Market Snapshot
briefing.com
| Dow | 33203.74 | -93.17 | (-0.28%) | | Nasdaq | 10918.10 | -38.90 | (-0.36%) | | SP 500 | 3920.87 | -7.99 | (-0.20%) | | 10-yr Note | -2/32 | 3.40 |
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| | NYSE | Adv 1221 | Dec 1736 | Vol 853 mln | | Nasdaq | Adv 1729 | Dec 2807 | Vol 4.6 bln |
Industry Watch
| Strong: Communication Services, Health Care, Energy |
| | Weak: Financials, Consumer Discretionary, Information Technology, Industrials, Materials |
Moving the Market
-- Digesting latest slate of economic data including weekly jobless claims that came in stronger than expected, indicating the labor market remains in good shape and December building permits, which decreased for the third consecutive month
-- Rate hike concerns fueled by JPMorgan CEO Jamie Dimon's remarks that he thinks rates will top 5.0%
-- Reacting to Fed Vice Chair Brainard's recent speech
-- Modest rise in Treasury yields
-- Profit taking activity after a big run to start 2023
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Closing Summary
19-Jan-23 16:25 ET
Dow -252.40 at 33044.51, Nasdaq -104.74 at 10852.26, S&P -30.01 at 3898.85
[BRIEFING.COM] The stock market retreat continued today, building on Wednesday's sizable losses. Today's negative bias was fueled by lingering growth and rate hike concerns following a slate of economic data this morning.
Weekly initial claims (actual 190,000; Briefing.com consensus 212,000) decreased to their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
At the same time, investors received weak building permits data for December (actual 1.330 mln; Briefing.com consensus 1.370 mln), highlighting the deteriorating economic backdrop and rising risk of a policy mistake triggering a deeper setback. However, that report contained one positive element, as single-family starts grew 11.3% month-over-month.
Piling onto the market's concerns, JPMorgan Chase CEO Jamie Dimon said in a CNBC interview this morning “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.
In addition to the aforementioned growth and rate hike worries, there may have been an element of profit taking behind the recent weakness after a big run to start 2023. Including today's losses, the S&P 500 and Nasdaq Composite are still up 1.6% and 3.7%, respectively, this year.
The main indices were pinned in negative territory for the entire session, but there was a recovery attempt in the afternoon trade that seemed to coincide with Fed Vice Chair Brainard giving a speech. Ms. Brainard's remarks did not include anything surprising. She said "Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis."
The recovery attempt didn't last, however, and the main indices faded from session highs ahead of the closing bell.
Most of the S&P 500 sectors traded down with the industrial (-2.1%) sector showing the steepest loss. Other influential laggards included the consumer discretionary (-1.7%), financial (-1.2%), and information technology (-1.1%) sectors.
The energy sector (+1.1%) led the outperformers amid rising oil prices. WTI crude oil futures rose 1.5% to $80.73/bbl.
Treasury yields made relatively small upside moves today. The 2-yr note yield rose three basis points to 4.12% and the 10-yr note yield rose two basis points to 3.40%.
In an expected development, Treasury Secretary Yellen notified Congress via a letter that the debt ceiling has been reached, prompting the Treasury Department to begin employing extraordinary measures.
- Russell 2000: +4.3% YTD
- Nasdaq Composite: +3.7% YTD
- S&P Midcap 400: +3.6% YTD
- S&P 500: +1.6% YTD
- Dow Jones Industrial Average: -0.3% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
- The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
- Total housing starts declined 1.4% month-over-month in December to a seasonally adjusted annual rate of 1.382 million units (Briefing.com consensus 1.355 million) while total building permits declined 1.6% month-over-month to a seasonally-adjusted annual rate of 1.330 million (Briefing.com consensus 1.370 million).
- The key takeaway from the report is that new single-family starts increased by 11.3% month-over-month even though total starts recorded a month-over-month decrease. This element lends some optimism regarding a sector that has been pressured by rising rates and decreasing affordability. That said, building permits, which have a leading indicator status, decreased for the third consecutive month.
- The Philadelphia Fed Index fell to -8.9 in January (Briefing.com consensus -11.0) from -13.8 in December.
- Weekly EIA Natural Gas Inventories showed a draw of 82 bcf versus a build of 11 bcf last week.
- Weekly Crude Oil Inventories showed a build of 8.41 million barrels after a build of 18.96 million barrels last week.
Economic data tomorrow is limited to the December Existing Home Sales (Briefing.com consensus 3.96 million; prior 4.09 million) at 10:00 a.m. ET.
Indices fall from session highs ahead of the close
19-Jan-23 15:30 ET
Dow -137.89 at 33159.02, Nasdaq -57.92 at 10899.08, S&P -15.80 at 3913.06
[BRIEFING.COM] The main indices are drifting somewhat lower ahead of the close.
