Market Snapshot
briefing.com
| Dow | 29944.10 | -96.65 | (-0.32%) | | Nasdaq | 10518.11 | -130.89 | (-1.23%) | | SP 500 | 3636.28 | -33.70 | (-0.92%) | | 10-yr Note | -27/32 | 4.01 |
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| | NYSE | Adv 844 | Dec 2068 | Vol 273 mln | | Nasdaq | Adv 1410 | Dec 2745 | Vol 1.8 bln |
Industry Watch
| Strong: -- |
| | Weak: Energy, Materials, Consumer Discretionary, |
Moving the Market
-- Rising Treasury yields
-- Mixed reaction to earnings reports this morning
-- S&P 500 rejected at 3,700 level
-- Heightened uncertainty around UK markets as the BoE steps back from gilt purchases and PM Truss confirms fiscal stimulus plan
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10-yr note yield back above 4.00% as stocks continue to suffer
14-Oct-22 11:35 ET
Dow -149.56 at 29891.19, Nasdaq -165.89 at 10483.11, S&P -43.37 at 3626.61
[BRIEFING.COM] The stock market trades just off session lows as the 10-yr Treasury note yield pushed above 4.00%.
The Dow Jones Industrial Average shows the slimmest loss for the major averages thanks to gains in JP Morgan (JPM 113.31, +3.96, +3.6%) and UnitedHealth (UNH 520.35, +10.52, +2.1%) after both companies reported favorable earnings results. Boeing (BA 133.31, +0.90, +0.7%) also sports a decent gain on reports that United Airlines (UAL 35.88, +0.89, +1.4%) is aiming to purchase 100 widebody jets.
Separately, the CBOE Volatility Index is climbing, up 2.1%, or 0.67, to 32.61.
Health care sector with slimmest losses thanks to UNH
14-Oct-22 10:55 ET
Dow -157.89 at 29882.86, Nasdaq -162.59 at 10486.41, S&P -43.37 at 3626.61
[BRIEFING.COM] The major averages trade just off session lows.
As the market gave back its early gains, all the S&P 500 sectors fell into negative territory. Energy (-3.1%) shows the steepest losses while health care (-0.3%) has the slimmest. The latter is getting a boost from UnitedHealth (UNH 519.59, +9.68, +1.9%), which trades up after reporting favorable quarterly results.
The worst performing health care sector component is Organon (OGN 23.07, -0.96, -4.0%) after the company was downgraded to Underperform from Neutral at BofA Securities.
Earlier, Kansas City Fed President George (FOMC voter) said she supports ongoing rate increases, adding that the path of rate hikes needs to be balanced against the state of the economy and financial markets, according to CNBC.
Market continues decline as Treasury yields rise
14-Oct-22 10:35 ET
Dow -96.65 at 29944.10, Nasdaq -130.89 at 10518.11, S&P -33.70 at 3636.28
[BRIEFING.COM] The stock market gave back all of its opening gains and continues to inch lower.
The 10-yr UK gilt yield, which was at 3.94% a short time ago, is up six basis points to 4.27%. This occurred following Prime Minister Truss giving a press conference where she confirmed the governments plan to cut corporate taxes. The British pound came off its overnight high at the same time (GBP/USD -1.3% to 1.1188).
Treasury yields are also climbing with the 10-yr note yield up three basis points to 3.98% and the 2-yr note yield up one basis point to 4.46%.
The preliminary October University of Michigan Index of Consumer Sentiment rose to 59.8 (Briefing.com consensus 58.6) from the final reading of 58.6 for September. In the same period a year ago, the index stood at 71.7.
The key takeaway from the report is that inflation expectations for the year ahead and five-year period increased from September, creating some uncertainty about the strength of consumer spending activity in coming months.
Market gives back opening gains
14-Oct-22 10:05 ET
Dow +52.81 at 30093.56, Nasdaq -79.77 at 10569.23, S&P -12.59 at 3657.39
[BRIEFING.COM] The stock market started on an upbeat note but pulled back from early highs. The major averages dipped into negative territory after the S&P 500 got rejected at the 3,700 level.
Weak mega cap stocks weigh on index level performance. The Vanguard Mega Cap Growth ETF (MGK) is down 0.1% versus a 0.4% gain in the Invesco S&P 500 Equal Weight ETF (RSP) are a 0.2% gain in the S&P 500.
Just in, August Business Inventories rose 0.8% (Briefing.com consensus 0.9%) following a revised increase of 0.5% in July (from 0.6%).
The preliminary University of Michigan Consumer Sentiment reading came in at 59.8 (Briefing.com consensus 58.6) after the prior reading of 58.6.
