Market Snapshot
briefing.com
| Dow | 32218.91 | +214.63 | (0.67%) | | Nasdaq | 10348.23 | +65.44 | (0.64%) | | SP 500 | 3752.58 | +32.62 | (0.88%) | | 10-yr Note | -1/32 | 4.16 |
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| | NYSE | Adv 2072 | Dec 872 | Vol 1.0 bln | | Nasdaq | Adv 2610 | Dec 1926 | Vol 5.4 bln |
Industry Watch
| Strong: Materials, Financials, Communication Services, Industrials, Information Technology |
| | Weak: -- |
Moving the Market
-- Apple dragging on broader market following reports that the company paused hiring for many jobs outside R&D in continued cost-cutting effort; company says it is "taking a very deliberate approach in some parts of the business"
-- October employment report showing labor market remains tight, piling onto the Fed signaling they're likely to raise rate higher than expected for longer
-- Weakness in the dollar
-- Strength in Chinese stocks after reports that U.S. auditors completed their on-site inspection of Chinese-listed companies sooner than expected, and renewed speculation that China will ultimately relax its zero-COVID policy
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Closing Summary
04-Nov-22 16:35 ET
Dow +401.97 at 32406.25, Nasdaq +132.31 at 10415.10, S&P +50.66 at 3770.62
[BRIEFING.COM] Today's trade started and ended on an upbeat note. Most of the session in between, however, saw the major averages trading with modest losses. The stock market took its cues from the bond and currency markets today.
Upside momentum was driven by an October Employment Report that was generally supportive of a soft landing outcome, renewed speculation that China will ultimately relax its zero-COVID policy, a weakening dollar, and a pullback in Treasury yields.
Downside moves in the stock market coincided with rising Treasury yields and a stronger dollar. Some ongoing struggles for Apple (AAPL ) also proved to be a weighty influence on the major indices.
The 10-yr note yield fell to 4.12% when the major averages hit session highs and rose to 4.17% when the stock market was at its lows. The 2-yr note yield hit 4.65% when stocks hit their highs and rose to 4.70% while stocks fell. Ultimately, the 10-yr note yield and the 2-yr note yield settled at 4.16% and 4.67%, respectively.
The U.S. Dollar Index fell to 110.96 around the time stocks hit their highs before climbing back to 111.37. By the close, the U.S. Dollar Index was at 110.75, hitting its worst levels of the day as other major currencies registered big gains against the greenback (EUR/USD +2.2% to 0.9960). Stocks rallied back toward their highs for the day in the final hour as the U.S Dollar Index broke down.
The Vanguard Mega Cap Growth ETF (MGK) closed up 1.4%, but was down 0.7% when the major averages put in their lows for the day. Apple (AAPL 138.38, -0.27%) was a notable standout for the group following reports that the company paused hiring for many jobs outside R&D in a continued cost-cutting effort, saying it is "taking a very deliberate approach in some parts of the business," according to Bloomberg.
Chinese stocks, and U.S. stocks with high exposure to the Chinese market, maintained sizable gains today even as the indices traded down. Aside from the renewed speculation about easing the zero-covid policy, Chinese stocks were also boosted by reports that U.S. auditors completed their on-site inspection of Chinese-listed companies sooner than expected and China reportedly approving the use of the Pfizer (PFE 47.22, +0.65, +1.4%) and BioNTech (BNTX 154.31, +9.06, +6.2%) COVID vaccine for foreign residents.
JD.com (JD 44.38, +3.94, +9.7%), Alibaba (BABA 69.87, +4.60, +7.1%), and Pinduoduo (PDD 61.89, +4.92, +8.6%) were winning standouts for Chinese names while Starbucks (SBUX 91.86, +7.18, +8.5%) and Nike (NKE 95.79, +5.39, +6.0%) were among the biggest winners for U.S stocks with high exposure to the Chinese market.
In turn, there were some big moves in the commodities market rooted in the aforementioned reports about China potentially relaxing its zero-covid policy. WTI crude oil futures settled the day up 5.2% to $92.64/bbl while copper futures jumped 7.6% to $3.69/lb.
