| | | Market Snapshot
briefing.com
| Dow | 37090.24 | +512.30 | (1.40%) | | Nasdaq | 14733.96 | +200.57 | (1.38%) | | SP 500 | 4707.09 | +63.39 | (1.37%) | | 10-yr Note | +36/32 | 4.02 |
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| | NYSE | Adv 2491 | Dec 304 | Vol 1.3 bln | | Nasdaq | Adv 3302 | Dec 1039 | Vol 6.8 BLN |
Industry Watch
| Strong: Information Technology, Utilities, Communication Services, Real Estate |
| | Weak: -- |
Moving the Market
-- Reacting to an updated Summary of Economic Projections that featured an improved growth outlook for 2023, a lowered inflation outlook for 2023 and 2024, and a median estimate of three rate cuts in 2024 (vs. two in the prior)
--Reacting to Fed Chair Powell acknowledging that "the question of when will it become appropriate to begin dialing back the amount of policy restraint in place" is beginning to come into view for the Fed
-- Reacting to a better than expected November PPI report
-- Treasury yields moving sharply lower
-- Fear of missing out on further gains in a seasonally strong period for the market
| Closing Summary
13-Dec-23 16:30 ET
Dow +512.30 at 37090.24, Nasdaq +200.57 at 14733.96, S&P +63.39 at 4707.09
[BRIEFING.COM] The stock market rallied today. The Dow Jones Industrial Average (+1.4%) surged more than 500 points to close at a new record high. The S&P 500 (+1.4%) closed above 4,700 at its highest level since January 2022.
Stocks initially traded in a cautious manner today despite some welcome disinflation seen in the November Producer Price Index. Market participants were not showing a lot of conviction as they waited for the latest policy move by the FOMC.
Buying picked up immediately after the market learned that the committee voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. This was accompanied by an updated Summary of Economic Projections that featured an improved growth outlook for 2023, a lowered inflation outlook for 2023 and 2024, and a median estimate of three rate cuts in 2024 versus a previous estimate of two rate cuts.
Fed Chair Powell also acknowledged in his press conference that the FOMC discussed when it will become appropriate to begin dialing back its policy restraint.
Stocks and bonds both exhibited strong responses to these developments, suggesting that participants believe the Fed is more aligned now with the market's more hopeful rate-cut view. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, plunged 28 basis points to 4.46% and the 10-yr note yield sank 18 basis points to 4.02%.
Market participants also adjusted rate cut expectations in response to the Fed's latest moves. According to the CME FedWatch Tool, the probability of a 25 basis points rate cut at the March FOMC meeting jumped to 74.4% from 48.5% shortly before 2:00 p.m. ET.
Just about everything came along for the rally, which featured the outperformance of small cap stocks, leaving the Russell 2000 up 3.5%. Notably, mega cap stocks lagged relative to the broader market. The equal-weighted S&P 500 logged a 2.1% gain and the Vanguard Mega Cap Growth ETF (MGK) rose 1.1%.
All 11 S&P 500 sectors registered gains ranging from 0.7% (communication services) to 3.7% (utilities).
- Nasdaq Composite: +40.8%
- S&P 500: +22.6%
- Dow Jones industrial Average: +11.9%
- S&P Midcap 400: +11.4%
- Russell 2000: +10.6%
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index 7.4%; Prior 2.8%
- November PPI 0.0% (Briefing.com consensus 0.1%); Prior was revised to -0.4% from -0.5%; November Core PPI 0.0% (Briefing.com consensus 0.2%); Prior 0.0%
- The key takeaway for the continued disinflation view is that the index for processed goods for intermediate demand was unchanged month-over-month while the index for unprocessed goods for intermediate demand declined 1.4% in November.
Looking ahead to Thursday, market participants will receive the following economic data:
- 08:30 ET: Initial jobless Claims (Briefing.com consensus 222K; Prior 220K) and Continuing Jobless Claims (Prior 1.861M); November Retail Sales (Briefing.com consensus -0.1%; Prior -0.1%) and Retail Sales, Ex-Auto (Briefing.com consensus 0.0%; Prior 0.1%); November Export Price Index (Prior -1.1%) and Export Prices, ex-agricultural (Prior -1.0%); November Import Price Index (Prior -0.8%) and Import Prices, ex-fuel (Prior -0.2%)
- 10:00 ET: October Business Inventories (Briefing.com consensus 0.1%; Prior 0.4%)
- 10:30 ET: EIA Natural Gas Inventories (Prior -117 bcf)
Stocks hangout near highs ahead of the close
13-Dec-23 15:35 ET
Dow +416.39 at 36994.33, Nasdaq +155.65 at 14689.04, S&P +52.16 at 4695.86
[BRIEFING.COM] The major indices remain just off session highs heading into the close.