Equity futures rebound ahead of the open
14-Oct-22 09:15 ET
Market is Closed
[BRIEFING.COM] S&P futures vs fair value: +35.50. Nasdaq futures vs fair value: +117.50. The S&P 500 futures are up 34 point and are trading 1.0% above fair value. The Nasdaq 100 futures are up 114 points and are trading 1.1% above fair value. The Dow Jones Industrial Average futures are up 225 points and are trading 0.9% above fair value.
Total retail sales were unchanged month-over-month in September (Briefing.com consensus +0.2%) following an upwardly revised 0.4% increase (from 0.3%) in August. Excluding autos, retail sales were up 0.1% month-over-month (Briefing.com consensus 0.0%) following an upwardly revised 0.1% decline (from -0.3%) in August.
The key takeaway from the report is that it is not adjusted for inflation, so the lackluster numbers for September suggest consumers were pulling back on spending activity in the face of high inflation.
The September Import-Export Price Index brought some better inflation news. Import prices were down 1.2% month-over-month and down 0.4% excluding fuel. Export prices were down 0.8% month-over-month and down 0.9% excluding agricultural products. This report, though, has been largely overshadowed by the fresh memory of yesterday's disappointing CPI report.
Treasury yields remain near their lows ahead of the open. The 2-yr note yield is down four basis points to 4.41% and the 10-yr note yield is down eight basis points to 3.85%.
The Big Picture
Last Updated: 14-Oct-22 15:22 ET | Archive
CPI storyline remains much the same (which isn't good)
Try as we might, there is no getting around discussing the September Consumer Price Index this week. The easy way out would be to copy/paste the column we wrote on September 14, August CPI report gets in the way of the Hollywood ending.
The September CPI had a similar storyline. It got in the way of the Hollywood ending that calls for a soft economic landing, but that still didn't stop the market from pretending it was in Hollywood.
The reaction to the report was as exhilarating as Top Gun: Maverick, but like the movie, it required the viewer to suspend disbelief.
Tearing Up the Script
The news hit at 8:30 a.m. ET on Thursday, October 13. Total CPI was up 0.4% month-over-month in September. Core CPI, which excludes food and energy, was up 0.6% month-over-month. On a year-over-year basis, total CPI was up 8.2%, versus 8.3% in August. Core CPI was up 6.6% versus 6.3% in August.
Those were awful inflation readings. The year-over-year increase in core CPI was the focal point, because the Fed says its monetary policy tools are better suited to fight core inflation. Food and energy prices are notoriously volatile and something the Fed cannot control.
The sobering takeaway was that core inflation worsened in September, hitting its highest level since August 1982.
The reaction to this understanding was swift. The futures for the major indices plummeted ahead of Thursday's open, yields on Treasury securities spiked, and the U.S. Dollar Index shot higher as the fed funds futures market altered its terminal rate projection from 4.25-4.50% to 4.75-5.00%.
It was a reaction that went according to script... but then the script got torn up.
Stock prices soon reversed and raced higher, Treasury yields faded from their post-CPI highs, and the U.S. Dollar Index rolled over, losing 0.9% for the day. The move in stock prices was extreme, almost as extreme as Maverick getting his Darkstar hypersonic plane to reach Mach 10. We won't tell you what happened after that.
The S&P 500 reached 3,491.58, down 2.4% from Wednesday's close. It would end the day up 2.6%. The Dow Jones Industrial Average for its part hit 28,660.94 at its low and ended the day at 30,038.72. It had gotten as high as 30,168.54, which marked a 1,507-point swing from low to high.
We told you it was an exhilarating ride.
Another 75 on the Way
What happened to fuel the turnaround? There were various explanations, although none had any fundamental grounding.
The lead explanation is that the S&P 500 hit the ignominious mark of retracing 50% of the gains it had registered in the pandemic rally. Having done so, a technically oriented rebound effort ensued that was exacerbated by short-covering activity and computer-driven buy programs.
It is important to note that the S&P 500 had posted losses in six consecutive sessions leading up to the CPI report, having lost 5.6% in that span and leaving it down 16.9% since mid-August.
Some would rightfully allege that the market was oversold and due for a bounce, particularly with sentiment surveys showing extreme levels of bearishness. The ground was ripe for a counter-trend rally and that is exactly what we got.
It didn't hurt matters that the UK gilt market was showing some needed improvement on reports that UK Prime Minister Truss might scale back her fiscal stimulus plan. She ultimately did on Friday (but didn't scrap it altogether) and also announced the firing of Finance Minister Kwarteng.
As of this writing, the 10-yr UK gilt yield was at 4.38%, six basis points higher than where it was on September 28 when the Bank of England announced its emergency purchase operations. That operation is now over, leaving many to wonder if the BoE's hand will soon be forced to provide liquidity support again.
The situation in the UK is not a good situation and that also includes high inflation that the BoE is trying to tame with interest rate hikes.