Ahead of Monday's open, Palantir Technologies (PLTR), BioNTech (BNTX), NRG Energy (NRG), and TreeHouse Foods (THS) are among a handful of companies scheduled to report their earnings results.
Economic data on Monday is limited to the September Consumer Credit (prior $23.80 bln) at 15:00 ET.
Reviewing today's economic data:
- October Nonfarm Payrolls 261K (Briefing.com consensus 220K); Prior was revised to 315K from 263K; October Nonfarm Private Payrolls 233K (Briefing.com consensus 225K); Prior was revised to 319K from 288K; October Avg. Hourly Earnings 0.4% (Briefing.com consensus 0.3%); Prior 0.3%; October Unemployment Rate 3.7% (Briefing.com consensus 3.6%; Prior 3.5%; October Average Workweek 34.5 (Briefing.com consensus 34.5); Prior 34.5
- Ultimately, though, the key takeaway is that the labor market isn't showing enough weakness yet to convince the Fed that it can stop raising the target range for the fed funds rate.
Dow Jones Industrial Average: -10.8% YTD
S&P Midcap 400: -15.3% YTD
S&P 500: -20.9% YTD
Russell 2000: -19.8% YTD
Nasdaq Composite: -33.0% YTD
Market climbs ahead of close
04-Nov-22 15:35 ET
Dow +310.41 at 32314.69, Nasdaq +94.85 at 10377.64, S&P +41.01 at 3760.97
[BRIEFING.COM] The market continues to climb ahead of the close.
The 2-yr Treasury note yield fell five basis points today, but rose 25 this week, to 4.67%. The 10-yr note yield rose three basis points today, and 15 this week, to 4.16%.
Ahead of Monday's open, HF Sinclair (DINO), Palantir Technologies (PLTR), BioNTech (BNTX), NRG Energy (NRG), and TreeHouse Foods (THS) headline the earnings reports.
Economic data on Monday is limited to the September Consumer Credit (prior $23.80 bln) at 15:00 ET.
Market breadth reflects underlying strength
04-Nov-22 15:05 ET
Dow +214.63 at 32218.91, Nasdaq +65.44 at 10348.23, S&P +32.62 at 3752.58
[BRIEFING.COM] The major averages continued a steady climb higher in the last half hour.
Market breadth reflects more strength under the surface than index performance might suggest. Advancers lead decliners by a 2-to-1 margin at the NYSE and an 11-to-10 margin at the Nasdaq.
Energy complex futures settled higher today. WTI crude oil futures rose 5.2% to $92.64/bbl and natural gas futures rose 6.7% to $6.72/mmbtu.
Freeport-McMoRan outperforms on Friday as metals prices surge
04-Nov-22 14:30 ET
Dow +55.33 at 32059.61, Nasdaq -27.11 at 10255.68, S&P +5.34 at 3725.30
[BRIEFING.COM] The Dow Jones Industrial Average (+0.17%) and the S&P 500 (+0.14%) regain positive territory in recent trading, while the Nasdaq Composite (-0.26%) trims losses.
S&P 500 constituents Warner Bros. Discovery (WBD 10.29, -1.68, -14.04%), Paycom Software (PAYC 296.98, -29.35, -8.99%), and ServiceNow (NOW 355.97, -29.59, -7.67%) dot the bottom of today's standings. WBD slips following earnings, while PAYC and NOW fall victim to broader weakness in tech/software.
Meanwhile, Arizona-based precious metals miner Freeport-McMoRan (FCX 34.87, +3.31, +10.49%) is outperforming owing in part to today's strength in precious metals prices.
Gold shines as dollar weakens following jobs data
04-Nov-22 14:00 ET
Dow -17.76 at 31986.52, Nasdaq -56.46 at 10226.33, S&P -3.96 at 3716.00
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-0.55%) remains today's worst-performing major average, making a top to bottom move north of 282 points.
Gold futures settled $45.60 higher (+2.8%) to $1,676.50/oz, aided mostly by declines in the dollar following this morning's jobs report.
