Market Snapshot
briefing.com
| Dow | 33160.59 | +31.08 | (0.09%) | | Nasdaq | 13242.48 | +6.47 | (0.05%) | | SP 500 | 4264.53 | +0.78 | (0.02%) | | 10-yr Note | +2/32 | 4.71 |
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| | NYSE | Adv 1254 | Dec 1550 | Vol 883 mln | | Nasdaq | Adv 2084 | Dec 2169 | Vol 4.1 bln |
Industry Watch
| Strong: Real Estate, Health Care, Information Technology, Financials |
| | Weak: Consumer Staples, Materials, Energy, Industrials, Consumer Discretionary, Utilities |
Moving the Market
-- Treasury yields moving lower after a volatile response to this morning's data, but the prospect of rates staying higher for longer is weighing over the market
-- Some hesitation ahead of the September employment report tomorrow
-- Digesting the weekly jobless claims report, which indicated an ongoing tight labor market
-- Strength in the mega cap space boosting the broader market
| Closing Summary
05-Oct-23 16:25 ET
Dow -9.98 at 33119.53, Nasdaq -16.18 at 13219.83, S&P -5.56 at 4258.19
[BRIEFING.COM] The stock market experienced some turbulence on the back of yesterday's gains. Unlike yesterday, there was a disconnect between the stock market and Treasury yields, which is to say that stocks languished despite a modest drop in yields.
The major indices were able to close well off their lows of the day, albeit with modest declines, thanks to some mega cap stocks recovering from early losses. The Vanguard Mega Cap Growth ETF (MGK) rose 0.1% while the market-cap weighted S&P 500 fell 0.1%. Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) saw a 0.3% decline.
The Russell 2000 for its part closed with a 0.1% gain, drawing some support from its regional bank components. On a related note, the SPDR S&P Regional Banking ETF (KRE) rose 1.7% today.
Buyers were seemingly hesitant in front of the September jobs report on Friday at 8:30 a.m. ET. The labor report follows this morning's release of the weekly initial jobless claims report, which showed a low level of initial claims (207,000) that is typically associated with a tight labor market and an economy running at a healthy clip.
Treasuries had a volatile response to the data, but calmed down fairly quickly. The 10-yr note yield was at 4.71% just before the release and jumped to 4.77% in the immediate aftermath. It settled the day at 4.71%, which is down three basis points from yesterday. The 2-yr note yield was at 5.02% just before 8:30 a.m. ET and jumped to 5.07% in response to the data, ultimately settling the session six basis points lower at 5.03%.
Seven of the 11 S&P 500 sectors registered a decline, but the consumer staples sector (-2.1%) was the worst performer by a wide margin due in part to a big loss in Clorox (CLX 124.93, -6.90, -5.2%) following its disappointing guidance. The materials sector (-1.3%) was the next worst performer.
The real estate (+0.7%), health care (+0.5%), financials (+0.4%), and information technology (+0.3%) sectors were alone in the green at the close.
Separately, WTI crude oil futures extended their losses today, dropping another 2.9% to $82.29/bbl. That weakness, along with the decline in Exxon Mobil (XOM 108.99, -2.51, -2.3%), drove the underperformance of the energy sector (-0.6%).
- Nasdaq Composite: +26.3% YTD
- S&P 500: +10.9% YTD
- S&P Midcap 400: +0.2% YTD
- Dow Jones Industrial Average: -0.1% YTD
- Russell 2000: -1.7% YTD
Reviewing today's economic data:
- Weekly Initial Claims 207K (Briefing.com consensus 225K); Prior was revised to 205K from 204K; Weekly Continuing Claims 1.664 mln; Prior was revised to 1.665 mln from 1.670 mln
- The key takeaway from the report is the understanding that the low level of initial claims is associated not only with a tight labor market, but also an economy running at a good pace.
