Market Snapshot
briefing.com
| Dow | 33368.14 | -58.40 | (-0.17%) | | Nasdaq | 12740.57 | +82.50 | (0.65%) | | SP 500 | 4204.82 | +11.57 | (0.28%) | | 10-yr Note | -2/32 | 3.71 |
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| | NYSE | Adv 1728 | Dec 1170 | Vol 804 mln | | Nasdaq | Adv 2768 | Dec 1652 | Vol 4.2 bln |
Industry Watch
| Strong: Communication Services, Real Estate, Health Care, Information Technology |
| | Weak: Consumer Staples |
Moving the Market
-- Uncertainty about the debt ceiling continues to be a limiting factor; resident Biden and House Speaker McCarthy plan to meet around 5:30 p.m. ET tonight for further discussions
-- Strength in bank stocks boosting sentiment
-- Minneapolis Fed President Kashkari (FOMC voter) said in a CNBC interview that a decision to pause in June is a close call, adding that if the Fed skips in June, it does not mean the tightening cycle is over
-- Rising Treasury yields in response to Fed commentary
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Closing Summary
22-May-23 16:25 ET
Dow -140.05 at 33286.49, Nasdaq +62.88 at 12720.95, S&P +0.65 at 4193.90
[BRIEFING.COM] Index level performance was mixed today, yet action under the surface skewed more positive. Still, there was not a lot of conviction on either side of the tape. Uncertainty about the debt ceiling remains front of mind for market participants.
Over the weekend, Treasury Secretary Janet Yellen reiterated in an interview that early June is a "hard deadline" for the debt ceiling and that the odds the US can pay all its bills on June 15 are "quite low" without a debt ceiling increase, according NBC News. House Speaker Kevin McCarthy, though, told reporters that it's possible to get a deal tonight or later this week, according to CNBC.
President Biden and House Speaker McCarthy plan to meet around 5:30 p.m. ET tonight for further discussions.
There was also some commentary from Fed officials for market participants to digest today. Minneapolis Fed President Kashkari (FOMC voter) said in a CNBC interview that a decision to pause in June is a close call, adding that if the Fed pauses in June, it does not mean the tightening cycle is over. St. Louis Fed President Bullard (not an FOMC voter) said he thinks two more rate hikes are needed this year, according to Bloomberg.
Stocks didn't have an outsized reaction to the aforementioned catalysts. The major indices clung to fairly narrow ranges for the entire session, sporting only modest gains or declines. The S&P 500 briefly peaked above 4,200 on a few occasions today, but couldn't maintain a posture above that level, which has offered stern resistance since last August. Like Friday, the S&P 500 closed today's session slightly below 4,200.
Gains in some of the mega caps, along with a strong showing from bank stocks, offered some support to the broader market. Tesla (TSLA 188.87, +8.73, +4.9%) jumped nearly 5.0% on no news while Alphabet (GOOG 125.87, +2.62, +2.1%), Microsoft (MSFT 321.18, +2.84, +0.9%), and Meta Platforms (META 248.32, +2.68, +1.1%) all logged nice gains.
The SPDR S&P Bank ETF (KBE) rose 2.4% and the SPDR S&P Regional Banking ETF (KRE) gained 3.2%. This comes after PacWest Bancorp (PACW 6.85, +1.12, +19.6%) disclosed it entered into a loan purchase and sale agreement with a unit of Kennedy-Wilson Holdings (KW 15.55, +0.49, +3.3%) to sell a portfolio of 74 real estate construction loans with an approximate $2.6 billion aggregate principal balance currently outstanding.
Strength from regional bank shares also helped the Russell 2000 outperform its peers today, rising 1.2%.
The S&P 500 communication services sector (+1.2%) held the top spot among the 11 sectors by a decent margin thanks to gains in Meta Platforms and Alphabet. Real estate (+0.7%) and financials (+0.2%) were also top performers today. The consumer staples sector (-1.5%) closed at the bottom of the pack.