The 2-yr Treasury note yield rose three basis points to 4.12% and the 10-yr note yield rose two basis points to 3.40%.
Netflix (NLFX) and PPG Industries (PPG) are among the earnings reporters after today's close.
Ahead of Friday's open, SLB (SLB), Regions Fincl (RF) and Ally Financial (ALLY), along with other names, are set to report earnings.
Economic data tomorrow is limited to the December Existing Home Sales (Briefing.com consensus 3.96 million; prior 4.09 million) at 10:00 a.m. ET.
Upside moves coincided with Fed Vice Chair giving a speech
19-Jan-23 15:00 ET
Dow -93.17 at 33203.74, Nasdaq -38.90 at 10918.10, S&P -7.99 at 3920.87
[BRIEFING.COM] The upside moves that brought the main indices to their highs of the day coincided with Fed Vice Chair Brainard giving a speech, which didn't include anything surprising. The S&P 500 is comfortably above the 3,900 level.
She said "Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis."
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 1.5% to $80.73/bbl and natural gas futures fell 0.3% to $3.12/mmbtu.
Comerica outperforms in S&P 500 following earnings
19-Jan-23 14:30 ET
Dow -85.07 at 33211.84, Nasdaq -35.53 at 10921.47, S&P -8.05 at 3920.81
[BRIEFING.COM] The markets are at HoDs in recent trading, the S&P 500 (-0.20%) now hosting the shallowest losses on the day.
S&P 500 constituents Enphase Energy (ENPH 229.92, -20.39, -8.15%), Generac (GNRC 106.76, -7.15, -6.28%), and VF Corp (VFC 28.61, -1.45, -4.82%) pepper the bottom of today's standings. ENPH follows general weakness in the solar space, pulling back from recent gains, while VFC caught a sell side downgrade out of Williams Trading.
Meanwhile, Comerica (CMA 70.36, +4.42, +6.70%) is today's top performer following earnings.
Gold snaps modest losing streak
19-Jan-23 14:00 ET
Dow -172.99 at 33123.92, Nasdaq -79.95 at 10877.05, S&P -20.89 at 3907.97
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.73%) still sits at the bottom of the major averages.
Gold futures settled $16.90 higher (+0.9%) to $1,923.90/oz as a modest dip in the dollar saw gold notch its first advance since Friday.
Meanwhile, the U.S. Dollar Index is down about -0.3% to $102.10.
Page One
Last Updated: 19-Jan-23 09:02 ET | Archive
Poised to build on yesterday's losses
The S&P 500 futures are down 33 points and are trading 0.9% below fair value. The Nasdaq 100 futures are down 107 points and are trading 0.9% below fair value. The Dow Jones Industrial Average futures are down 271 points and are trading 0.8% below fair value.
Equity futures indicate a lower open for the stock market, carrying over yesterday's downside momentum. Recession and Fed rate hikes fears continue to plague investors after the latest slate of economic data.
Total housing starts declined 1.4% month-over-month in December to a seasonally adjusted annual rate of 1.382 million units (Briefing.com consensus 1.355 million) while total building permits declined 1.6% month-over-month to a seasonally-adjusted annual rate of 1.330 million (Briefing.com consensus 1.370 million).
The key takeaway from the report is that new single-family starts increased by 11.3% month-over-month even though total starts recorded a month-over-month decrease. This element lends some optimism regarding a sector that has been pressured by rising rates and decreasing affordability. That said, building permits, which have a leading indicator status, decreased for the third consecutive month.
Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle. Initial jobless claims for the week ending January 14 decreased by 15,000 to 190,000 (Briefing.com consensus 212,000). Continuing jobless claims for the week ending January 7 increased by 17,000 to 1.647 million.
The key takeaway from the report is that new claims were at their lowest level since late September, implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.
Earlier this morning, JPMorgan CEO Jamie Dimon told CNBC in an interview “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.
Also, many names that reported quarterly results since yesterday's close are trading down ahead of the open.
The 2-yr Treasury note yield is up two basis points to 4.11% and the 10-yr note yield is up two basis points to 3.40%. The U.S. Dollar Index is down 0.1% to 102.28.
Energy complex futures trade in mixed fashion. WTI crude oil futures are down 0.1% to $79.73/bbl and natural gas futures are up 0.8% to $3.14/mmbtu.
Alcoa rolling lower as lower aluminum prices and high energy costs dent profits (AA)
Aluminum producer Alcoa (AA) is rolling lower after issuing a disappointing Q4 earnings report that also included a tepid shipment outlook for FY23.
- After surging higher in 2021 and early 2022, aluminum prices softened considerably over the past several months as rising macroeconomic headwinds cut into global demand.
- Simultaneously, high energy prices applied upward pressure on production costs, further squeezing margins and profits.
