Market Snapshot
| Dow | 41503.10 | -103.08 | (-0.25%) | | Nasdaq | 17573.28 | -54.76 | (-0.31%) | | SP 500 | 5618.26 | -16.32 | (-0.29%) | | 10-yr Note | -3/32 | 3.69 |
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| | NYSE | Adv 1238 | Dec 1443 | Vol 945 mln | | Nasdaq | Adv 1796 | Dec 2393 | Vol 5.6 bln |
Industry Watch
| Strong: Energy, Communication Services |
| | Weak: Materials, Utilities, Financials, Real Estate |
Moving the Market
-- Reacting to the FOMC policy directive, updated Summary of Economic Projections, and Fed Chair Powell's press conference
-- Treasury yields settle higher in reaction to Fed announcement
-- Digesting this morning's economic data, which was stronger than expected
| Closing Summary
18-Sep-24 16:25 ET
Dow -103.08 at 41503.10, Nasdaq -54.76 at 17573.28, S&P -16.32 at 5618.26
[BRIEFING.COM] Today's session started sluggish in front of the afternoon's headline event. The Federal Open Market Committee (FOMC) voted in favor of cutting the target range for the fed funds rate by 50 basis points to 4.75-5.00%. It was not a unanimous vote. Fed Governor Bowman preferred a 25-basis points rate cut.
The directive indicated that the Committee has "gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance."
The Summary of Economic Projections showed a shift in the median estimate for the 2024 unemployment rate to 4.4% (from 4.0% in June) and a downward shift in PCE inflation to 2.3% (from 2.6% in June) and core-PCE inflation to 2.6% (from 2.8%). The dot-plot, meanwhile, shows a median estimate for 2024 (4.40%) that implies another 50 basis points of rate cuts this year and another 100 basis points in 2025.
Fed Chair Powell defended the larger, 50-basis points cut today as a proper "recalibration" to make sure the labor market and the economy remain in a solid condition and that the intent of today's move is to make sure they remain there. He also said that the Fed doesn't feel like it is behind the curve with its policy rate and that the larger cut today can be construed as a sign of the Fed's commitment not to get behind.
There was some whipsaw trading action in the stock market and the Treasury market after the FOMC announced a 50-basis points rate cut at 2:00 p.m. ET and as Fed Chair Powell conducted his press conference, which began at 2:30 p.m. ET.
The major indices hit session highs in response, which marked fresh record highs for the S&P 500 (-0.3%) and Dow Jones Industrial Average (-0.3%), but ultimately settled lower than yesterday. Nine of the 11 S&P 500 sectors closed with declines ranging from 0.1% (industrials) to 0.8% (utilities). The energy (+0.3%) and communication services (+0.02%) sectors were alone in positive territory at the close.
The interesting action was in the Treasury market. The monetary policy rate was cut, and it is likely to get cut again (several times) based on the Fed's own projections. The interesting thing is that Treasury yields, which dropped initially, moved higher, with the 10-yr note yield settling the session higher than where it was before the 2:00 p.m. ET policy decision.
The connection here is that the Treasury market could be pricing in some inflation angst in a curve-steepening trade. The 2-yr note yield settled today's session at 3.60%, up one basis point, while the 10-yr note yield settled at 3.69%, up four basis points. They had traded down to 3.54% and 3.64%, respectively, in the initial wake of the policy announcement.
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index rose 14.2% with refinance applications surging 24% and purchase applications jumping 5%
- Housing starts increased 9.6% month-over-month to a seasonally adjusted annual rate of 1.356 million units (Briefing.com consensus 1.320 million), bolstered by a 15.8% increase in single-unit starts. Building permits increased 4.9% month-over-month to a seasonally adjusted annual rate of 1.475 million (Briefing.com consensus 1.415 million), aided by a 2.8% increase in single-unit permits.
- The key takeaway from the report is that single-unit starts and permits were up in every region, reflecting increased activity among builders that has been facilitated by sliding interest rates and pent-up demand.