Treasuries retreated in response to the Fed commentary with shorter tenors seeing greater selling action. The 2-yr note yield rose seven basis points to 4.34% and the 10-yr note yield rose two basis points to 3.71%.
- Nasdaq Composite: +21.5% YTD
- S&P 500: +9.2% YTD
- Russell 2000: +1.9% YTD
- S&P Midcap 400: +1.6% YTD
- Dow Jones Industrial Average: +0.4% YTD
There was no U.S. economic data of note today.
Lowe's (LOW), BJ's Wholesale (BJ), AutoZone (AZO), and Dick's Sporting Goods (DKS) are among the notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 9:45 a.m. ET: May IHS Markit Manufacturing PMI - Prelim (prior 50.2) and IHS Markit Services PMI - Prelim (prior 53.6)
- 10:00 a.m. ET: April New Home Sales (Briefing.com consensus 660,000; prior 683,000)
Market dips ahead of the close
22-May-23 15:35 ET
Dow -118.37 at 33308.17, Nasdaq +64.22 at 12722.29, S&P +2.71 at 4195.96
[BRIEFING.COM] The market turned modestly lower ahead of the close.
After the close, Zoom Video (ZM), HEICO (HEI), Nordson (NDSN), and Capital Southwest Corp. (CSWC) will report earnings results.
Lowe's (LOW), BJ's Wholesale (BJ), AutoZone (AZO), and Dick's Sporting Goods (DKS) are among the notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 9:45 a.m. ET: May IHS Markit Manufacturing PMI - Prelim (prior 50.2) and IHS Markit Services PMI - Prelim (prior 53.6)
- 10:00 a.m. ET: April New Home Sales (Briefing.com consensus 660,000; prior 683,000)
Energy complex futures settle mixed; CVX narrows losses
22-May-23 15:05 ET
Dow -58.40 at 33368.14, Nasdaq +82.50 at 12740.57, S&P +11.57 at 4204.82
[BRIEFING.COM] Things are little changed over the last half hour.
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 0.4% to $72.07/bbl and natural gas futures fell 6.4% to $2.55/mmbtu.
On an energy related note, the S&P 500 energy sector (+0.6%) is among the top performers this afternoon. Chevron (CVX 15.13, -1.10, -0.7%) has narrowed earlier losses after confirming plans to acquire PDC Energy (PDCE 70.67, +5.54, +8.5%) in a $6.3 billion, or $72.00 per share, all-stock deal.
Zions Bancorp gets upgrade at Hovde, Everest Re slips on general weakness in insurance stocks
22-May-23 14:30 ET
Dow -74.33 at 33352.21, Nasdaq +75.07 at 12733.14, S&P +9.36 at 4202.61
[BRIEFING.COM] The S&P 500 (+0.22%) is in second place to this point on Monday afternoon.
S&P 500 constituents Match Group (MTCH 33.80, +1.96, +6.16%), Zions Bancorp (ZION 28.33, +1.56, +5.83%), and Pfizer (PFE 38.46, +1.69, +4.60%) pepper the top of today's action. Hovde started coverage on ZION at Outperform this morning, while PFE gains after reports that its Danuglipron drug could be as effective as Novo Nordisk's (NVO 170.89, +0.35, +0.21%) Ozempic at weight loss.
Meanwhile, reinsurance firm Everest Re (RE 362.49, 13.98, -3.71%) is today's top laggard, underperforming alongside weakness in insurance stocks (RNR -5.31% CB -1.58% TRV -1.22%).
Gold lower to open the week
22-May-23 14:00 ET
Dow -105.90 at 33320.64, Nasdaq +67.54 at 12725.61, S&P +5.25 at 4198.50
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+0.53%) holds atop the major averages, tapping afternoon higher in the previous half hour.
Gold futures settled $4.40 lower (-0.2%) to $1,977.20/oz, pressured in part by a moderately higher dollar as well as gains in treasury yields.
Meanwhile, the U.S. Dollar Index is up less than +0.1% to $103.23.
