Market Snapshot
| Dow | 32860.46 | -570.89 | (-1.71%) | | Nasdaq | 11524.50 | -151.23 | (-1.30%) | | SP 500 | 3983.89 | -64.53 | (-1.59%) | | 10-yr Note | -1/32 | 3.98 |
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| | NYSE | Adv 593 | Dec 2332 | Vol 885 mln | | Nasdaq | Adv 1339 | Dec 3134 | Vol 5.3 bln |
Industry Watch
| Strong: -- |
| | Weak: Financials, Materials, Real Estate, Utilities, Health Care, Energy |
Moving the Market
-- Fed Chair Powell telling the Senate Banking Committee that "the ultimate level of interest rates is likely to be higher than previously anticipated."
-- Rising Treasury yields in response to Fed Chair Powell's remarks
-- Expectations increase for 50 bps rate hike at March FOMC meeting
-- S&P 500 taking out support at its 50-day moving average (3,994)
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Closing Summary
07-Mar-23 16:30 ET
Dow -574.98 at 32856.37, Nasdaq -145.40 at 11530.33, S&P -62.05 at 3986.37
[BRIEFING.COM] Today's trade started somewhat mixed with investors anxiously awaiting Fed Chair Powell's testimony before the Senate Banking Committee. The tone in the market shifted markedly after the release of the Fed Chair's prepared remarks at 10:00 a.m. ET, followed by his testimony shortly after.
Both the stock and bond market reacted strongly to the following comments:
"Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time."
Fed Chair Powell would add in the Q&A portion of his testimony that the economic data thus far doesn't suggest the Fed has overtightened; indeed, the data suggest the Fed has more work to do. He also acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting.
The market had been accounting for rates moving higher following the release of the January Employment Report in early February, but the upsetting factor today was that Fed Chair Powell's remarks suggested the market has still underestimated where the terminal rate will fall. In addition, it was forced to contend with an understanding that a 50 basis points rate hike at the March FOMC meeting is back on the table.
This newfound thinking rocked the short end of the Treasury yield curve. The 6-month T-bill yield was up eight basis points to 5.21%, the 1-yr T-bill yield was up 16 basis points to 5.27%, and the 2-yr note yield rose ten basis points to 5.01%. The 10-yr note yield, meanwhile, fell one basis point to 3.98%. These moves put additional pressure on the 2s10s spread, which is now at -103 basis points.
According to the CME FedWatch Tool, the probability of a 50 basis points rate hike at the March meeting increased to 70.5% today from 31.4% yesterday. In turn, the fed funds futures market now expects the Fed's terminal rate to be in the 5.50-5.75% range versus 5.25-5.50% previously. The U.S. Dollar Index surged 1.2% to 105.63.
Broad selling had the S&P 500 take out support at its 50-day moving average (3,994) and close near its low for the day. All 11 S&P 500 sectors closed with losses ranging from 1.0% (consumer staples) to 2.5% (financials).
- Nasdaq Composite: +10.2% YTD
- Russell 2000: +6.7% YTD
- S&P Midcap 400: +6.4% YTD
- S&P 500: +3.8% YTD
- Dow Jones Industrial Average: -0.9% YTD
Reviewing today's economic data:
- January Wholesale Inventories down 0.4% month-over-month, as expected, following a 0.1% increase in December.
- Consumer credit increased by $14.8 bln in January (Briefing.com consensus $22.9 bln) following a downwardly revised $10.6 bln (from $11.6 bln) in December.
- The key takeaway from the report is that the pace of credit expansion is moderating in the face of rising interest rates. The $14.8 billion increase in January, which was driven predominately by revolving credit, was the second-lowest increase in the last 12 months (the lowest was in December).
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior -5.7%)
- 8:15 ET: February ADP Employment Change (Briefing.com consensus 195,000; prior 106,000)
- 8:30 ET: January Trade Balance (Briefing.com consensus -$69.0 bln; prior -$67.40 bln)
- 10:00 ET: January job openings (prior 11.012 mln)
- 10:30 ET: Weekly crude oil inventories (prior 1.17 mln)14:00 ET: March Fed Beige Book
2s10s widens as 2-yr breaches 5.00%
07-Mar-23 15:35 ET
Dow -511.56 at 32919.79, Nasdaq -137.59 at 11538.14, S&P -55.88 at 3992.54
[BRIEFING.COM] The main indices tried to lift off session lows recently.
Consumer credit increased by $14.8 bln in January (Briefing.com consensus $22.9 bln) following a downwardly revised $10.6 bln (from $11.6 bln) in December.
The key takeaway from the report is that the pace of credit expansion is moderating in the face of rising interest rates. The $14.8 billion increase in January, which was driven predominately by revolving credit, was the second-lowest increase in the last 12 months (the lowest was in December).