- The end result was that AA's Q4 adjusted EBITDA plunged by 86% yr/yr to $29 mln, badly missing analysts' estimates.
On the top-line, the story isn't much better as revenue fell by over 20% yr/yr to $2.66 bln.
- Persistent weakness across Europe and the impact of COVID-19 in China continued to weigh on demand, but the revenue decline is also related to production issues.
- For instance, production in the Alumina segment decreased by 2% due to the partial curtailment of AA's San Ciprian refinery in Spain. In Q3, the company decided to reduce production there due to high natural gas prices.
- Similarly, AA disclosed a partial curtailment at its refinery in Western Australia due to a natural gas shortage.
The natural gas shortage isn't the only issue that AA is contending with in Australia.
- With the annual mine plan approval process taking longer than usual in Western Australia, the company is working with regulators to ensure that it's in compliance with more stringent environmental regulations.
- Accordingly, AA is reducing the bauxite grade at its Huntly mine beginning on April 20, 2023. From a margin standpoint, that's a negative development for AA because the processing of lower quality bauxite is costlier.
Despite a relatively lighter global supply of aluminum, AA is still expecting its total alumina shipments to decrease by about 500K metric tons yr/yr to 12.7-12.9 mln metric tons in 2023. Looking at aluminum specifically, AA is anticipating shipments to remain flat yr/yr at 2.5-2.6 mln metric tons, which slightly missed analysts' forecasts. The guidance looks especially soft because AA is restarting production at its Alumar smelter in Brazil and at its Portland smelter in Australia.
On the positive side, energy prices have been easing in Europe. Furthermore, demand in the automotive, aerospace, and packaging end markets should remain healthy in 2023. The main takeaway, though, is that AA's margins and profits are likely to dip lower in 2023, barring another huge rally in aluminum prices.
Fastenal reverses gains as Q4 report stokes some uneasiness surrounding industrial markets (FAST)
Mammoth fastener and industrial/construction supplies distributor Fastenal (FAST -1%) quickly reversed initial gains that followed its minor top and bottom line upside in Q4, as well as its raised quarterly dividend to $0.35 per share from $0.31. FAST typically tops earnings estimates by a few pennies, with its largest earnings beat in the past five years only reaching high single digits. Therefore, the market tends to not overreact to just minor earnings upside.
- Instead, today's unfavorable reaction likely branches from FAST's decelerating sales growth in Q4. FAST grew revs by 10.7% yr/yr to $1.70 bln, slowing from the +16.0% posted in Q3, +18.0% in Q2, and +20.3% in Q1. This negative trend may be spooking investors, especially with so many economic uncertainties on the horizon.
- Management touched on this subject, with CFO Holden Lewis commenting that the company saw a deceleration in industrial production during the quarter. Also, a handful of FAST's large retailer customers tightened their belts surrounding facilities and labor. Meanwhile, FAST's non-North American sales softened.
- The comments echo those from peer MSC Industrial (MSM), which noted it was hearing continued talk of softening demand among a portion of its customers, along with extended holiday shutdowns, earlier this month.
- Also, although operating margins remained stable at 19.6%, FAST experienced margin pressure in the quarter. Gross margins contracted greater than FAST anticipated at 120 bps yr/yr. The decline can be chalked up to a wider-than-expected drag related to product and customer mix as non-fastener growth outpaced fasters. FAST's non-fastener and non-safety products tend to have less centralized supply chains and more unplanned spending, which, combined with slower demand and a better-stocked marketplace, resulted in pronounced discounting.
- FAST remarked that this dynamic was related to its actions rather than the state of the market and plans to address the problem in 1Q23.
- The company also noted that it was a bit more aggressive with headcount adds than may have been prudent given the cloudy manufacturing forecast in 2023.
FAST's Q4 results did not do much to douse the nervousness within the industrial economy sparked by MSM's concerning Q4 report earlier this month. We liked seeing FAST hike its quarterly dividend, something it has done following Q4 earnings for two consecutive years, as well as its manufacturing-related sales, which total roughly three-quarters of revenue, climb 16% yr/yr. However, its comments regarding demand were not very reassuring. As we mentioned following MSM's report, perhaps FAST is taking a conservative viewpoint. Nevertheless, it may be worth staying on the sidelines to wait and see if market dynamics improve over the next few months.
Discover Financial Services sinks lower as investors detect rising strain on its borrowers (DFS)
On the surface, Discover Financial Services' (DFS) 4Q22 earnings report looks strong as the credit card company beat EPS and revenue estimates, thanks to a 24% jump in net interest income. However, a closer look at the results reveals a potential warning sign regarding the health of the consumer and the associated strength of DFS's balance sheet. Specifically, the company's delinquency and net charge-off rates continue to trickle higher, raising concern that consumers' ability to repay debt is strained after months of fending off inflation and rising interest rates.