Debt ceiling uncertainty contributes to hesitation trade
In one respect, we are picking up this week at a spot where we left off last week. That spot would be the absence of any agreement on the debt ceiling. The one agreement made by President Biden and House Speaker McCarthy in a Sunday phone call was that the negotiations will be restarted today.
That's a good thing because the X-date is approaching. According to NBC News, Treasury Secretary Yellen deemed early June a hard deadline and said the odds that the U.S. can pay all its bills on June 15 are quite low without a debt ceiling increase.
The stock market is certainly attentive to the situation, but it does not appear to be overly anxious about the debt ceiling not being raised. That could change the closer we get to June without a deal, yet the futures trade this morning isn't the picture of heightened angst.
Currently, the S&P 500 futures are up two points and are trading fractionally above fair value, the Nasdaq 100 futures are down five points and are trading in-line with fair value, and the Dow Jones Industrial Average futures are up 19 points and are trading 0.1% above fair value.
There isn't a lot of fear and loathing in those indications. Hesitation, yes. Fear and loathing, no.
Some other news sources of "hesitation" include:
- China notifying critical information/infrastructure operators in China to stop using Micron (MU) products; MU is down 4.3%
- The EU fining Facebook (META) EUR 1.2 billion for transferring EU user data to the U.S.; META, which is down 0.6%, says it will appeal the ruling
- Loop Capital downgrading Apple (AAPL) to Hold from Buy; AAPL shares are down 0.9%
- Minneapolis Fed President Kashkari (FOMC voter) telling CNBC that a decision to pause in June is a close call, but that it is important to signal -- if the Fed pauses -- that a pause doesn't mean the tightening cycle is over
Some are spinning Mr. Kashkari's view as more of a dovish-sounding view, but to us it is eminently non-committal.
That is not what Dow component Chevron (CVX) is this morning. The oil giant is committing to acquire PDC Energy (PDCE) in a $6.3 billion, or $72.00 per share, all-stock deal. Similarly, Ironwood (IRWD) is committing to acquire VectivBio (VECT) for approximately $1 billion, or $17.00 per share, in an all-cash transaction.
These are smaller transactions boosting the acquisition targets, yet they lack the gravitas to move the market on a day that is devoid of notable U.S. economic data and is accented right now with an ample degree of hesitation.
-- Patrick J. O'Hare, Briefing.com
Canadian Nat'l Rail tracks below its 50-day moving average following a downgrade at Citi (CNI)
Canadian Nat'l Rail (CNI -1%) is tracking below its 50-day moving average (118.69) following a downgrade at Citi to "Neutral" from "Buy" today, citing a weak volume landscape ahead. Today's downgrade clashes with Morgan Stanley's upgrade earlier this month which followed CNI's Investor Day, where the company updated its three-year financial goals. It also marks the first downgrade CNI received since January (per Briefing.com's coverage).
Briefing.com notes that Citi's downgrade differs from what we have been noticing across transportation firms lately. For example, Dow Jones Transportation Index components AAL, JBHT, NSC, and UPS have received analyst upgrades over the past few weeks. Also, as mentioned above, CNI was recently viewed favorably by Morgan Stanley. Although analysts may have been pricing in a potential bottom in demand for transportation companies, volumes remain depressed and could still weaken from here, severely denting CNI's future financial performance.
- CNI's recently outlined 2024-2026 EPS growth target of +10-15% assumed improving volumes and a supportive economy, with volume gains outpacing the general economy. Its projection also incorporates pricing to exceed inflation and incremental efficiency improvements from precision scheduled railroading (PSR), where CNI focuses on moving cars instead of moving trains (not waiting on a long train to be established).
- PSR is most beneficial when volumes are relatively strong, as cars are more widely available. Therefore, if the volumes needed to make PSR more cost-effective than the traditional method of moving long trains to maximize capacity do not materialize, CNI could see pressure on its bottom line.
- This becomes more problematic given that volumes are weakening, trending down 7% in April and 9% month-to-date as of May 18, totaling negative 8% Q2-to-date, a stark contrast from the 6% improvement posted in Q1. Furthermore, when backing out a more normalized Canadian grain crop, volumes are down 14% thus far through Q2. The number worsens in the intermodal space, with volumes tracking down 26% Q2-to-date.