Meanwhile, the U.S. Dollar Index is down about -1.5% to $111.19.
Page One
Last Updated: 04-Nov-22 09:03 ET | Archive
October employment report has a softer (landing) side to it
The stock market had a great run in October but it has gotten tripped up in November. Entering today, the Nasdaq Composite is down 6.8% for the week, the S&P 500 is down 4.6%, the Russell 2000 is down 3.6%, and the Dow Jones Industrial Average is down 2.6%.
It has been a lousy week in particular for the growth stocks, which have been afflicted by rising interest rates, weak guidance in a number of cases, and the shift out of the mega-cap darlings. The Vanguard Mega-Cap Growth ETF (MGK) is down 8.0% for the week.
These losses fueled a bit of a buy-the-dip mindset this morning in front of the October Employment Situation Report, which was helped along by a Bloomberg report that U.S. auditors completed their on-site inspection of Chinese-listed companies sooner than expected, and renewed speculation that China will ultimately relax its zero-COVID policy. On a related note, Hong Kong's Hang Seng surged 5.4% on Friday.
Such a move in the U.S. indices is highly unlikely today, but it does appear as if the major indices will reclaim some of this week's lost ground when trading begins.
Currently, the S&P 500 futures are up 45 points and are trading 1.2% above fair value, the Nasdaq 100 futures are up 129 points and are trading 1.2% above fair value, and the Dow Jones Industrial Average futures are up 286 points and are trading 0.9% above fair value.
The October employment report had some good in it and some not-so-good in it. Payroll growth was stronger than expected, which is good objectively speaking. Now, speaking in terms of what the market likes to hear at this juncture, the unemployment rate moved up and the year-over-year pace of average hourly earnings growth decelerated. That is not good, objectively speaking, but it is good for thinking that these key components are moving in a direction the Fed wants to see them move.
Ultimately, though, the key takeaway is that the labor market isn't showing enough weakness yet to convince the Fed that it can stop raising the target range for the fed funds rate.
The latter point notwithstanding, we would characterize the October employment situation as one that is more consistent with achieving a soft landing for the economy than a hard landing; however, the Fed has created a lot of turbulence with its rapid move toward a restrictive rate and the economy still needs to fly through that turbulence. In any case, the landing promises to be bumpy and market participants have their seatbelts fastened.
The Treasury market has seen some turbulence following the employment report, but hasn't moved much relative to where it was before the release. The 2-yr note yield is unchanged at 4.72% (it was at 4.75% before the release) and the 10-yr note yield is up six basis points to 4.18% (it was at 4.16% before the release).
Other notable headlines from the Employment Situation Report are as follows:
- October nonfarm payrolls increased by 261,000 (Briefing.com consensus 220,000). The 3-month average for total nonfarm payrolls decreased to 289,000 from 381,000.
- September nonfarm payrolls revised to 315,000 from 263,000
- August nonfarm payrolls revised to 292,000 from 315,000
- October private sector payrolls increased by 233,000 (Briefing.com consensus 225,000)
- September private sector payrolls revised to 319,000 from 288,000
- August private sector payrolls revised to 233,000 from 275,000
- October unemployment rate was 3.7% (Briefing.com consensus 3.6%), versus 3.5% in September
- Persons unemployed for 27 weeks or more accounted for 19.5% of the unemployed versus 18.5% in September
- The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.8% versus 6.7% in September
- October average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus up 0.3% in September
- Over the last 12 months, average hourly earnings have risen 4.7%, versus 5.0% for the 12 months ending in September
- The average workweek in October was 34.5 hours (Briefing.com consensus 34.5), versus 34.5 hours in September
- Manufacturing workweek was little changed at 40.4 hours
- Factory overtime decreased 0.1 hour to 3.1 hours
- The labor force participation rate slipped to 62.2% from 62.3% in September
- The employment-population ratio dipped to 60.0% from 60.1% in September
-- Patrick J. O'Hare, Briefing.com
Twilio takes a tumble as growth rate sharply decelerates and margin contraction continues (TWLO)
Twilio (TWLO), a cloud communications platform provider, beat analysts' 3Q22 EPS and revenue estimates, continuing a winning streak that extends beyond five years. However, the stock is still getting crushed today because the company issued weak Q4 guidance, confirming fears that macroeconomic headwinds are causing its customers to pull back on spending. Specifically, its outlook for revenue of $995-$1.005 bln equates to yr/yr growth of just 18% at the midpoint, representing a steep deceleration from this quarter's growth of 33%. In fact, since 2Q21, TWLO's top-line growth rate has been trending lower, steadily dropping from the mid-60% level seen last year.