- The weekly EIA Crude Oil Inventories showed a draw of 1.63 million barrels following last week's build of 833,000 barrels
Looking ahead to Thursday, participants receive the following data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 232,000; prior 230,000), Continuing Claims (prior 1.850 mln), Q2 Current Account (prior -$237.6 bln), and September Philadelphia Fed (Briefing.com consensus 3.0; prior -7.0)
- 10:00 ET: August Existing Home Sales (Briefing.com consensus 3.90 mln; prior 3.95 mln) and August Leading Indicators (Briefing.com consensus -0.3%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +40 bcf)
Major indices move toward highs ahead of the close
18-Sep-24 15:35 ET
Dow +45.69 at 41651.87, Nasdaq +77.94 at 17705.98, S&P +14.68 at 5649.26
[BRIEFING.COM] The major indices are moving toward session highs amid ongoing turbulence after the latest move by the Fed.
Many stocks are participating in upside moves. Nine of the 11 S&P 500 sectors are higher and the equal-weighted S&P 500 sports a 0.4% gain. The energy (+0.8%) and consumer discretionary (+0.7%) sectors lead the pack and the materials sector (+0.2%) shows the slimmest gain.
Looking ahead to Thursday, participants receive the following data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 232,000; prior 230,000), Continuing Claims (prior 1.850 mln), Q2 Current Account (prior -$237.6 bln), and September Philadelphia Fed (Briefing.com consensus 3.0; prior -7.0)
- 10:00 ET: August Existing Home Sales (Briefing.com consensus 3.90 mln; prior 3.95 mln) and August Leading Indicators (Briefing.com consensus -0.3%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +40 bcf)
Choppy action continues during press conference
18-Sep-24 15:05 ET
Dow -67.89 at 41538.29, Nasdaq -35.75 at 17592.29, S&P -11.30 at 5623.28
[BRIEFING.COM] The major indices trade in a volatile fashion following to the FOMC decision and in response to Fed Chair Powell's ongoing press conference.
The Treasury market has also exhibited choppy action. The 10-yr note yield moved 3.65% immediately after the release of the policy directive, but sits at 3.70% now. The 2-yr note yield hit 3.54% after the release, but sits at 3.62% now.
The US Dollar Index is down 0.1% to 100.78.
Fed invites elation and criticism with 50-basis points rate cut decision
18-Sep-24 14:30 ET
Dow +108.20 at 41714.38, Nasdaq +112.96 at 17741.00, S&P +23.98 at 5658.56
[BRIEFING.COM] The Federal Open Market Committee (FOMC) voted in favor of cutting the target range for the fed funds rate by 50 basis points to 4.75-5.00%. It was not a unanimous vote. Fed Governor Bowman preferred a 25 basis points rate cut.
It is a decision that will be met with both elation and criticism. The larger rate cut should placate participants who think the Fed is behind the curve already in trying to forestall a hard landing. Conversely, it will elicit criticism from participants who think the larger rate cut wasn't warranted given broader economic trends that include an inflation rate that is much improved but still above target at 2.5%. The worry will be that the more aggressive rate cut risks igniting inflation again.
The directive, however, indicated that the Committee has "gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance."
That said, with stock prices at record highs and initial jobless claims -- a leading indicator -- still well below recession levels, it would seem by way of the larger rate cut to get things started that perhaps the Fed sees more of an imbalance than it is letting on.
Fed Chair Powell will have the opportunity to explain the decision at his press conference that begins at 2:30 p.m. ET, as well as the changes to the Summary of Economic Projections and so-called dot-plot. The former showed an upward shift in the median estimate for the 2024 unemployment rate to 4.4% (from 4.0% in June) and a downward shift in PCE inflation to 2.3% (from 2.6% in June) and core-PCE inflation to 2.6% (from 2.8%). The dot-plot, meanwhile, shows a median estimate for 2024 (4.40%) that implies another 50 basis points of rate cuts this year and another 100 basis points in 2025.
The 2-yr note yield, at 3.64% in front of the release, is at 3.54% now, and the 10-yr note yield, at 3.69% in front of the release is at 3.65% now. The U.S. Dollar Index is down 0.4% to 100.47.
Stock prices have moved higher after the release, albeit in choppy action before the press conference.
The Russell 2000 is up 1.6%; the Nasdaq Composite is up 0.7%; the S&P 500 is up 0.4%; and the Dow Jones Industrial Average is up 0.3%.