- August Trade Balance -$58.3 bln (Briefing.com consensus -$65.1 bln); Prior was revised to -$64.7 bln from -$65.0 bln
- The key takeaway from the report is that the drop in imports in August, versus the increase in exports, will factor favorably as an input to Q3 GDP computations.
Friday's economic calendar features:
- 08:30 ET: September Nonfarm Payrolls (Briefing.com consensus 158K; prior 187K)
- 08:30 ET: September Nonfarm Private Payrolls (Briefing.com consensus 150K; prior 179K)
- 08:30 ET: September Unemployment rate (Briefing.com consensus 3.7%; prior 3.8%)
- 08:30 ET: September Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.2%)
- 08:30 ET: September Average Workweek (Briefing.com consensus 34.4; prior 34.4)
- 15:00 ET: August Consumer Credit (Briefing.com consensus $12.0B; prior $10.4B)
Treasuries settle with gains
05-Oct-23 15:35 ET
Dow -1.91 at 33127.60, Nasdaq -3.03 at 13232.98, S&P -1.95 at 4261.80
[BRIEFING.COM] The major indices are trading just below their closing levels from yesterday.
The 2-yr note yield fell six basis points today to 5.03% and the 10-yr note yield fell three basis points to 4.71%.
Friday's economic calendar features:
- 08:30 ET: September Nonfarm Payrolls (Briefing.com consensus 158K; prior 187K)
- 08:30 ET: September Nonfarm Private Payrolls (Briefing.com consensus 150K; prior 179K)
- 08:30 ET: September Unemployment rate (Briefing.com consensus 3.7%; prior 3.8%)
- 08:30 ET: September Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.2%)
- 08:30 ET: September Average Workweek (Briefing.com consensus 34.4; prior 34.4)
- 15:00 ET: August Consumer Credit (Briefing.com consensus $12.0B; prior $10.4B)
Mega caps power upside moves
05-Oct-23 15:05 ET
Dow +31.08 at 33160.59, Nasdaq +6.47 at 13242.48, S&P +0.78 at 4264.53
[BRIEFING.COM] The major indices continued a steady move higher in recent action, trading at or near session highs.
The upside moves coincided with some mega caps recovering from early losses. The Vanguard Mega Cap Growth ETF (MGK) is up 0.2%.
Energy complex futures settled mixed. WTI crude oil futures fell 2.9% to $82.29/bbl and natural gas futures rose 6.6% to $3.18/mmbtu. The S&P 500 energy sector (-0.7%) is near the bottom of the pack among the 11 sectors.
Molson Coors falls in sympathy to STZ's post-earnings drop, Lamb Weston atop S&P 500 after earnings
05-Oct-23 14:30 ET
Dow -41.03 at 33088.52, Nasdaq -27.91 at 13208.10, S&P -9.57 at 4254.18
[BRIEFING.COM] The S&P 500 (-0.2%) is narrowly today's top lagging major average, having consolidated trading over the prior half hour just off afternoon highs.
S&P 500 constituents Molson Coors Brewing (TAP 59.18, -3.85, -6.11%), PepsiCo (PEP 160.91, -8.00, -4.74%), and First Solar (FSLR 145.41, -6.41, -4.22%) dot the bottom of the index. TAP slides to the bottom of the standings, displaying weakness in sympathy to peer Constellation Brands' (STZ 240.91, -8.44, -3.39%) post-earnings drop, while PEP and other non-alcoholic bev stocks show weakness despite a dearth of corporate news, and FSLR slides in part on higher rate concerns.
Meanwhile, Lamb Weston (LW 99.16, +8.67, +9.58%) is today's top performer after this morning's beat and raise report.
Buyers continue to give gold the cold shoulder; gold futures down a ninth session in a row
05-Oct-23 14:00 ET
Dow -36.69 at 33092.86, Nasdaq -36.54 at 13199.47, S&P -11.35 at 4252.40
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.28%) is narrowly today's top declining major average, the trio having bounced a bit in the last half hour.