Until this quarter's earnings conference call, TWLO had maintained a relatively upbeat posture regarding its near-term prospects, while highlighting the resiliency of its business. For instance, during the Q2 earnings call, President Elena Donia commented that the company hadn't seen a significant deterioration in demand and that companies are prioritizing investments in solutions like TWLO's that drive revenue and efficiency. She did acknowledge, though, that a couple of isolated areas of softness were emerging, including crypto, social, and consumer on-demand. Not only did those verticals weaken further in Q3, but new cracks also formed in areas such as e-Commerce and retail.
Compounding the problem is that TWLO decided after the 2020 election cycle to off-board political traffic from its platform to avoid friction with some of its customers. Consequently, Q3 and Q4 will not experience the typical spike in political-based traffic that typically occurs during election cycles.
Unfortunately, the troubles aren't relagated to TWLO's Q4 revenue outlook.
- Non-GAAP gross margin continues to contract, sinking to 25% in Q3 from 33% last quarter, and from 41% in 1Q22. The company is moving further and further away from its long-term gross margin target of 60% and investors are clearly losing confidence that it will reach that mark any time soon.
- TWLO attributes the erosion to a higher mix of lower margin international revenue. In Q3, international revenue accounted for 34% of total revenue, which was actually down from 35% in Q2 and Q1.
- When asked about this contradiction during the earnings call, COO Khozema Shipchandler explained that the 35% figure is based on where the customer's address is, not necessarily where the traffic ends up. Shipchandler added that TWLO has U.S. and international customers that reside internationally, and that send messages internationally, which have a slightly lower gross margin.
- As a result of the eroding gross margin and declining revenue growth, TWLO's profits are heading in the wrong direction. This quarter's ($0.27)/share loss was its worst showing in over five years and the company is forecasting another loss for Q4, guiding for EPS of ($0.11)-($0.06).
- Despite this backslide, TWLO maintained its expectation of achieving non-GAAP operating profitability in FY23. To help reach that goal, the company announced an 11% workforce reduction in September, but more changes to its cost structure may be needed.
TWLO is getting punished because the slowdown in growth is much more pronounced than investors were anticipating. Coming off of the Q2 earnings report, it seemed that demand was holding up relatively well, outside of a few weak spots. Conditions have soured significantly since then, though, and TWLO is now experiencing a broad-based downturn in customer spending levels. Making matters worse, TWLO's margins are on the downtrend, putting its profitability aspirations into question for next year.
Starbucks' upbeat Q4 results and reiterated FY23 guidance highlights its brand loyalty (SBUX)
Shares of Starbucks (SBUX +7%) are hot today after the global coffee retailer posted solid upside on its top and bottom lines in Q4 (Sep) while also delivering robust comp growth globally and in the U.S. Although China comps dove by -16% in the quarter, this was a marked improvement from the -44% drop posted in Q3 (Jun). SBUX is also optimistic that after another quarter of negative comp growth in Q1 (Dec), it should see outsized comps throughout the remainder of FY23.
Expectations were slightly elevated leading into SBUX's Q4 report, as close competitor McDonald's (MCD) served impressive U.S. and international, ex-China, comp growth in SepQ. Nevertheless, SBUX exceeded this higher bar, underscoring the company's exceptional brand loyalty and early success with its previously announced investments.
- SBUX's Q3 same-store growth was the star of the show, boasting +7% global and +11% U.S. comps. A continual climb in average ticket was the primary fuel behind the solid comps, although, in the U.S., comparable transactions did see a 1% improvement.