The 2-yr note yield settled above 5.00%, up 10 basis points to 5.01%. The 10-yr note yield, meanwhile, fell one basis point to 3.98%. These moves put additional pressure on the 2s10s spread, which is now at -103 basis points.
Market breadth shows strong negative bias
07-Mar-23 15:00 ET
Dow -570.89 at 32860.46, Nasdaq -151.23 at 11524.50, S&P -64.53 at 3983.89
[BRIEFING.COM] The main indices remain in a steady grind lower, trading at or near their worst levels of the session.
Market breadth is decidedly negative with decliners leading advancers by a better than 4-to-1 margin at the NYSE and a 7-to-3 margin at the Nasdaq.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures fell 3.7% to $77.52/bbl and natural gas futures rose 3.5% to $2.85/mmbtu.
The CBOE Volatility Index has been in a steady incline most of the session, up 5.7% or 1.06 to 19.67.
Just in consumer credit increased by $14.8 billion in January (Briefing.com consensus $22.9 billion) following a revised $10.6 billion in December (from $11.6 billion).
CORRECTION: the original post had an incorrect value for the revised December Consumer Credit. The post has been edited with the correct value ($10.6B).
Freeport-McMoRan dips alongside commodity declines, DISH Network gains on insider purchase
07-Mar-23 14:30 ET
Dow -560.29 at 32871.06, Nasdaq -135.19 at 11540.54, S&P -61.98 at 3986.44
[BRIEFING.COM] The S&P 500 (-1.53%) is in second place on Tuesday afternoon, currently near lows of the day, trimming monthly gains to +0.41%.
S&P 500 constituents Freeport-McMoRan (FCX 40.13, -2.60, -6.08%), DXC Technology (DXC 27.02, -1.46, -5.13%), and Corning (GLW 34.08, -1.39, -3.92%) dot the bottom of today's action. FCX falls alongside losses in precious metals, and specifically copper, while DXC slips after revealing last night that it had ended talks with a financial sponsor related to a potential acquisition, and GLW is moving lower today after appearing at the Morgan Stanley TMT conference earlier in the morning.
Meanwhile, DISH Network (DISH 11.41, +0.51, +4.68%) is today's top performer owing in part to last night's insider purchase.
Gold snaps lower after Powell comments
07-Mar-23 14:00 ET
Dow -553.60 at 32877.75, Nasdaq -127.70 at 11548.03, S&P -60.27 at 3988.15
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-1.09%) hosts the shallowest losses among the major averages, down more than 127 points.
Gold futures settled $34.60 lower (-1.9%) to $1,820.00/oz, slammed by comments from Fed Chair Powell who suggested more aggressive rate hikes could be warranted saying, "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
Meanwhile, the U.S. Dollar Index is up about +1.2% to $105.55.
Domo is a no-go as bleak outlook and another CEO shake-up sinks investor confidence (DOMO)
Just one year after taking the helm of Domo (DOMO), John Mellor is stepping down as CEO after the mobile-based business intelligence company issued another disappointing earnings report. Although the company edged past Q4 top and bottom-line expectations, its billings growth slipped into negative territory and its FY24 outlook indicates that an upswing in growth isn't on the near-term horizon. Like many other tech companies, DOMO is contending with elongated sales cycles and increasing deal scrutiny from its customers. However, its troubles are also rooted in some company-specific issues that are compounding the problem.
- When Mr. Mellor transitioned from Chief Strategy Officer to CEO last March, the company was reeling from high turnover across its sales force. This turnover seemed to be related to a change of strategy spearheaded by Mellor as the company shifted its focus towards winning smaller corporate deals that would be quicker and easier to close. In turn, the sales team on the enterprise side of the business was trimmed down as employees headed for the exits, resulting in less sales capacity.
- The hope was that this shift in strategy would generate stronger growth as DOMO's resources and efforts homed in on corporate accounts. Unfortunately, it hasn't played out that way, even as revenue increased by 19% from DOMO's corporate customers
- Offsetting the solid growth in corporate was the rather lackluster revenue growth of 9% from enterprise customers, which account for about half of the company's recurring revenue. The slowdown in spending from DOMO's largest customers is reflected in its dollar gross retention rate remaining below 90%, just like last quarter.
- Most troubling, though, is the downward trend in billings growth. For the first time in recent history, DOMO's billings declined on a yr/yr basis, down by 3% to $104.5 mln. This followed tepid growth of 5% last quarter, after billings grew by a healthier 21% and 25% in Q2 and Q1, respectively. Worse yet, the company guided for billings to decrease by 5% in 1Q24 to about $69 mln.