Gold futures settled $3 lower (-0.2%) to $1,831.80/oz, continuing to slip for a ninth-consecutive session as buyers failed once more to step in despite a weaker dollar and yields.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $106.43.
Page One
Last Updated: 05-Oct-23 09:00 ET | Archive
Oh, the places you (the stock market) will go
The stock market has places to go and it seems still that the Treasury market is going to dictate where it goes -- for better or worse.
There isn't a strong leaning in the equity futures market this morning coming off yesterday's rebound effort, but that's because there isn't a strong leaning in the Treasury market either. The 10-yr note yield settled yesterday at 4.74%, it kissed 4.75% overnight, came back to 4.71%, and spiked to 4.77% following yet another solid initial jobless claims report. It has since slipped back to 4.74%.
Currently, the S&P 500 futures are down 13 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 34 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 97 points and are trading 0.3% below fair value.
The translation here is that the equity market isn't going to see a follow-through effort on yesterday's rebound -- at least not at the open.
That understanding could embolden short sellers, which of course could also raise the potential for a short squeeze later in the day, particularly if Treasury yields rediscover their own rebound line.
The thinking now, though, is the same it has been. The solid reading for initial jobless claims, which are a leading indicator, is feeding the notion that the Fed is going to stay higher for longer and won't be cutting rates anytime soon.
Briefly, initial jobless claims for the week ending September 30 increased by 2,000 to 207,000 (Briefing.com consensus 225,000). Continuing jobless claims for the week ending September 23 decreased by 1,000 to 1.664 million.
The key takeaway from the report is the understanding that the low level of initial claims is associated not only with a tight labor market, but also an economy running at a good pace.
In other economic news, the trade deficit narrowed to $58.3 billion in August (Briefing.com consensus -$65.1 billion) from an upwardly revised -$64.7 billion (from -$65.0 billion) in July. The improvement was the result of exports being $4.1 billion more than July exports and imports being $2.3 billion less than July imports. Exports of crude oil and fuel oil accounted for nearly half of the increase in exports.
The key takeaway from the report is that the drop in imports in August, versus the increase in exports, will factor favorably as an input to Q3 GDP computations.
The market, however, doesn't seem to be tolerating good economic news so well these days, because it desperately wants to see some relief on the interest rate horizon. That's why it applauded a softish-looking ADP jobs number yesterday and recoiled today at the sight of encouraging growth data.
-- Patrick J. O'Hare, Briefing.com
Exxon Mobil pumped out stronger profits in Q3, but falling oil prices negate the good news (XOM)
Exxon Mobil (XOM), which is scheduled to report 3Q23 earnings on November 4, disclosed in an SEC filing last night that its business benefitted from high oil and natural gas prices during the quarter. In essence, the company's update, which included an estimated operating profit of $5.2-$6.7 bln for the oil and gas business, indicated that its Q3 earnings will roughly match analysts' earnings expectations. Since XOM is typically one of the first oil and gas companies to report quarterly earnings, its Q3 update is a positive sign for the sector as earnings season approaches.
However, the good news for Q3 is being overshadowed by a sharp decline in crude oil prices this week. Yesterday, it was reported that gasoline inventories saw their largest weekly increase since early 2022, jumping by 6.5 mln barrels to 227 mln barrels, signaling that demand is falling as macroeconomic concerns rise in the face of higher interest rates.
Furthermore, with XOM shares rallying by about 10% since the beginning of August, prior to this week's selloff, it seems that a solid quarter was already priced in. It was indeed a good quarter for XOM as business improved from Q2 across most of its businesses.
- The largest impact came from higher crude oil prices, which pushed operating profit higher by $900 mln to $1.3 bln in the upstream business. During the quarter, crude oil prices jumped by about 30%, prompting oil and gas producers like XOM to ramp up production.
- Meanwhile, refining margins shot sharply higher in Q3, even as crude output in the U.S. increased. Supply cuts from OPEC+, combined with strong global demand for gasoline, jet fuel, and other products, have facilitated strong refining margins. XOM estimates that a positive change in industry margins drove operating profit higher by $900 mln to $1.1 bln in Q3.