- Guidance was also a highlight. SBUX reiterated its FY23 global comp forecast of +7-9%, expecting to come closer to the higher end of this range, consistent with its comments during Investor Day in September. With the global economy not improving since that time, it was encouraging to hear that it is not materially affecting SBUX at this time.
- SBUX also expected solid margin expansion globally in FY23, tempered in the first half but accelerating in 3Q23 and 4Q23. This outlook fueled SBUX's earnings forecast to exceed analyst expectations, a major bright spot, given ongoing FX headwinds and the company's over $1.0 billion incremental investments planned for the year. FY23 is also expected to continue seeing supply chain and commodity inflation, albeit to a lesser extent than in FY22.
- SBUX's Reinvention Plan, first outlined during Investor Day, may be in its early stages but is showing healthy progress. One of the key elements of SBUX's plan was improving wages and benefits, which showed up in Q4 through increased retention and turnover scores at the hourly level declining by 1 pt yr/yr and 4 pts sequentially.
- Regarding incoming CEO Laxman Narasimhan, who did not join the call, founder and interim CEO Howard Schultz commented that Mr. Narasimhan's immersion is going well as he visits numerous stores across the U.S. and U.K.
SBUX has been on an impressive run despite the current inflationary environment. Its global footprint and powerful brand recognition are fueling solid comp growth even as it has implemented aggressive pricing actions throughout the past year. Headwinds are still intense, which could knock SBUX off its path toward achieving its long-term financial targets, including +7-9% global comp growth and +15-20% adjusted EPS expansion. However, SBUX has yet to let these challenges encumber its quarterly results, an encouraging sign as it heads into FY23.
DoorDash sprints higher as solid Q3 results highlight resiliency of food delivery business (DASH)
DoorDash (DASH) is sprinting higher after issuing a 3Q22 earnings report and outlook showing that consumers are not dialing back their spending on food delivery, even as inflation cuts into their monthly budgets. The company generated Marketplace GOV (gross order value) growth of 30% to $13.53 bln, beating analysts' expectations, and improving on last quarter's 25% yr/yr growth. This was the first full quarter that Finnish delivery company Wolt was included in DASH's results, which does skew the yr/yr growth rate a bit. Still, Marketplace GOV increased by a solid 21% if Wolt's contributions are excluded. For its part, Wolt also performed well in Q3 despite the stiff macroeconomic headwinds in Europe as its Marketplace GOV jumped by 60% in Euros.
Like Uber's (UBER) delivery business, Uber Eats, there has been plenty of skepticism regarding DASH's profit potential. This helps explain why the stock is still hovering around its $52/share IPO price from 2020 even though DASH's top-line has grown by high-double digit and even triple-digit rates. However, also like Uber Eats, which posted adjusted EBITDA of $181 mln in Q3, DASH's profitability is improving -- at least on that measure. In Q3, DASH's adjusted EBITDA edged higher by $1 mln on a yr/yr basis to $87 mln, exceeding its prior guidance of $25-$75 mln.
On the surface, the yr/yr improvement looks rather unimpressive, but it's important to note that Wolt negatively impacted adjusted EBITDA by $65 mln in Q3. Therefore, using an apples-to-apples yr/yr comparison, DASH's adjusted EBITDA increased by 77% yr/yr. It appears that higher order values and a greater supply of drivers provided the main boost as DASH benefited from leverage on driver costs. In the shareholder letter, the company stated that total Dasher costs per order declined on a qtr/qtr and yr/yr basis. Wolt will continue to offset this tailwind over the next few quarters, although DASH noted that Wolt's Q3 adjusted EBITDA was an improvement compared to the run rate exiting Q2.
DASH's guidance was solid, indicating that its financials are moving in the right direction and that demand isn't cooling off.
- For Q4, adjusted EBITDA is expected to be $85-$120 mln, which is above analysts' expectations at the mid-point. The mid-point also equates to yr/yr growth of about 50%.