- When the largest banks in the country kicked off the Q4 earnings season last week, some cracks in the strong consumer narrative emerged. For instance, JPMorgan Chase (JPM) disclosed that net charge-offs increased by $337 mln yr/yr to $887 mln, while rival Bank of America (BAC) reported a $169 mln increase to $689 mln.
- This didn't cause too much alarm, though, because the size of JPM's and BAC's balance sheets are so massive that the increases barely moved the needle.
- Even with the jump in net charge-offs, JPMs net charge-off rate for card services remained very low at just 1.62% compared to 1.40% in Q3.
Unlike JPM, BAC, and other major banks, DFS is almost completely exposed to higher risk credit card loans and personal loans.
- In other words, DFS is not afforded the luxury of masking any troubles that may be arising within its consumer loan portfolio by allocating more capital towards higher quality mortgages and commercial loans. That's a key disadvantage relative to banks because consumers tend to pay their mortgages and auto loans first, before paying their credit card bill.
- Accordingly, the financial impact of a stressed consumer is more pronounced on DFS and peers such as Visa (V), Mastercard (MA), and American Express (AXP), each of which are scheduled to report earnings next week.
- In Q4, DFS's credit card net charge-off rate climbed by 89 bps yr/yr to 2.37%, while the 30+ day delinquency rate was also higher by 89 bps to 2.53%. What's especially concerning is that the delinquency rate trend is worsening, moving from 2.23% in October to 2.36% in November.
If DFS was concerned about rising credit risks, it didn't really show in Q4 as total loans grew by 20% yr/yr to $112.1 bln. On the other hand, the company set aside $883 mln in provision for credit losses, up by $620 mln from a year earlier. The main takeaway is that rising interest rates have become a double-edged sword for DFS. While higher rates are pushing net interest income higher, they're also creating more balance sheet risk as illustrated by the steady increase in delinquencies.
Procter & Gamble slips today as investors weigh concerning volume declines in DecQ (PG)
Procter & Gamble (PG -1%) is slipping today despite producing Q2 (Dec) results in line with consensus, reiterating its FY23 earnings forecast, and raising its FY23 sales projection. Today's gloomy reaction likely stems from the widening volume decline yr/yr as the consumer staples giant continually hikes its prices.
- Volumes fell across the board, the first time in years. Consolidated volumes dropped by 6% yr/yr, extending a negative trend that started in 4Q22 (Jun) when volumes dipped 1% and carried on into 1Q23 (Sep) when volumes declined 3%.
- Part of the volume contraction was fueled by price hikes; in Q4, prices grew 10% yr/yr. Volume drop-offs were most pronounced in categories that saw the most significant price increases, such as Grooming, where prices climbed 11% and volumes fell 8%, and Fabric & Home Care, where prices jumped 13%, driving a 7% volume decline.
- However, PG emphasized that the weakening volumes were not straightforward. Half of the decline was not consumption-driven, resembling what PG witnessed in Q1. For example, one point was related to PG's decision to cut its Russia portfolio by 50%. About two points stemmed from China's COVID-19 lockdowns and temporary inventory reductions due to retailers reducing stock to reserve cash.
- PG also added that it is encouraged by its volume shares holding globally, with its biggest market, the U.S., seeing an acceleration of volume share by 50 bps over the past three months.
- Touching on elasticities, PG noted that it continues to see more favorable elasticities than expected based on historical data, with Europe being the exception. PG points to its volumes falling just 3% when stripping away the nonconsumption-related impacts despite prices climbing 10% as evidence of its price inelasticity.
- Regarding Europe, PG noted that this is one place where elasticities reverted toward historical norms.
Looking ahead, PG's increased FY23 revenue growth guidance of negative 1% to flat yr/yr from negative 1-3% affirmed that its volume shares are holding up decently. PG also reiterated its FY23 adjusted EPS growth of flat to +4% yr/yr. Furthermore, PG's costs and FX headwinds are projected to ease somewhat from last quarter. The company anticipates material costs, freight costs, and FX impacts to total approximately $3.7 bln, a $200 mln drop from its projection in Q1. Still, the estimated hit to EPS is $1.50, meaningfully higher than the $1.33 PG initially anticipated.
Overall, PG is enduring a period of puts and takes. While some economic headwinds are easing on one end, others are intensifying on the other end. For example, modest improvements should begin in China, but European markets are softening. Meanwhile, the U.S. remains a resilient market. However, this situation is not exactly uplifting for investors, especially given PG's relatively premium valuation of 25x forward earnings.
Lastly, as one of the first major consumer defensive companies to report DecQ earnings, PG's results have set a slightly bearish tone ahead of DecQ earnings reports from Kimberly-Clark (KMB), Colgate-Palmolive (CL), Church & Dwight (CHD), and Clorox (CLX), over the next two weeks.
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