The 2-yr note dropped 28 basis points to 4.46% and the 10-yr note yield sank 18 basis points to 4.02%.
Looking ahead to Thursday, market participants will receive the following economic data:
- 08:30 ET: Initial jobless Claims (Briefing.com consensus 222K; Prior 220K) and Continuing Jobless Claims (Prior 1.861M); November Retail Sales (Briefing.com consensus -0.1%; Prior -0.1%) and Retail Sales, Ex-Auto (Briefing.com consensus 0.0%; Prior 0.1%); November Export Price Index (Prior -1.1%) and Export Prices, ex-agricultural (Prior -1.0%); November Import Price Index (Prior -0.8%) and Import Prices, ex-fuel (Prior -0.2%)
- 10:00 ET: October Business Inventories (Briefing.com consensus 0.1%; Prior 0.4%)
- 10:30 ET: EIA Natural Gas Inventories (Prior -117 bcf)
Stocks continue to surge; Treasury yields plunge
13-Dec-23 15:05 ET
Dow +464.20 at 37042.14, Nasdaq +207.20 at 14740.59, S&P +63.94 at 4707.64
[BRIEFING.COM] The S&P 500 climbed past 4,700 recently as market participants react to Fed Chair Powell's commentary.
Mr. Powell acknowledged that "the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today."
Treasuries are also reacting. The 10-yr note yield is down 17 basis points to 4.03% and the 2-yr note yield, which is most sensitive to changes in the fed funds rate, is down 28 basis points to 4.46%.
The fed funds futures market now sees a 73.9% probability of a 25 basis points rate cut in March versus a 48.5% probability earlier today, according to the CME FedWatch Tool.
Fed leaves rates unchanged, as expected; stocks, bonds rally
13-Dec-23 14:25 ET
Dow +235.12 at 36813.06, Nasdaq +102.77 at 14636.16, S&P +32.72 at 4676.42
[BRIEFING.COM] The stock market as well as the bond market rallied after the Fed decided to keep rates unchanged at 5.25% to 5.50%, as widely expected. Currently, the S&P 500 (+0.70%) is just off the lead while the 10-yr note yield is about 4.069%
Key points from the Fed's policy directive held that recent indicators suggested that growth of economic activity had slowed from its strong pace in the third quarter. Job gains had moderated since earlier in the year but remained strong, and the unemployment rate had remained low. Inflation had eased over the past year but remained elevated.
Also, the Committee said it would continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
The Fed's dot plot also showed that expectations for the fed funds rate now stand at 4.6% by the end of 2024, down from the prior projection of 5.1%. The dot plot also showed that median 2024 PCE, and Core PCE forecasts declined to 2.4% (from 2.5% and 2.6%, respectively).
What's more, the FedWatch Tool now shows a near 88% likelihood of a May interest rate cut vs. about 75% prior to the latest policy directive.
Gold slightly higher in front of rate decision
13-Dec-23 13:55 ET
Dow +13.66 at 36591.60, Nasdaq -4.16 at 14529.23, S&P +2.05 at 4645.75
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.03%) remains narrowly lower with about two hours to go on Wednesday.
Gold futures settled $4.10 higher (+0.2%) to $1,997.30/oz ahead of the FOMC's policy directive, which is widely expected to indicate that the target range for the fed funds rate has been left unchanged at 5.25% to 5.50%.
Meanwhile, the U.S. Dollar Index is up less than +0.1% to $103.90.
Page One
Last Updated: 13-Dec-23 09:07 ET | Archive
What kind of guy will Fed Chair Powell be today?
We talked about the stock market's resolve before yesterday's open and it was on full display again during the course of yesterday's trading. There were no losses at the close for the Dow, Nasdaq, and S&P 500, only gains. It didn't matter that they were only modest gains, not when one recognizes how far the indices had already come from their late October lows.
What mattered is that sellers were not calling the shots, because the stock market's resolve continued to feed a fear of missing out on further gains.
There was some early perturbation in response to a November Consumer Price Index that was not as friendly as market participants had been hoping. That only meant it wasn't "best friend" material. Overall, it was still considered a friend because inflation at the consumer level did not get worse. Total CPI was up 3.1% year-over-year, versus 3.2% in October, and core CPI was up 4.0% year-over-year, unchanged from October.