- Nevertheless, CFO Ghislain Houle sees the glass half full, hoping that the current trend reverses by the end of the year, pointing to a few silver linings developing during the quarter. For example, blank sailings (an ocean liner skipping a port) should be only half what they were in Q1. Meanwhile, CNI's intermodal team notices boats fuller than before, underpinning inventory restocking planned for 2H23.
Bottom line, an investment in CNI is a bet on a turnaround toward the back half of this year. We have heard from dozens of organizations throughout the past few months that they are optimistic about a rebound starting in Q3. However, by that same token, there have been others who are not as confident in calling a second-half turnaround. Regardless, CNI remains a solid long-term play, given its foothold in the railroad network throughout North America. Its new COO, Ed Harris, a railroad executive with 40 years experience, may also refresh CNI's operational performance over the long haul as he advances the next phase of the company's scheduled operating plan.
JetBlue and American Airlines sink as judge rules in DoJ's favor in Northeast Alliance case (JBLU)
U.S. regulators are tightening the screws on what they perceive as anti-competitive behavior and that more rigid approach is now playing out in the airline industry. On Friday night, Reuters reported that a federal judge ruled in favor of the Department of Justice, which filed a lawsuit to break up American Airlines' (AAL) and JetBlue Airways' (JBLU) Northeast Alliance. According to the ruling, the partnership between AAL and JBLU "substantially diminished competition" in New York and Boston, two markets that both airlines have a strong presence in.
- Launched in 2020, the Northeast Alliance was conceived as a way for AAL and JBLU to better compete with United Airlines (UAL) and Delta Air Lines (DAL) at New York's three main airports and at Logan International Airport in Boston. The partnership essentially removed any motivation for AAL and JBLU to compete on price for the flights originating out of those airports as the airlines sold seats on each other's networks.
- JBLU and AAL argue that their alliance actually improves competition in the northeast because together they are a more formidable competitive threat to UAL and DAL. The judge clearly didn't see it that way, giving the airlines just thirty days to unwind the Northeast Alliance. However, it seems that JBLU and AAL aren't throwing in the towel just yet with AAL commenting that it's "evaluating our next steps as part of the legal process."
This ruling follows a separate lawsuit filed by the Department of Justice in March that takes aim at the JBLU and Spirit Airlines (SAVE) merger.
- To rewind, on July 28, 2022, JBLU and SAVE approved a merger agreement in which JBLU would acquire SAVE for $33.50/share in cash. The deal was the culmination of a bitter back-and-forth bidding war with Frontier Group (ULCC), which made an initial offer to purchase SAVE in February 2022 in a cash-and-stock deal worth $2.9 bln.
- Throughout most of the negotiating process, SAVE's executives were quite vocal about their preference in combining with ULCC. SAVE's main apprehension about moving forward with JBLU is that JBLU is already at the center of an antitrust case due to its Northeast Alliance with AAL.
- Ultimately, SAVE decided to move forward with JBLU after JBLU sweetened the deal, including by increasing the reverse break-up fee to $400 mln payable to SAVE in the event the transaction doesn't gain regulatory approval. In comparison, ULCC offered a $350 mln reverse break-up fee.
- It now seems probable that JBLU will have to pay that fee. Although the lawsuits are independent of each other, the judge's decision in the Northeast Alliance case doesn't bode well for the JBLU-SAVE merger litigation. It would be difficult to argue that a merger between the two doesn't create competition concerns, while the Northeast Alliance does. JBLU and SAVE overlap on more than 10% of the nonstop routes they fly.
The bottom line is that regulators are really cracking down on deals that they believe to be anti-competitive, dealing a blow to JBLU and AAL, but a potential win for passengers.