- DASH's Q4 Marketplace GOV guidance of $13.9-$14.2 bln also topped estimates and equates to y/yr growth of 26% at the mid-point. While DASH and Etsy (ETSY) are completely different businesses, they both have one feature in common: both experienced booms during the pandemic and have largely held on to the user gains it achieved during that period.
- The restaurant delivery business will continue to be DASH's bread-and-butter for the foreseeable future. However, the company is making significant strides in its non-restaurant delivery services. In particular, the grocery marketplace achieved Marketplace GOV growth of over 100% in Q3 with variable profit as a percentage of Marketplace GOV improving on a qtr/qtr and yr/yr basis.
DASH continues to prove its doubters wrong. First, many doubted that a food delivery company could ever become profitable. While the company hasn't reached that designation on an EPS basis yet, it is comfortably profitable on an adjusted EBITDA basis and is trending higher. Next, many believed that DASH would come crashing down as COVID-related restrictions were eased and as people began dining in restaurants again. That concern has not come to fruition, though, because many people who made a habit of ordering delivery during the pandemic are now frequent users of DASH's app.
PayPal falls on weak Q4 guidance; still, Q3 results pointed to signs of a possible turnaround (PYPL)
Shares of PayPal (PYPL -3%) are trying to recoup their losses today after the payment processor delivered earnings and sales upside in Q3. Last quarter, PYPL received a nice push on a narrower earnings beat and downbeat Q3 sales guidance as investors applauded its $15 bln share repurchase program and were excited to hear that Elliott Investment Management took a $2.0 bln stake in the company.
This time around, without these exciting headlines, investors are focusing more on Q3 results, which continue to show some weaknesses, partially buoyed by a few encouraging signs.
- The item receiving much of the attention today is Q4 guidance. PYPL expects adjusted EPS of $1.18-1.20 and revs of approximately $7.375 bln, representing just 6.6% growth yr/yr, a further deceleration in revs from the +10.7% posted in Q3, and PYPL's softest quarter in over five years.
- PYPL was excited to announce that it is working with Apple (AAPL) to allow U.S. merchants to accept Apple Pay using the PayPal or Venmo app. iPhone users can choose Apple Pay when checking out on PayPal or Venmo and add PayPal and Venmo credit and debit cards to Apple Wallet. It will also eliminate the need for merchants to use a dongle or other payment terminals, as their iPhones can be used as a mobile point of sale.
- Despite PYPL's excitement, we do not view this development as that significant, especially since competitors like Block (SQ) have had this feature for some time.
- The same holds true regarding PYPL's recent partnership with Amazon (AMZN), whereby the e-commerce giant would offer Venmo as a new payment option for orders placed on its site. Although it helped spark a brief upswing for PYPL shares, we question how many AMZN users will stop using AMZN branded credit cards, which carry 5% back for Prime members, and switch to PYPL branded cards.
- On a lighter note, net new accounts (NNAs) were 2.9 mln in Q3, a solid acceleration from 0.4 mln in Q2 and 2.4 mln in Q1. PYPL expects further growth in Q4, estimating another 3-4 mln NNAs.
- Total payment volume (TPV) also accelerated from the previous quarter, jumping 14% on an FX-neutral basis to $337.0 bln. With TPV growth slowly eroding lately, going from 24% in 3Q21 to 23% in 4Q21, 15% in 1Q22, and then 13% in 2Q22, it was encouraging to see the metric stabilize in Q3.
- It is also worth noting that Q3 operating expenses grew just 4% yr/yr compared to 17% in the year-ago period, helping lift operating margins 2 pts above its prior outlook to 22.4%. PYPL also expects to expand operating margins for the first time this year in Q4, an encouraging sign that the investment by Elliot Investment Management, which tends to push for cost discipline, is bearing fruit.
Bottom line, PYPL's Q3 report did not contain many exciting developments. However, there were still some bright spots in the quarter, giving credibility to a possible turnaround for the stock, which is down around 60% on the year. Competition remains fierce, with tech giants like AAPL, AMZN, and Alphabet (GOOG), as well as buy now, pay later firms like Affirm (AFRM) and SQ, all competing for a slice of the payment processing pie. However, PYPL's attractive forward P/E ratio of ~17x, buyback program, and Elliot Investment Management's backing make it a possible turnaround play.