Gold narrowly higher in front of rate decision
18-Sep-24 13:55 ET
Dow -10.81 at 41595.37, Nasdaq +12.49 at 17640.53, S&P +1.81 at 5636.39
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.07%) holds the lead among the major averages, up about 12 points.
Gold futures settled $6.20 higher (+0.2%) to $2,598.60/oz, as yields and the dollar hold a mixed tape into the FOMC's rate decision, which is scheduled to hit at the top of the hour.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $100.85.
Intuitive Machines rockets to another planet after winning a $4.82 bln NASA contract (LUNR)
Intuitive Machines (LUNR +56%) is orbiting well above its flatline today after winning a $4.82 bln NASA contract yesterday after the close. This is not the first time LUNR has displayed its technological capabilities for NASA, securing a roughly $117 mln contract in August, news of which sent its shares soaring. However, nothing has compared in value to yesterday's $4.82 bln ten-year contract, a massive win for LUNR given it registered around $115 mln in total revenue through 1H24.
- What does LUNR do? LUNR is a space infrastructure firm committed to contributing to establishing infrastructure and commerce on the Moon. While its mission is ambitious, LUNR has been efficiently developing products and providing services for NASA and several other commercial payload customers. The company exited Q2 with zero debt on its balance sheet and sufficient cash to fund operations for the next 12 months.
- Details of the $4.82 bln NASA contract involve providing services supporting NASA's Artemis mission, which involves establishing a presence on the Moon. NASA's goal directly aligns with LUNR's goal, making the two an excellent pairing.
- While today's pop reflects tremendous enthusiasm, LUNR could still encounter setbacks. Space shuttle launches are extraordinarily challenging and can encounter numerous delays and problems. For example, Boeing's (BA) Starliner spacecraft has faced numerous issues, from leaks to thruster malfunctions. Additionally, it is worth noting that ten years is not a guarantee; NASA will have the option to extend the contract come September 2029.
- Furthermore, given how explosive today's move is, LUNR could take the opportunity to raise funds through stock offerings. However, LUNR has already noted that it has ample cash on hand. Also, the company booked nearly $70 mln of new backlog this year, noting it still has several sizeable opportunities on the horizon. Meanwhile, following a successful first half of the year, LUNR raised its FY24 revenue outlook to $210-240 mln from $200-210 mln. Still, stock offerings are something to keep in mind as LUNR funds its new NASA contract.
Bottom line, the $4.82 bln NASA contract underscores LUNR's technological edge in providing space communications and navigation. If NASA's Artemis mission ultimately succeeds in establishing a presence on the Moon, LUNR stands to reap enormous benefits. However, the timeline here is long, and LUNR could face many speed bumps in the short run.
Microsoft's partnership with BlackRock to expand AI infrastructure looks like a win-win (MSFT)
Through the rapid growth of Azure, Microsoft's (MSFT) cloud platform that helps enterprises manage and run databases and applications, the tech giant is seeing firsthand how the emergence of AI is creating an ever-increasing demand for data center infrastructure. In fact, when MSFT reported Q4 results in late July, one key takeaway was that Azure's revenue growth of 30% likely would have been even stronger if not for capacity constraints.
The issue isn't that MSFT is being too conservative with its investments -- its capital expenditures were $19 bln in Q4 with nearly half of that tied to AI-related spending -- rather, the inability to build and scale data centers fast enough to keep pace with demand is the main challenge for MSFT and other hyperscalers. While MSFT expects its FY25 capex to exceed FY24 levels due to ramping infrastructure investments, the company recognizes that there is no slowdown in sight in terms of the need for more data centers for itself or for its cloud computing peers.
- Blackrock (BLK), the massive investment manager with $10.6 trillion in assets under management, sees the writing on the wall, too, and is turning to MSFT and NVIDIA (NVDA) to help it create a new vehicle for investors, insurance companies, pension funds, and corporations to invest in data centers and power infrastructure.
- Specifically, BLK announced that its forming a new AI partnership with MSFT, Global Infrastructure Partners, and MGX through the creation of the Global AI Infrastructure Investment Partnership (GAIIP). NVIDIA has agreed to provide its expertise in GPUs and AI data centers, helping the GAIIP to develop a healthy AI ecosystem in the U.S.
