that, starting in 2023, Lennox will roll its North America Refrigeration segment into its Commercial segment and start reporting just two segments: Residential and Commercial.
- We also like that the new CEO said recently at an investor conference that he sees HVAC as a growth industry with macro tailwinds that is fueled by innovation. At the same time, it's an industry with strong competition, but disciplined competition. He also sees Lennox as having significant market share upside potential because it is one of the smaller players among the larger 4-5 players. Lennox should also benefit from tighter regulations around emissions, such as the move to A2L refrigerants. Also, with people working from home more, they are running their HVAC systems more, which will need to be replaced sooner.
Overall, the stock is lower today on the 2023 guidance. We think investors are focusing on the slight downside to expectations and perhaps investors wanted to see better revenue growth. However, we see the EPS guidance as being better than feared, especially in light of the new home construction slowdown expected next year.
Braze shares bounce back quickly as positives from Q3 erase an initial negative reaction (BRZE)
With expectations ahead of Braze's (BRZE) Q3 (Oct) earnings report low, following fellow customer experience management platform developer Spinklr's (CXM) mild OctQ results last week, its earnings and sales upside and upbeat Q4 (Jan) outlook is fueling rapid rebound action today. Today's earlier sell-off was likely sparked by a few blemishes, magnified by BRZE's slightly pricey 6x forward sales multiple, a premium compared to CXM at 3x.
- The macroeconomic backdrop did not improve over the last quarter. BRZE commented that, like many of its peers, it continues to experience macroeconomic headwinds across geographies and industry verticals, manifesting in longer sales cycles, slower new business growth, and fewer multi-year contracts.
- The souring economic conditions drove a continual slowdown in revenue growth. BRZE grew revs 45.6% yr/yr to $93.13 mln, representing a deceleration from the +54.5% registered in Q2 and +61.9% in Q1 (Apr).
- At the same time, sales are expected to remain in a lower gear to close out the year. BRZE is predicting Q4 revs of $95-96 mln, translating to 35.6% growth yr/yr at the midpoint.
- Other metrics simultaneously tapped the brakes. Free cash flow dipped further into negative territory as CapEx grew, slipping to negative $28.1 mln in Q3 from negative $24.7 mln in Q2 and positive $15.7 mln in Q1. BRZE's customer base, although accelerated sequentially, expanded by just 37.5% yr/yr in Q3, down slightly from 42.9% in Q2. BRZE also saw a slowdown in yr/yr and sequential growth in customers with annual recurring revenue (ARR) above $500,000.
Still, there were plenty of positives from Q3. Revs grew at an impressive clip and exceeded BRZE's $90-91 mln guidance. Meanwhile, current RPO was up 42% yr/yr and 3% sequentially, driven by contract renews and strong upsells, with signs pointing to sustained upsell motions across BRZE's customer base. Management also remarked that expenses should begin to moderate after Q4 as the company focuses on driving operating leverage. BRZE also guided Q4 adjusted EPS and sales ahead of consensus, considerably better than CXM, which forecasted JanQ earnings in-line with consensus and revs below consensus. BRZE also noted that its pipeline remains strong, with demand continuing to be robust.
Finally, BRZE remains committed to achieving profitability. Although there is no clear timeline for when this may happen (analysts are not expecting an annual profit over the next two years), maintaining focus on profitability will be vital in traversing the current rising rate and inflationary environment.
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