Booking Holdings checks in with solid gains as resilient travel demand fuels another beat (BKNG)
Booking Holdings (BKNG) became the latest travel company to show that the desire to travel is still greater than the fear of an economic downturn, even as rising interest rates and inflation continue to cut into consumers' spending power. Last night, the company easily surpassed analysts' Q3 EPS and revenue expectations as gross bookings jumped by 36% yr/yr to $32.1 bln. Looking across BKNG's key metrics, it's hard to find any sign that travel demand is waning at all. In fact, it appears that momentum is only building as we head towards the holiday season.
- During the earnings conference call, CEO Glenn Fogel noted that October room nights have increased by 12% versus 2019, representing a modest improvement from September's growth of 10%. Additionally, Fogel stated that customers haven't been trading down to less expensive hotels and haven't reduced the length of their trips.
- This is evidenced by BKNG's strong ADR growth of 28% on a constant currency basis. Travelers are quite willing to pay higher prices for accommodations and flights and BKNG doesn't see this trend subsiding in Q4.
- The two key drivers fueling this strong demand are pent-up demand for travel coming out of the pandemic, and a healthy amount of savings in consumers' banking accounts -- partly due to prior stimulus packages.
- Geographically, the U.S. continues to outperform other regions with bookings up by a robust 35%. However, it's encouraging to see that Asia -- which has been afflicted by COVID-related lockdowns -- generated high-single digit growth in Q3. In September, bookings in Asia surpassed pre-pandemic levels for the first time.
- This resiliency of demand and strength in gross bookings is having a significant positive impact on BKNG's profitability. For the quarter, adjusted EBITDA grew by 26% yr/yr to a quarterly record of $2.66 bln. Although the company's Q4 guidance for adjusted EBITDA of $1.1 bln fell a bit short of analysts' expectations, it still equates to solid yr/yr growth of 17%.
- The company has generally kept its expenses in check. For instance, marketing as a percentage of gross bookings was roughly in line with 3Q19 and was better than its internal expectations.
- One of the few negatives is an item that's out of BKNG's control. Specifically, foreign exchange impacts are creating a considerable headwind with BKNG estimating FX to pressure Q4 bookings growth by about 18%. Also, if not for FX, the company believes that Q4 adjusted EBITDA would exceed the 4Q19 mark of $1.26 bln.
BKNG's strong results certainly don't come as a surprise. Virtually every airline that reported earnings highlighted the strength and resiliency of travel demand. Although Airbnb (ABNB) suffered a sell-the-news reaction to its earnings report earlier this week, its results were also quite strong. At this point, it looks like clear skies ahead for BKNG as consumers show no signs of reining in travel spending, even as macroeconomic headwinds persist.
The Big Picture
Last Updated: 04-Nov-22 15:22 ET | Archive
"Tardius, Altius, Diutius - Communiter" is the Fed's new motto
For more than 100 years, the Olympic motto was "Citius, Altius, Fortius." Those Latin words translate to "Faster, Higher, Stronger." In July 2021 the International Olympic Committee (IOC) revised that motto to include the word "Communiter," which means together.
The new motto, then, is: "Citius, Altius, Fortius - Communiter."
We got to thinking about this motto because we have been struck by the Fed's Olympian mentality when it comes to raising interest rates. Since March 2022, the Fed's approach has been faster, higher, stronger - together (there haven't been any dissents at the last three meetings, all of which culminated in a 75 basis points increase in the target range for the fed funds rate).
A revision, though, now seems to be in order for the Fed based on the remarks heard from Fed Chair Powell following the November FOMC meeting.
It is no longer "Citius, Altius, Fortius - Communiter." We would submit that the Fed's new motto is "Tardius, Altius, Diutius - Communiter," which in a post-Vatican II world translates to "Slower, Higher, Longer - Together."