- What this downward trajectory in billings growth indicates is that new business growth is slowing. That is a function of the challenging macroeconomic environment, but it's also tied to DOMO's focus on smaller corporate customers that are more sensitive to the economic headwinds than larger enterprise customers.
Based on the company's lack of progress and inability to turn its billings growth around, it's unsurprising that another shake-up at the top is underway. DOMO's founder, Josh James, is now taking over as CEO, while David Jolley comes over from Ernst & Young, where he was office manager partner, to accept the CFO role.
They will have their work cut out for them as they try to execute a major turnaround. One positive is that DOMO's cost structure has been trimmed, facilitating margin growth, even as its top-line growth fades. In Q4, non-GAAP operating margin expanded by 18 percentage points yr/yr. The bottom line, though, is that DOMO will need to show material improvement over the course of a few quarters before investors' confidence is restored.
Sea Limited creates a massive splash by achieving its first quarter of profitability in Q4 (SE)
Sea Limited's (SE +22%) new course to achieve profitability outlined last quarter materialized in Q4, boasting adjusted EPS of $1.01, its first quarter of profitability since becoming a public company in 2017. This milestone is causing quite the splash today, with shares sailing toward levels not seen since August.
In Q3, SE acknowledged that its current trajectory of growth at all costs was not working, prompting the firm, often referred to as the Amazon (AMZN) of Asia Pacific, to pivot its focus toward profitable growth. As such, SE tightened its belt, reducing spending and future investment commitments across office space, logistics facilities, and employee travel. SE also halted all new financial equity investments and downsized operations in noncore markets.
- As a result of these actions, SE's Q4 net income and adjusted EBITDA turned positive, crushing analyst expectations, which anticipated another quarter of operating in the red.
- Much of SE's eye-catching bottom-line performance stemmed from its cost improvements, especially since sales growth decelerated from Q3, expanding just 7.1% yr/yr to $3.45 bln, down from the +17.4% posted last quarter.
- Outside of Digital Entertainment, where video game demand remains depressed, SE's businesses posted strong yr/yr sales growth.
- SE's largest segment, E-commerce, climbed 31.8% yr/yr to $2.1 bln, with Shopee (its e-commerce platform) reaching positive adjusted EBITDA for the first time, soaring to $196.1 mln from $(877.7) mln in the year-ago period. GMV did dip slightly, contracting 1% yr/yr to $18.0 bln on a 15% decline in gross orders. However, this was mainly due to FX impacts; on a currency-neutral basis, GMV grew 7%.
- Digital Financial Services, which houses SE's SeaMoney offering, saw revs surge 92.5% yr/yr to $380.2 mln. Like E-commerce, this segment reached positive adjusted EBITDA for the first time ever, driven by excellent top-line growth and spending optimization.
- In Digital Entertainment, bookings fell 18.2% yr/yr to $543.6 mln as SE witnessed a nearly 15% drop in quarterly active users yr/yr. As we have seen from others in this space, like Take-Two (TTWO) and Electronic Arts (EA), the gaming market remains adversely affected by moderation in user engagement and monetization. As a result, SE closed certain projects and remains selective about other potential projects where its resources would be better utilized.
- Looking ahead, SE remains aware of the macro uncertainty, noting that it will monitor the market environment closely and adjust its operations accordingly. The company also warned that this shakiness in the global economy could spark near-term fluctuations in its quarterly performance. Still, management remained upbeat about long-term growth prospects.
Bottom line, with analysts skeptical of SE's ability to turn its ship of perpetual net losses around as quickly as it did, shares are popping today. Several obstacles are still standing in SE's way over the near future, including lingering economic headwinds in its Digital Entertainment business and heightened uncertainty in consumer spending. However, after SE proved the doubters wrong with its ability to turn a profit so rapidly in Q4, it is hard to count out SE's capacity to successfully manage any future troubles it may encounter.
Dick's Sporting Goods racks up another win with upside report and huge dividend increase (DKS)
Consumers may be reining in spending for many discretionary items, but demand for sporting goods and fitness apparel remains quite healthy -- at least that's the case at Dick's Sporting Goods (DKS). Before the open, the leading sporting goods retailer posted an impressive beat-and-raise Q4 earnings report that featured solid comparable store sales growth of +5.3%. The strong Q4 results and upbeat outlook aren't the only catalysts behind today's strength. DKS also more than doubled its quarterly dividend to $1.00/share, equating to an annualized yield of about 2.8%.
- After smaller competitor Hibbett (HIBB) reported downside quarterly results last week, we were a bit nervous that DKS would follow suit and disappoint investors. However, DKS's market share gains and its favorable merchandise assortment that includes plenty of in-demand NIKE (NKE) products are propelling its results and enabling it to overcome a highly promotional environment.