A 3.8% drop in WTI crude futures yesterday, however, fostered a trading sense that coming months should see continued disinflation.
The November Producer Price Index perpetuated that sense of things this morning. The index for final demand was unchanged month-over-month (Briefing.com consensus 0.1%), as was the index for final demand less foods and energy (Briefing.com consensus 0.2%).
On a year-over-year basis, the index for final demand was up 0.9%, versus 1.2% in October, and the index for final demand less foods and energy was up 2.0%, versus 2.3% in October.
The key takeaway for the continued disinflation view is that the index for processed goods for intermediate demand was unchanged month-over-month while the index for unprocessed goods for intermediate demand declined 1.4% in November.
This will be viewed as a welcome development by the Fed, but at this juncture, we expect Fed Chair Powell et al to place more emphasis on inflation still being too high and the Fed possibly needing to raise rates again if progress on inflation stalls.
Another point of emphasis is that the Fed is not thinking about rate cuts -- at least not to the extent the fed funds futures market is thinking about rate cuts. The fed funds futures market has four cuts priced in before the end of 2024. The Fed's Summary of Economic Projections in September anticipated only two cuts, so that projection is sure to be a focal point when the updated projections are released today at 2:00 p.m. ET along with the policy directive.
The other focal point -- or tonal point -- will be how Fed Chair Powell sounds when discussing the seeming disconnect between what the market thinks and what the Fed thinks at his 2:30 p.m. ET press conference. Will he adopt the tough-guy Jackson Hole tone he took in 2022 to rein in the market or will he sound more like the fun uncle who tells kids they must obey their parents while at the same time giving them a wink of the eye?
You don't have to determine this yourself. The Treasury market, and presumably the stock market, will tell you which guy they think showed up today.
Our expectation is that Mr. Powell will work to tamp down the market's rate-cut outlook, but what we are left to wonder given how resilient the market has been since late October is, will the market really believe a tough-sounding Powell or will it trade more on its own confidence that Mr. Powell and the Fed will come around soon enough to the market's view of the world?
So, today will feature two trading markets: the one before the FOMC hoopla and the one after the FOMC hoopla.
Currently, the stock market is on track to show more resolve despite an FY24 warning from Pfizer (PFE). The S&P 500 futures are up 11 points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 56 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 71 points and are trading 0.2% above fair value.
This resolve has been fortified by a further drop in market rates. The 2-yr note yield is down seven basis points to 4.67% and the 10-yr note yield is down four basis points to 4.16%.
-- Patrick J. O'Hare, Briefing.com
Southwest Air grounded as profit-taking and lack of updated EPS guidance create headwinds (LUV)
After soaring higher by about 35% since the beginning of November, Southwest Air (LUV) is losing some altitude today after issuing a 4Q23 update that was mostly positive and reflected a surge in travel demand over the Thanksgiving holiday period. Most notably, the airline said that it expects unit revenue, or Revenue per Available Seat Mile (RASM), to come in at -9% to -10% versus its prior guidance range of -9% to -11%.
The question, then, is why isn't LUV rallying on this bullish update? We believe there are two main reasons.
- First, it's well-known that demand for the Thanksgiving holiday period and for the upcoming Christmas and New Years holiday periods is very strong. On December 6, Delta Air Lines (DAL) reaffirmed its Q4 EPS guidance with the airline citing record revenue for the Thanksgiving period. That good news was followed by JetBlue Airways (JBLU) raising its Q4 revenue and EPS guidance on December 7 as slightly lower-than-expected fuel costs added another element to the brighter outlook.
- As noted above, shares of LUV have rallied over the past several weeks, pricing in this upswing in demand. Therefore, we are seeing a sell-the-news reaction today as investors lock in recent gains.
- Second, unlike JBLU, LUV did not raise its Q4 EPS guidance. In fact, the company surprisingly increased its fuel cost estimate to $3.00-$3.10 per gallon from $2.90-$3.00 per gallon, which is a modest headwind to its expected Q4 earnings. Importantly, LUV reiterated its CASM-X forecast of -16% to -19% and its capacity, or Available Seat Mile (ASM), guidance of +21%.
- On the topic of capacity, LUV kept its 2024 expectations of an increase of 10-12% intact, but it lowered its annual targets beyond 2024, seeing low-to-mid single digit growth compared to its prior estimate mid-single-digit growth. Given the concerns regarding rising capacity across the airline industry, and the negative impact it has on airfare prices, LUV's intention to pull back a bit on adding capacity should come as a mild relief.