Out of the Block
The Fed has moved like an Olympic sprinter changing the target range for the fed funds rate, which stood at 0.00-0.25% on January 26 and is now at 3.75-4.00%. The Fed has moved as quickly as it has because it recognized in the inflation data that it remained stuck in the starting block far too long.
When the Fed finally started running in March, the Consumer Price Index (CPI) was up 8.6% year-over-year and core CPI, which excludes food and energy, was up 6.4%. The PCE Price Index was up 6.4% year-over-year and the core-PCE Price Index, which excludes food and energy and is the Fed's preferred inflation gauge, was up 5.4%.
The inflation rates have been leveling off, but as can be seen in the chart, they are not coming down in any meaningful way. In fact, Fed Chair Powell conceded at his press conference that, "There's no sense that inflation is coming down. If you look at -- I have a table of the last 12 months of 12-month readings, there's really no pattern there. We're exactly where we were a year ago."
This "sticky" inflation is what is bothering the Fed the most, yet the recent policy directive made an allowance for the idea that the lag effect of the previous rate hikes could help unstick things.
That view was captured in the following line:
"In determining the pace of future increases in the target range, the Committee will 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."
This perspective is why the market thinks the Fed may raise rates "only" 50 basis points at its December 13-14 FOMC meeting. The latest read of the CME's Fed Watch Tool shows a 56.8% probability of a 50-basis points rate hike in December.
A Way to Go
The Fed, therefore, may slow the pace of its rate hikes, but it is still going to raise rates further. That was the implicit message from Fed Chair Powell, who said, "When (people) hear lags, they think about a pause. It's very premature in my view to be thinking about or talking about pausing our rate hike. We have a way to go. We need ongoing rate hikes to get to that level of restrictive. We don't know where that exactly is."
Separately, he acknowledged that the assessment of further tightening comes down to three questions: how fast to go; how high to raise our policy rate; and how long to remain at a restrictive level?
The market wishes there were definitive answers to each question, but there isn't at this juncture. That uncertainty is creating excess volatility around each economic release that pertains to inflation and employment since the trends in those areas are the fulcrum upon which monetary policy will pivot.
We noted above that the Fed chair isn't comfortable with where inflation sits today. He is also struck by how resilient the labor market has been, noting that the unemployment rate is still sitting near a 50-year low and that wage inflation, while flattening out, is still well above the level that would be consistent over time with 2.0% inflation.
So, there won't be a pause in the Fed's rate hikes. There are more to come, and the Fed Chair acknowledged that incoming data since the last meeting suggests the ultimate level of interest rates (i.e. the terminal rate) will be higher than previously expected. He also said that he thinks it is very difficult to make the case that the current target range for the fed funds rate is too tight given that inflation still runs well above that target range.
No one knows yet what the terminal rate will be, yet the fed funds futures market now thinks it will be 5.00-5.25% by June 2023.
The CME's FedWatch Tool indicates that the fed funds futures market assigned a 0% probability to that being the case a month ago. It is a moving target alright. To get from here to there will involve another 125 basis points worth of rate hikes, assuming that does in fact end up being the terminal rate.
What It All Means
It is not normal for the Fed to raise its policy rate by 75 basis points. The normal course of things over the past 30 years has been to move rates up, or down, in 25-basis point increments. There have been some 50-basis point moves along the way, but 75 basis points is a true outlier.
Accordingly, it says something about the Fed's race to catch up that it just implemented its fourth, consecutive 75-basis point hike and left the door open for another 75-basis point move at the December meeting.
It is moving at Usain Bolt-like speed. The difference is that Bolt won several Olympic gold medals. The Fed for its part gets a participation ribbon but is still a long way from the podium.
It will be appropriate for the Fed to slow the pace of increases and that time is coming. Those aren't our words. They are Fed Chair Powell's words. He isn't uttering any word, however, that suggests the Fed is done raising rates and considering cutting rates.
For the Fed and the market, it is "Tardius, Altius, Diutius - Communiter."
-- Patrick J. O'Hare, Briefing.com
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