Another takeaway from the September CPI report is that it effectively cemented another 75-basis point rate hike from the Fed at its November 1-2 FOMC meeting and raised the possibility of an additional 75-basis point rate hike at the December 13-14 FOMC meeting. The fed funds futures market is pricing in a 75% probability of the extra 75 basis points in December versus a 23.4% probability only a week ago.
Been There, Heard That
The details of the September CPI report are not pretty. The food index was up 11.2% year-over-year; the energy index was up 19.8% year-over-year; and the shelter index was up 6.6% year-over-year. That's only a sliver of things, too.
There was much squawking that core inflation is not as bad as it seems because of the lag in how the government measures rent and owners' equivalent rent in the shelter component of the CPI. Okay, maybe, but if you exclude shelter, along with food and energy, the all items index was still up 6.7% year-over-year and leaving much room for improvement.
Something else we have heard before -- and which was cited as a catalyst for the Mach 10 rally on Thursday -- is that the inflation report for September was so bad that it can't get any worse. This view is affectionately known as the "peak inflation narrative."
You might have heard of it before. We talked about it in this column on August 10, Peak inflation? Maybe. Peak hawkishness? Not yet.
Since then, the target range for the fed funds rate has increased another 75 basis points to 3.00-3.25%, the 10-yr note yield has risen 123 basis points to 4.02%, and core CPI has climbed to a 40-year high.
What It All Means
The chart above must be hanging like a "Wanted" poster in the halls of the Eccles Building. It is a stark reminder to Fed officials that their work is most definitely not done.
That is infuriating to critics who want the Fed to consider more fully the lag effect of their prior rate hikes. The fear is that the Fed will raise rates too much and pilot the economy to a hard landing.
These critics might be right, but what they think doesn't matter. What matters is what the Fed thinks, because the Fed is calling the policy shots, and so far, they keep calling for more rate hikes.
The September CPI report, not to mention the 3.5% unemployment rate for September, will only strengthen the Fed's resolve to fight inflation with higher interest rates that weaken demand. That resolve was not accounted for in Thursday's rally.
The coming months will be a dogfight between the Fed and the stock market, much like it has been all year, yet the Hollywood ending with Maverick calling the ball after defeating the enemy is still in production.
-- Patrick J. O'Hare, Briefing.com
Morgan Stanley sliding lower as sluggish investment banking business causes a Q3 earnings miss (MS)
Ice-cold conditions in the investment banking industry took a toll on Morgan Stanley's (MS) 3Q22 results, which came up short of EPS and revenue expectations. A rough quarter for MS's investment banking unit was widely anticipated, though, especially in the wake of Jefferies' (JEF) earnings report from September 28. Yesterday, MS rallied by 3.5% despite these low expectations, setting the stage for a sell-the-news reaction today.
CEO James Gorman described the company's performance as "resilient and balanced in an uncertain and difficult environment." That might seem like an overly optimistic view of the results considering that earnings fell by 29% yr/yr as investment banking revenue plummeted by 55%. However, it's important to keep in mind that MS and its peers are lapping a very strong period from a year-earlier. For instance, MS's investment banking revenue soared by 65% in 3Q21, while the Wealth Management segment delivered growth of 28%. Therefore, even under a "normal" operating environment, the 3Q22 yr/yr growth rates probably wouldn't look overly impressive.
On a sequential basis, investment banking revenue actually increased by 19% to $1.28 bln, with advisory revenue up by 16% to $693 mln. Staying within the Institutional Securities segment, MS's trading desk had a respectable performance given the challenging market conditions. The fixed income side really stands out with revenue growing by 33% yr/yr to $2.2 bln as MS capitalized on higher trading activity in a rising interest rate climate.
The results in MS's other two segments, Wealth Management and Investment Management, were mixed overall.
- Unsurprisingly, asset management revenues fell by 7% in Wealth Management due to the declining stock market. However, higher interest rates provided a significant boost for net interest income, which jumped by 49% to $2.0 bln. As interest rates rise, MS and other financial institutions are able to achieve wider spreads between loans and deposits.
- Total expenses were roughly flat yr/yr, enabling pre-tax income to improve to $1.6 bln from $1.5 bln a year ago.
- Falling asset prices battered the Investment Management segment, which is the smallest of MS's segments at roughly 10% of total revenue. This segment, which generates fees from a wide range of public and private financial products, experienced a 20% drop in revenue.
Overall, MS's quarterly results generally played out as expected. The investment banking business struggled, and volatile market conditions were a headwind for equity trading, Wealth Managment, and Investment Management. MS once again displayed its strength in the fixed income trading space, but there weren't too many other areas of strength, setting a low bar for Goldman Sachs (GS) to hurdle when it reports earnings next Tuesday.