The main takeaway is that while LUV joined its competitors in benefitting from this surge in holiday-related travel, that was widely expected and baked into the stock already. That allowed market participants to focus on the fact that the company didn't lift its earnings guidance as JBLU did before it.
ABM Industries pops to one-year highs following better-than-feared Q4 results (ABM)
ABM Industries (ABM +13%), a provider of facility services, including janitorial, parking, HVAC, and landscaping, is scooping up phenomenal gains today, gapping to one-year highs following better-than-feared Q4 (Oct) results. Ahead of ABM's report, the market was cautious, evidenced by shares remaining relatively flat on the year. A depressed commercial property market as the hybrid work model remains prevalent has led to intense headwinds for ABM. The company was coming off its first earnings miss in over two years last quarter, contributing to its slashed FY23 EPS guidance. ABM also initiated adjustments to its cost structure in Q3 (Jul) to better steer through a challenging demand environment, which it predicted would remain soft throughout 2024.
Therefore, by returning to delivering earnings upside in Q4 as well as projecting FY24 EPS of $3.20-3.40, consistent with analyst forecasts, ABM is rapidly alleviating previously elevated concerns. The company also announced an additional $150 mln for share buybacks.
- During Q4, ABM grew revs by 4.4% yr/yr to $2.1 bln, providing a decent lift to its bottom line, which expanded by 13.5% to $1.01. While growth was broad-based, it was not evenly distributed.
- Business & Industry, ABM's largest segment by far at 50% of total revs, grew sales at the slowest pace at 0.4% yr/yr to $1.03 bln. Management commented that office density rates remained somewhat static during the quarter, with commercial office vacancies near 20%. These factors directly hurt demand for the company's janitorial services. However, even though hybrid work looks to be the new norm following the pandemic, ABM anticipates a gradual increase in employees' time at the office over the next couple of years.
- Each of ABM's other segments enjoyed solid growth in Q4. Manufacturing & Distribution experienced a 5.4% bump to $391.2 mln, benefiting from e-commerce and logistics clients, while onshoring of manufacturing continued to provide a tailwind. Education expanded by 5.8% to $229.8 mln driven by 100% in-class learning. Technical Solutions grew by 6.2% to $190.8 mln comprised of an even split between the closeout of several legacy projects and M&A activity.
- A notable standout was Aviation, which soared by nearly 16% to $248.2 mln, reflecting sustained strength within the leisure and business travel markets, including international travel. ABM does not anticipate Aviation to let up on the gas in 2024 either, projecting another solid year ahead despite lapping more formidable yr/yr comparisons.
- Speaking of which, ABM expects decent growth across all its segments outside of Business & Industry, which may remain muted due to 2024 office lease expirations which could shift clients toward smaller office footprints.
It has been a tricky year for ABM as remote work has weighed on its most critical businesses. However, even though 2024 is not shaping up to be a quick bounce to pre-pandemic activity, at least not within its Business & Industry division, it looks like a solid growth year for ABM, providing plenty of room for continued upside.
Tesla recalls two million vehicles, but losing tax credit on Model 3s has major implications (TSLA)
Tesla's (TSLA) highly scrutinized Autopilot system, which has been at the center of investigations from various governmental agencies, isn't effective enough at preventing driver misuse, according to the National Highway Traffic Safety Administration (NHTSA). Therefore, the EV maker is recalling more than 2 million vehicles, ranging across all of its models, in order to add more safety controls.
- As Bloomberg reported earlier this morning, the recall follows an investigation by the NHTSA that began two years ago as the agency reviewed over 950 crashes that potentially involved TSLA's Autopilot system. This recall is the by-product of that investigation, and it should also mark an end to that probe.
- Although the headline of a massive recall like this may seem ominous for TSLA, the news isn't as bad as it may seem. For starters, the word "recall" isn't exactly accurate since TSLA isn't taking in vehicles at repair shops to fix physical components and auto parts.
- Rather, the company is releasing a free software update that includes the new safety features for Autopilot, which is far less costly than the typical recall.
- Also, generally speaking, recalls tend to have a short-lived impact on automakers' stock prices since they're viewed more as an extraordinary item.
The recall news may be garnering most of the attention for TSLA this morning, but we believe there is another story that is more important -- at least from a financial perspective.