Micron gaps lower following a ban on the use of its products in China; severity still unclear (MU)
Micron (MU -4%) is gapping lower today after the company confirmed that the Cyberspace Administration of China (CAC) concluded that MU's products present a cybersecurity risk, notifying critical information infrastructure operators in China to stop using MU's products. CFO Mark Murphy touched on this new development during the company's J.P. Morgan Technology conference today, noting that it is unclear what security concerns exist but will cooperate with Chinese regulators. MU added that it is evaluating what percent of its sales may be impacted by the critical information ban.
With direct and indirect sales through distributors to China-headquartered companies representing around 25% of MU's total annual sales, the ban is not insignificant, explaining investors' concern today. The news also coincides with a substantial drop-off in consumer demand, with MU reducing wafer fab equipment spending by over 50% for FY23 (Aug) and even further for FY24. Although on the plus side, Mr. Murphy commented today that the supply/demand balance is improving, reiterating that bit growth should continue in the second half of CY23.
- The number of unknowns surrounding the CAC ban is primarily triggering today's negative response, as the market can only speculate how significantly the ban will affect MU's future financial performance. Management could not provide many details on the situation, repeatedly stating that adverse impacts are unclear. What the ban encompasses was also hazy, ranging from a base case of networking firms to potentially more severe smartphone suppliers. MU would not have further details until its Q3 (May) earnings call in late June.
- On a lighter note, the ban will not affect MU's MayQ guidance, which the company noted was trending positively. Mr. Murphy reiterated that he feels MU is closer to a period of sequential revenue growth, with bit demand bottoming in November, expanding in Q2 (Feb), and again in MayQ. Additionally, customer inventories are gradually falling from higher levels seen over the past year, leading to pockets of price stabilization and, in some cases, price increases.
- Following the CAC ban on MU's products, the market is also speculating which other chip makers could be subject to a ban, illuminated by relative weakness across several of MU's peers, including QCOM and AVGO. Although other semiconductor firms are not enduring the same selling pressure as MU, the ones with significant sales to China, including INTC, TXN, and NVDA are worth watching.
As MU shares recently broke out of their past resistance level around the $65 mark, investors expressed their eagerness that MU was finally turning a corner, following a possible bottoming of demand late last year. However, overseas markets can always throw a wrench in recovery efforts, especially surrounding China, where regulations either emanating from the region or from the U.S. government, like the export ban announced in October, can act as a wild card. Nevertheless, the broader markets remain in an uptrend, potentially leading investors to eventually shrug off the CAC ban.
Foot Locker erases the past six months of gains after slashing its FY24 (Jan) outlook (FL)
Foot Locker (FL -26%) is erasing the past six months of gains today following its slashed FY24 (Jan) outlook as the footwear retailer faced significant macro headwinds during Q1 (Apr). FL was forced to take an aggressive promotional stance to spur demand and manage its inventory toward the end of the quarter and expects to keep promotional activity elevated throughout the year. Also, FL appointed a new CFO, but this likely has little relative impact on price today.
- When FL first issued its FY24 outlook in late March, it anticipated an uptick in growth during April, benefiting from a more favorable launch calendar. Unfortunately for FL, while it saw a minor benefit from this trend, it was not close to what the company projected, with the weakness persisting into May. The result was comparable store sales growth dropping by 9.1% in Q1, resulting in adjusted EPS of $0.70, missing FL's original expectations.
- FL already set expectations that FY24 would be a reset year as the company simplified its organization, closing certain banners while transitioning most of its Asia business to a licensed model. At the same time, FL would reset its relationship with brand partners (specifically NIKE), provide a broader range of brand assortment, and remodel storefronts. These initiatives were going to weigh on FL's financial performance during the year, leading to its initially downbeat FY24 guidance.
- Although investors brushed off the original tepid outlook, with shares holding up relatively well, they are unwilling to shrug off FL's updated predictions. The company expects EPS of $2.00-2.25, down from $3.35-3.65, and comps to fall 7.5-9.0%, worse than its initial negative 3.5-5.5% forecast.