- Partially offsetting these gains is the continued weakness in the Chemicals business, which makes products that are used in economically sensitive industries such as automotive, industrial, and consumer packaging. In Q3, the Chemicals segment experienced an operating profit decline of $400-$600 mln due to contracting industry margins.
The main takeaway is that while higher crude oil and natural gas prices led to a strong Q3 for XOM, market participants are looking beyond those results as commodity prices dive lower, signaling a rougher quarter ahead.
Lamb Weston mounting a turnaround following upbeat AugQ results (LW)
Lamb Weston's (LW +9%) Q1 (Aug) earnings results were no small potatoes, topping bottom-line estimates by its widest margin in over five years and hiking its FY24 (May) outlook. The global potato producer, whose largest customer is McDonald's (MCD), comprising 13% of FY23 (May) sales, did experience 8% lower volumes yr/yr in the quarter. However, this minor weak point was primarily due to the company exiting lower-priced, lower-margin businesses, with some lingering effects from ongoing inventory destocking. Notably, LW anticipates volumes to improve as the year progresses.
- Headline numbers shined in Q1. LW delivered adjusted EPS of $1.63, a 117% spike yr/yr. Meanwhile, revs exploded by 48.0% to $1.67 bln, LW's second-consecutive quarter of above-40% growth. However, it should be noted that most of LW's buoyant sales growth branched from recent acquisitions, primarily from its EMEA business. When backing out acquisition impacts, sales grew just 15% yr/yr.
- By exiting lower-margin businesses, LW has enjoyed meaningful margin improvements over the past few quarters. In fact, despite Q1 typically being LW's lowest-margin quarter due to seasonality, gross margins expanded by roughly 400 bps yr/yr to nearly 28%. Helping LW's margins were higher potato prices, including a 20% jump in prices in North America and a 35-40% increase in Europe.
- LW was quite upbeat about the current operating climate despite a few pockets of lingering weakness. Management mentioned that the global frozen potato category remains healthy, boasting balanced supply and demand dynamics. Furthermore, the rate at which consumers order fries at food service outlets across LW's key markets remained steady and above pre-pandemic levels.
- On a side note, LW commented that quick-service-restaurant traffic growth offset further declines in full-service-restaurant channels, reflecting the effects of inflation nudging consumers toward lower-priced QSR venues.
- This dynamic is a positive sign for QSR chains, such as MCD, Wendy's (WEN), and Restaurant Brands International (QSR).
- Conversely, shifting away from full-service chains could hinder the growth of companies like Brinker International (EAT). We already witnessed underwhelming figures from casual dining firm Darden Restaurants (DRI) last month.
- Regarding the upcoming potato crop harvest, LW was also bullish, expecting crops in North America in line with pre-pandemic historical averages. Likewise, in Europe, LW anticipates crops in line with historical norms due to improved growing conditions in the region.
- As a result of sound Q1 results and upcoming crop harvests, LW raised its FY24 outlook, forecasting adjusted EPS of $5.50-5.95, up from $4.95-5.40, and revs of $6.8-7.0 bln, a $0.1 bln improvement.
After a discouraging Q4 (May) report in late July spurred investors to drop LW like a hot potato, its Q1 results signaled that much of its woes may have been short-lived. After spooking the market last quarter, projecting a challenging global demand backdrop to persist, LW appears to be amid improving dynamics. Although inflationary pressures could intensify, weighing on the end consumer, LW has already secured price hikes within around 80% of its contracts. Given positive harvests and improving traffic trends, LW might be amid a broader turnaround.
Constellation Brands' beer business was stellar in Q2, but wine business hangs over outlook (STZ)
Bolstered by another strong performance from its beer business, Constellation Brands (STZ) delivered a beat-and-raise Q2 earnings report that featured its largest EPS beat in nearly three years. Despite the difficult macroeconomic backdrop, STZ has been able to push through price increases as it capitalizes on the momentum of its Mexican beer brands. That's especially the case for Modelo, which was once again the top share gainer and #1 brand in the entire U.S. beer category.