- Specifically, Reuters reported that TSLA's lowest-priced version of its Model 3 and its long-range vehicles will lose up to a $7,500 federal tax credit after December 31, 2023. The Model 3 is by far TSLA's most popular vehicle. Combined, the Model 3 and Model Y represented nearly 95% of total deliveries in 2022.
- In order to qualify for the EV tax credit, the manufacturer must not source any battery components that are manufactured or assembled by a foreign entity of concern, including entities owned or controlled by the governments of China, Russia, North Korea, and Iran. It appears that TSLA did not meet that criteria.
- For its part, TSLA has been warning consumers that it's about to lose a substantial portion of the tax credit. On December 4, the company announced on its website that those two Model 3 variants will lose half of the tax credit, but now it appears that the entire tax credit will be gone.
- This could push some potential buyers to pull the trigger before year end, providing TSLA with a Q4 deliveries boost. Recall that Q3 deliveries of 435K missed expectations, partly due to factory downtime, putting the pressure on TSLA to deliver a big Q4 number. In fact, TSLA will need to produce record-setting Q4 deliveries of about 480K vehicles to meet its target of 1.8 mln vehicles delivered in 2023.
The main takeaway is that the recall news is generating plenty of buzz this morning, but it's almost a non-event in our view as it relates to TSLA's fundamentals. Losing the tax credit on two Model 3 versions is far more important, in our view, and that should actually spark sales over the final weeks of 2023.
Pfizer falls toward pandemic lows after issuing downbeat FY24 guidance (PFE)
Pfizer (PFE -8%) continues to struggle to find a cure for its ailing stock price today after projecting FY24 earnings and revs below consensus. The company targeted FY24 EPS of $2.05-2.25, a 39% jump yr/yr at the midpoint but well below consensus, and revs of $58.5-61.5 bln, translating to roughly flat growth yr/yr. Shares of the pharmaceutical and biotech giant are now slipping to pandemic lows, tumbling toward $26.00, a level that has served as strong support over the past decade.
While PFE's downbeat EPS outlook in FY24 was likely already anticipated following its $43 bln purchase of oncology drug maker Seagen (SGEN) in March, as the acquisition's heavy debt load would weigh on earnings over the near term, PFE's lighter-than-expected revenue forecast came as a surprise. The underlying factor is fading demand for its COVID-19 vaccine Comirnaty and treatment Paxlovid; PFE forecasts approximately $8.0 bln in combined revenue, markedly below street estimates.
When news broke that PFE was seeking a deal with SGEN, we commented at the time that PFE was staring at several looming headwinds, including a substantial drop-off in COVID-19 vaccine sales and upcoming patent expirations for many prominent drugs, including Xeljanz in 2025 and Eliquis in 2026. Since its March M&A announcement, PFE has been dealt additional blows, such as an accelerating drop off in Comirnaty sales and its weight-loss drug danuglipron not advancing into Phase 3 studies.
However, with shares sliced in half since the beginning of the year, an attractive valuation, and outsized potential emanating from recent M&A activity, perhaps PFE may finally have hit bottom.
- While its recent woes in the weight-loss drug market were disappointing, PFE's pipeline, through acquisitions like Biohaven Pharma and Seagen as well as its internal efforts, is robust, potentially turning the company into a cancer and immunology powerhouse. Seagen's portfolio alone is exciting, boasting four FDA-approved oncology drugs. Seagen may not immediately contribute much to PFE's top line, adding an estimated $3.1 bln in FY24. Still, PFE remains confident in its recent purchase reaching $10.0 bln in revenue by 2030.
- PFE's restructuring initiatives, targeting at least $4.0 bln in net cost savings by the end of 2024, up from $3.5 bln projected in October, should alleviate COVID-19 vaccine-related earnings pressure. PFE noted that the plan places it on a path to potentially regain its pre-pandemic operating margins.
- Cost-cutting will also alleviate pressures from potential lost revenue when PFE's more prominent patents on Xeljanz and Eliquis expire. Given its business model, PFE is accustomed to expiring patents. The company finds ways to offset revenue loss through cost-savings and a rich drug pipeline.
Shares of PFE have withered this year. However, the company's financials remain healthy. While the price PFE paid to acquire SGEN may have looked rather expensive at 14x FY24 revenue, SGEN is a pioneer of Antibody-Drug Conjugate (ADCs) cancer treatments, allowing PFE to carve out an even wider economic moat down the line. Other headwinds, including a loss of COVID-19 vaccine revenue and patent expirations, may not be as troubling as PFE's stock price indicates.
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