- Initially, the GAIIP will seek $30 bln in private equity capital -- MSFT will also be an investor -- but the partnership is ultimately targeting $100 bln in total investment potential when including debt financing.
- According to BLK, these investors will have the opportunity to earn long-term returns, while hyperscalers like MSFT are freed up to use their capital in other areas.
The main takeaway is that this partnership looks like a win-win scenario for both BLK and MSFT. While BLK should have little trouble raking in new capital from this endeavor, MSFT should ultimately benefit from the expanded data center infrastructure in the U.S., allowing it to dial back its capex over time.
BJ's Wholesale higher on insider buy; co is betting that investing in new stores will pay off (BJ)
BJ's Wholesale Club (BJ) is trading modestly higher today after disclosing last night that a director bought 2,455 shares at $81.26 worth ~$199K. In fairness, this does follow some sales by its CEO in early September. However, while not a huge purchase, we see it as a sign that this person sees some value here because the stock has pulled back following its Q2 (Jul) report last month.
- This warehouse club chain beat on EPS in Q2, its largest EPS upside in five quarters. Revenue rose 4.9% yr/yr to $5.21 bln, which also was better than expected. It also reaffirmed full year EPS at $3.75-4.00. However, with its investments for the long term, BJ says this could possibly drive EPS toward the low end of that range.
- Basically, it sounds like BJ is going to sacrifice some near term earnings potential in order to invest for the future. Specifically, BJ says its real estate pipeline is growing faster than it has in years. These investments are heavy today, but in the years ahead, the company believes it will be thrilled that it made them. Just last week, BJ announced a new store opening in Palm Coast, Florida.
- The company is at the start of a stretch that will see it open 11 new clubs in just the next six months. That's a lot in a short period of time relative to its 244 locations right now. BJ made a good point on its Q2 call: The new clubs that it has opened since its IPO have delivered comp sales growth of more than 3x the chain average for the second quarter.
- In terms of the health of the consumer, BJ says its members remain focused on value. Spend per shopper remains very healthy at higher income levels and continues to improve at the lower end, especially as it has moved past the tougher laps related to government aid in Q2. Critically, in Q2, BJ drove greater trip frequency and overall spend growth across high-, mid-, and low income levels, which demonstrates that its value position in is resonating across income segments.
- Also, BJ has smartly positioned itself as sort of a hybrid between warehouse clubs and grocery stores. It combines the bulk savings of a warehouse club but offers a broader assortment of perishable and grocery products than its club competitors. With groceries in high demand these days with more people eating at home and with consumers focusing more on necessities and less on discretionary items, that is good for BJ.
Overall, we understand why investors are often not too excited when a company plans to spend a lot of money in the short term in order to grow over the long term. That eats into margins and EPS. However, management sounds pretty confident that it will look back in the years ahead and be "thrilled" it spent the money now on new locations. With the stock having pulled back 12% from its July highs, at least this one director sees some value here.
General Mills' AugQ performance mostly expected ahead of time, spurring a muted response today (GIS)
General Mills' (GIS) slim earnings beat, in-line revenue, and flat volume growth in Q1 (Aug) come up stale, spurring a muted response today. The consumer packaged goods giant also reiterated its FY25 (May) financial targets. However, this was not surprising given that the company reiterated its guidance earlier this month before a consumer staples conference. With shares running hot lately, appreciating by roughly +20% since bottoming out following GIS's underwhelming Q4 (May) numbers in late June, investors were simply hungry for more buoyant headline results in Q1.
- For the quarter, net sales and organic net sales edged 1% lower yr/yr to $4.85 bln. Similarly, adjusted EPS contracted by 6% -- 2% when backing out FX impacts -- to $1.07. Organic revenue and constant currency EPS growth fell short of GIS's FY25 targets of flat to up 1% and down 1% to up 1%, respectively. However, management expected this heading into Q1, as it faced challenging yr/yr comparisons.
- On a sequential basis, GIS's numbers signaled decent improvement. Net sales expanded by 3%, and EPS moved 6% higher, leading to pound volume finishing flat compared to last year, a promising jump from the 2% drop delivered in Q4. While GIS has now gone ten consecutive quarters without registering positive yr/yr volume growth, its sequential improvement does provide some encouragement that volumes may begin to tick higher during FY25.