However, another more discouraging trend also remained in place for STZ.
- Back in 2021, the company sold a large portion of its mainstream and lower-priced wines to E&J Gallo Winery for $810 mln in an effort to prioritize its premium brands such as Kim Crawford, The Prisoner Wine Company, Meiomi, and others.
- STZ doubled down on that strategy about one year ago when it unloaded another batch of mainstream wine brands, this time selling them to The Wine Group.
- The hope was that this pruned wine portfolio with higher price points would drive higher margins and reinvigorate sales for STZ's struggling Wine & Spirits segment. So far, though, materially stronger results have been elusive as organic net sales dipped by 11% in Q2 while operating margin slipped by 80 bps qtr/qtr to 18.2%.
- That long-awaited turnaround in the Wine & Spirits segment doesn't seem to be on the near-term horizon, either. Unlike the Beer business, which raised its FY24 net sales growth to 8-9% from 7-9%, Wine & Spirits left its guidance unchanged, forecasting an organic net sales decline of (0.5%) to growth of 0.5%.
- STZ did raise its FY24 EPS guidance to $12.00-$12.20 from $11.70-$12.00, but even that increase is a bit of a disappointment. That's because the amount that STZ raised its guidance by is less than the amount that STZ beat Q2 estimates by. In other words, STZ is essentially ratcheting down its expectations for 2H24.
- Considering how strong the beer portfolio is performing at the moment, there's likely some disappointment that STZ's outlook isn't more bullish. Relatedly, there may be some concern that once the momentum for Modelo fades, STZ's growth will slow as the Wine & Spirits segment fails to show much improvement.
Overall, it was a solid quarter for STZ, highlighted once again by the strength of its Mexican beer brands. However, the Wine & Spirits business remains an overhang on the stock as it can't seem to gain any traction despite STZ's efforts to trim the portfolio and focus on higher end labels.
Clorox sharply lower today as we get our first look at post-cyberattack guidance (CLX)
Clorox (CLX -8%) is heading lower today following some weak guidance for Q1 (Sep) last night. The consumer products giant, whose brands extend well beyond bleach (Brita, Fresh Step, Glad, Liquid-Plumr, Pine-Sol etc.), had previously reported it suffered from a cyberattack. The company also previously disclosed it expected the impact would be material to its Q1 financial results. However, today we got the actual numerical guidance and it was pretty shocking.
- To recap, on August 14, Clorox first alerted investors that it identified unauthorized activity on some of its IT systems. In response, the company began taking certain systems offline and coordinated with law enforcement. Clorox implemented workarounds for certain offline operations. In mid-September, CLX provided an update and described how it began manual ordering and processing procedures at a reduced rate of operations, which led to an elevated level of consumer product availability issues.
- Turning to the Q1 guidance, Clorox expects revenue to decline 23-28%, which we compute as $1.25-1.34 bln, which is well below analyst expectations. Organic sales are now expected to decrease by 21-26%, well below prior guidance of mid-single-digit growth. And perhaps more glaring was CLX's adjusted EPS Q1 guidance of just $(0.40)-0.00, which was even further below analyst expectations.
- Last night, Clorox explained that the cyberattack caused wide-scale disruption of its operations, including order processing delays and significant product outages. Shipment and consumption trends prior to the cybersecurity attack were in line with expectations. Gross margin is expected to decline yr/yr as the cybersecurity attack more than offset the benefits of pricing, cost savings and supply chain optimization.
Where do we go from here? Well, the good news is that Clorox expects to experience ongoing, but lessening, operational impacts in Q2 (Dec) as it makes progress in returning to normalized operations. The company also expects to begin to benefit from the restocking of retailer inventories as it ramps up fulfillment in Q2. Clorox is still assessing the FY24 impact and will provide updated FY24 guidance on its earnings call next month.