JPMorgan Chase bounces back with solid beat after misses in Q1 and Q2; credit still healthy (JPM)
JPMorgan Chase (JPM +2%) is heading higher today after it bounced back with a solid EPS and revenue beat in Q3 after misses in both Q1 and Q2. Unfortunately, JPM announced in July that it would pause share buybacks for the time being. We had hoped the company might resume them by now, but the bank is now saying it hopes to resume buybacks by early 2023. However, the banking giant was generally upbeat on its earnings call this morning.
- In its Consumer & Community Banking (CCB) segment, revenue rose a healthy 14% yr/yr to $14.33 bln. Consumer & Business Banking revenue jumped 30% yr/yr to $8.0 bln, driven by higher deposit margins and growth in deposits. As rates rise, JPM benefits from charging higher interest, but the interest it pays on deposits has not changed much. Not surprisingly, Home Lending revenue fell 34% yr/yr to $920 mln as mortgage demand has slowed.
- In the Corporate & Investment Bank (CIB) segment, revenue fell 4% yr/yr to $11.88 bln. Markets revenue was up 8% to a record $6.8 bln, although a bit of a slowdown from 15% growth in Q2. Investment Banking revs fell sharply, down 43% yr/yr to $1.7 bln, a slight improvement from a 54% decline in Q2. In fairness, JPM was lapping a record IB year last year. Commercial Banking (CB) revs rose 21% yr/yr to $3.05 bln while Asset & Wealth Mgmt (AWM) revs rose 6% to $4.54 bln.
- The provision for credit losses was $1.54 bln, which was up from $1.10 bln in Q2. This included a net reserve build of $808 mln and net charge-offs of $727 mln. The net reserve build included $937 mln in Wholesale, reflecting loan growth and the impact of updates to the firm's macroeconomic scenarios, partially offset by a reserve release of $150 mln in Home Lending.
- JPM insists that credit is still quite healthy, and net charge-offs remain historically low. Spend is still strong across both discretionary and non-discretionary categories, with combined debit and credit spend up 13% yr/yr. Cash flow among consumers remains elevated across all income segments. However, with spending growing faster than income, JPM is seeing a continued decrease in median deposits yr/yr, particularly in the lower income segments. Card delinquencies remain well below pre-pandemic levels though JPM continues to see gradual normalization.
Overall this was a good report both from the perspective of JPM's results and the health of the consumer. Our big concern with banks is when macro issues like inflation start to impact creditworthiness and delinquencies, but the consumer seems to be holding up pretty well. The delay in restarting buybacks was a bit of a disappointment, but not a huge deal. Many banks reported this morning and most beat or reported in-line, with Morgan Stanley (MS) being the lone exception.
UnitedHealth's Q3 results were similar to Q2 highlighting a return to normalized care patterns (UNH)
The double-digit Q3 earnings beat by UnitedHealth (UNH +1%), the largest U.S. health insurer and a Dow Jones component, is helping its shares feel fairly good today. UNH also increased its FY22 EPS guidance, which with one quarter left, can be viewed as Q4 guidance, to $21.85-22.05 from $21.40-21.90.
- Many of UNH's strong headline numbers in Q3 were similar to Q2. Adjusted earnings expanded by 28.1% yr/yr to $5.79, registering a similar-sized beat as last quarter. Revs decelerated slightly from the previous quarter but remained growing at a double-digit clip, jumping 11.8% yr/yr to $80.89 bln.
- Another similarity from the previous quarter was that care patterns continued to normalize. UNH expects this to continue in the quarters ahead.
- One item that differed from Q2 was UNH's medical care ratio, the percentage of premiums used to cover claims, which ticked slightly higher yr/yr. However, it only increased by 1 bp to 81.6%, far below the 83.0% registered in the year-ago period, when pronounced COVID effects still pressured UNH.
- Deferred care was a possible headwind worth keeping an eye on. UNH did not comment on deferred care this quarter after noting in Q2 that it was not seeing any noticeable uptick in deferred care. We view no new insights into deferred care this quarter as likely good news.
Overall, UNH's Q3 results displayed a continuation of a steady return to more normalized care patterns since the pandemic. As UNH puts further distance between it and the pandemic, concerns of a negative impact on UNH's results due to deferred care are receding. As a result, we like UNH during the current inflationary environment for its ability to provide a less volatile option while returning capital to shareholders through a decent 1.3% dividend yield, which it consistently increases annually, and a good share buyback program. Through the year's first nine months, UNH has returned $10.5 bln to shareholders.
On a final note, given UNH's reach in the health insurance space, its results set the tone for many in the industry. This includes companies like Elevance Health (ELV), Centene (CNC), Molina Healthcare (MOH), Humana (HUM), and Cigna (CI), which each report Q3 earnings over the next few weeks. After UNcH's similar upbeat results in Q2, investor reactions were mixed; ELV and HUM did not see favorable price movement, while shares of CNC, MOH, and CI moved higher.
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