- The demand environment remains a problem. Consumers continue exhibiting value-seeking behaviors in light of the cumulative effects of inflation. Competitors' supply chains stabilizing is adding another wrinkle, providing consumers with several private-label alternatives. Meanwhile, in China, the situation is even worse as headwinds pick up speed, translating into a significant yr/yr drop in traffic through GIS's Haagen-Dazs shops.
- On the flip side, at-home food prices have mostly stabilized, unlike away-from-home prices, which continue to rise, shifting consumer tastes toward at-home food occasions. GIS estimates this shift contributed to 1 pt of pound volume growth in its U.S. retail categories in Q1, which is ahead of its long-term expectations.
- GIS's other segments displayed a few highlights. In Pet, where GIS is amid a turnaround, the company posted improved retail sales and market share trends in Q1, supporting a 3% lift in volumes, a stark reversal from the 7% drop posted last quarter. In Foodservice, volumes decelerated from a 3% jump in Q4 to flat growth in Q1. However, management commented that it continued to capture market share in critical away-from-home channels, including K-through-12 schools, healthcare, and universities.
Silver linings were present in GIS's Q1 report. However, many of these bright spots were touched on just a few weeks earlier. For instance, GIS remarked that it was excited by the gradual volume improvement during the past three months. The company also added that it continued taking market share in several categories. As such, expectations were set higher ahead of Q1 results. Without showcasing more robust growth across the board, some of the wind was taken out of GIS's sails.
Accenture slides following reports of delayed staff promotions amid slump in IT consulting (ACN)
IT consulting giant Accenture (ACN -4%) is encountering selling pressure today after Bloomberg reported that the company would delay staff promotions by six months due to an extended slump within the consultancy industry. The news is sending a shockwave across the consultancy landscape as several of ACN's peers tick lower in sympathy, including DAVA -5%, EPAM -2%, GLOB -2%, and IBM -1%.
Since reporting Q3 (May) results in late June, ACN has been mounting an impressive comeback, soaring by over +20%. Artificial intelligence kept shares of ACN afloat after delivering a rather underwhelming Q3 performance. Management was allocating significant resources to its AI division, boasting around 55,000 skilled data and AI practitioners as it heads toward its target of roughly 80,000 by the end of FY26, reflecting outsized enthusiasm for a surge in AI-related demand. Excitement was further kicked into gear after ACN posted a nearly sevenfold increase in Gen AI bookings YTD compared to all of FY23.
Against this backdrop, today's Bloomberg story is creating some uneasiness among investors, spurring profit-taking.
- Still, today's report should not be too surprising. Even though shares of ACN gapped higher, its Q3 (May) report in late June showed some cracks. The company missed earnings expectations on a 0.6% drop in revs yr/yr. Meanwhile, management lowered its FY24 (Aug) EPS guidance while narrowing its revenue growth forecast to +1.5-2.5% from +1.0-3.0%.
- Client spending developed differently than ACN anticipated at the start of FY24. Customers continue prioritizing large-scale transformations, which convert to revenue more slowly. At the same time, customers are limiting their discretionary spending, especially on smaller projects, while also delaying decisions, all adding to a sluggish pace of spending. These structural headwinds were not offset by the explosive AI-related revenue, largely because $2.0 bln in bookings is a drop in the bucket compared to ACN's $21.1 bln in total bookings last quarter.
- ACN was confident it was positioned to capture an eventual uptick in discretionary spending. However, the timeline is hazy. EPAM noted last month that there are conversations surrounding significant modernization among customers. Still, it had not turned into anything tangible. Nevertheless, ACN repeatedly cited AI as the catalyst that will ramp overall spending.
Today's reaction illuminates how volatile the macroeconomic backdrop remains. While Gen AI has been spurring significant demand, it has not propped up the rest of ACN's business. Meanwhile, the road ahead remains uncertain. Perhaps management will provide FY25 commentary when it reports Q4 earnings on September 26. Lastly, keep an eye on DAVA as it reports Q4 results on September 19 before the open.
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