In terms of the stock action today, we think investors were already bracing for weak SepQ guidance. We commend Clorox for being upfront about the situation and providing updates. Clorox had prepared investors with its "material impact" language last month. However, we think the numbers were even worse than expected.
Looking at this issue more broadly, situations like this can also present opportunities for investors. These are one-off situations where a stock sells off, but the issues are transitory and they get resolved. Chipotle (CMG) comes to mind, it sold off during the food safety issues a few years ago, but has recovered strongly. Boeing (BA) had its 737 MAX issues, which have since been resolved for the most part. We are not predicting where CLX will trade, but our point is that this issue will get resolved. And like CLX said, retailers are now restocking inventories, which could boost results soon. The stock has pulled back a lot since mid-August. The decline also means CLX is now paying a close to 4% dividend yield. CLX is probably worth keeping on the radar.
Conagra's AugQ results take a bite out of its shares as they sink to 52-week lows today (CAG)
A minor Q1 (Aug) sales miss and reiterated FY24 (May) guidance took a bite out of Conagra (CAG -1%) today. The consumer-packaged-goods titan, owning brands like Slim Jim and Vlasic, did deliver single-digit upside on its bottom line, its sixth-straight earnings beat. Meanwhile, through the four-week period ending August 26, volumes have begun improving, an encouraging sign that perhaps CAG, as well as peers SJM, CPB, K, GIS, and POST, is finally in the early stages of a turnaround.
- Still, revs were flat yr/yr at $2.9 bln despite a 6.3% jump in price as consumer behavior remained unfavorable, resisting price increases and decreasing their basket size. As a result, volumes continued to fall, slipping by 6.6% on an organic basis and marking their 11th consecutive quarter of yr/yr declines.
- Refrigerated & Frozen was the laggard in Q1, registering a 4.6% decline in revs to $1.2 bln on a 10.5% drop in volumes.
- Meanwhile, Grocery & Snacks edged 1.2% higher to $1.2 bln, driven by a 5.6% price increase. Foodservice climbed by 5.2% to $289 mln, helped by a 10.3% price increase.
- International was the star, boasting an 11.4% sales bump to $260 mln on a 0.3% volume improvement despite prices moving 7.9% higher.
- The problem for CAG has not been so much a trade down to private labels, although this has been a factor, evidenced by mass merchants like Walmart (WMT) and Costco (COST) boasting solid private label penetration in recent quarters. Instead, like CAG mentioned last quarter, consumers have hunkered down, lowering overall spending and triggering a slowdown across categories.
- On the plus side, CAG expanded its adjusted operating margins in Q1, boasting a 300 bp improvement yr/yr to 16.7%, a return to pre-pandemic levels. As a result, adjusted EPS enjoyed a solid 15.8% increase to $0.66, topping estimates by a wider margin than in Q4 (May).
- However, much of CAG's margin expansion was fueled by price hikes, helping offset the negative impacts of inflationary costs. This is also problematic, as CAG does not have much room to lower prices to better compete in a slowing demand environment. If it did, margins would take a hit, clipping its bottom line. The company already does not expect Q1 adjusted operating margins to persist, reiterating its forecast of 16.0-16.5% for FY24 due to incremental trade and advertising and promotional spending.
- CAG also reiterated its other FY24 financial targets, projecting adjusted EPS of $2.70-2.75 and organic net sales growth of approximately +1.0% yr/yr.
A behavioral shift amongst consumers continues to weigh on CAG's quarterly performance. Management mentioned that this trend has elongated the volume recovery period for CAG and the industry. However, against the challenging macroeconomic environment, we view CAG's consistent earnings beats and reiterated guidance as positive signs. Most of CAG's issues may already be priced in as shares trade around March 2020 levels. Comparisons will start easing in the year's back half, making current price levels attractive for buy-and-hold investors.
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