Still, there were silver linings. FL reiterated its plans to return to growth in its NIKE business in 2024. In the meantime, other performance brands like On (ONON) and HOKA (DECK) continue enjoying robust sell-through, as did brands like New Balance, Puma, and ASICS, bringing FL's brand mix ahead of NIKE. Additionally, FL is progressing toward its target of off-mall sites and larger-format stores comprising over 50% and 20% of its locations by 2026. Also, overseas demand showed some signs of recovery, such as in Italy, Spain, and France, as well as in the Asia Pacific, where comps jumped 8.9%, helped by tourism returning to the region.
Nevertheless, the market is expressing disappointment regarding FL's reduced FY24 outlook. Even though we view FL's updated guidance as a potential worst-case scenario, it does not help that the economic landscape shows few signs of improvement, with inflation remaining sticky, barely budging month/month in April. Given the snail's pace at which inflation is easing, consumers are beginning to prioritize how they spend their dollars, shifting toward services and away from products, which will prove quite the challenge for FL this year.
Lastly, FL's results paint a gloomy picture ahead of earnings reports from footwear firms Deckers Outdoor (DECK; MarQ on May 25) and NIKE (NKE; MayQ on June 26), both of which are edging lower today. Other shoe companies like Adidas AG (ADDYY) and Sketchers (SKX) are also ticking down.
Applied Materials slides on temperate Q2 results and hesitation calling a 2H23 turnaround (AMAT)
Even though Applied Materials (AMAT -2%) topped earnings and sales estimates in Q2 (Apr), the stock is slipping today. The semiconductor equipment firm's Q2 report did not sway much from its peers' recent MarQ results, including Lam Research (LRCX), KLA Corp (KLAC), and ASML (ASML). Market demand was consistent with what we heard from AMAT's peers: consumer electronics consumption remains weak while the IoT, communications, automotive, and power and sensors (ICAPS) markets remain robust.
However, with shares climbing over 11% on the week and 18% since late April lows leading into AMAT's Q2 report, investors are using today's temperate results to take profits off the table. Also, concerns remain surrounding wafer fab equipment spending hitting its lowest level in over a decade. Additionally, in leading-edge foundry logic, AMAT's customers are cutting back their spending plans for the year. Due to the uncertainty regarding when these unfavorable dynamics will thoroughly shake out, AMAT did not predict a second-half turnaround like its peers.
- AMAT still delivered headline numbers toward the high end of its prior forecasts, registering adjusted EPS of $2.00 compared to its $1.66-2.02 estimate and revenue growth of 6.2% yr/yr to $6.63 bln versus its $6.0-6.8 bln prediction.
- Strength in the quarter stemmed from ICAPS customers focused on carving out leadership positions within the clean energy, electric vehicle, and industrial automation fields. This dynamic has remained unchanged over the past several years and is a significant reason why AMAT continues to be bullish in the long term.
- AMAT also pointed out that the regionalization of supply chains is occurring across multiple countries to avoid the constraints sparked by COVID-related shutdowns that have yet to fully normalize. AMAT is noticing around $400 bln of government incentives being deployed globally over the next five years, a considerable chunk flowing toward ICAPS markets, which could generate a long-lasting tailwind for the company.
- Still, AMAT's Q3 (Jul) outlook underscored pockets of weaknesses persisting throughout the global economy. The company anticipates adjusted EPS and revs to see sequential declines, projecting $1.56-1.92 and $5.75-6.55 bln, respectively.
- Also, AMAT could not confidently echo remarks from its peers regarding a second-half recovery. CFO Brice Hill stated that the company expects a similar dynamic from Q2 to continue in subsequent quarters and hesitates to call precisely when a rebound occurs because large memory and leading logic markets are meaningfully exposed to soft consumer-end markets. Mr. Hill added that the company needs more visibility into how quickly the consumer will rebound, possibly providing further details in Q4 (Oct).
Overall, AMAT's Q2 results were mostly consistent with what the market likely already priced in, given its competitors' recent MarQ reports. Also, management was not as confident in calling a second-half turnaround (AMAT's 4Q23 and 1Q24) as were many of its peers, including consumer-facing firms like Samsung (SSNLF) and Intel (INTC). As a result, investors are reducing their risk, taking money off the table, sending AMAT's shares modestly lower.
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