- Relatedly, on December 20, NKE posted its own beat-and-raise earnings report, easing fears that sluggish consumer spending, high inventory levels, and rampant markdown activity at retailers would severely impair its performance.
- Gross margin didn't decline as much as expected and revenue in North America jumped by 30%, fueled by market share gains at its top wholesale channel partners, including DKS. In short, NKE's upside earnings report was a positive omen for DKS, given its prominent positioning within DKS's stores.
- DKS was still contending with inventory overages in Q4, though, causing it to be promotional on certain merchandise. Accordingly, gross margin fell by 180 bps sequentially to 32.4%. The good news is that DKS's inventory is now in good shape heading into the spring and summer seasons. More specifically, inventories totaled $2.8 bln as of January 28, 2023, compared to $3.4 bln as of October 29, 2022.
- The company is clearly confident heading into FY24, stating that it plans to return to square footage growth this fiscal year, while substantially increasing the amount of capital returned to investors. While its FY24 EPS outlook of $12.90-$13.80 includes a $0.20/share benefit from a 53rd week, the guidance would still be well ahead of expectations even without that benefit.
Overall, it was difficult to find much to complain about regarding DKS's report. Its business is holding up much better than the vast majority of retailers, thanks to resilient demand for sports and fitness products and its favorable merchandise assortment that leans heavily on NKE.
Thor Industries slides after a weaker-than-expected Q2 results in slashed FY23 (Jul) guidance (THO)
Sell orders are raining down on Thor Industries (THO -3%) today after the RV manufacturer encountered a softer-than-expected Q2 (Jan), leading to its slashed FY23 (Jul) earnings and sales forecasts. There was some uneasiness around the RV industry ahead of THO's Q2 results. Last month, RV dealer Camping World Holdings (CWH) and major parts supplier Lippert Industries (LCII) cautioned of a weakening demand backdrop due to continually rising interest rates and consumer prices.
Although THO acknowledged that these macroeconomic factors would affect near-term demand last quarter, it still provided a reasonably decent FY23 outlook, expecting earnings of $7.40-8.70 and revs of $11.5-12.5 bln, both in line with consensus. However, economic conditions deteriorated since Q1 (Oct), driving THO's first earnings miss since 2Q20 and first sales miss since 1Q20. As a result, THO cut its FY23 estimates, projecting EPS of $5.50-6.50 and revs of $10.5-11.5 bln, both falling short of analyst estimates.
- What happened in Q2? As higher interest rates and inflation persist, their consequences can often lag, especially given the recent pent-up demand for certain discretionary assets like RVs resulting from lengthy supply chain constraints. Although THO's quarterly results have already been harmed by these factors, its Q2 numbers illustrate that the adverse effects can continually worsen, particularly if consumers grow less optimistic that these burdens will improve anytime soon.
- As a result, THO's bottom line plummeted 90% yr/yr to $0.50 per share as sales fell 39% to $2.35 bln. Meanwhile, THO delivered North American shipments of just 25,372 during Q2, a multi-year low.
- However, it is worth mentioning that THO was conditioning for a weak Q2, noting last quarter that it would focus on slowing production during the quarter to better position itself ahead of the prime Spring selling season. Therefore, THO expects shipments to increase sequentially from Q2. The company is projecting the year's second half to align with traditional channel destocking but acknowledged that a full North American dealer inventory will result in slow product pull-through for the remainder of 2023.
- In Europe, THO is experiencing slightly more favorable conditions. However, this is primarily due to ongoing supply chain constraints for motorized units, which are more popular overseas. THO's European segment posted a slightly higher gross profit in Q2, reflecting favorable price-cost realization. THO also anticipates gradual top-line improvement throughout FY23 with increasing component availability.
Bottom line, THO's Q2 results were clipped by a quickly decaying economic backdrop, a significant risk given the uncertainty in the RV industry, magnified by rising rates and stubborn inflation. Lastly, although rival Winnebago (WGO -3%) is ticking lower in sympathy to THO's lackluster Q2 results, its Marine segment (~9% of FY22 sales) could help offset some of the expected weakness in its upcoming FebQ report on March 22. For instance, LCII, a supplier to WGO, saw a positive performance from its end markets outside the RV industry, including a 4% jump in North American Marine sales yr/yr in DecQ.
Powell testimony is primary matter at hand
There is a slight upward bias in the equity futures market this morning with emphasis on the word "slight." Overall, there just isn't much conviction behind any index trades as market participants are cognizant that Fed Chair Powell will be delivering his semiannual monetary policy testimony before the Senate Banking Committee at 10:00 a.m. ET.
Currently, the S&P 500 futures are up six points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 29 points and are trading 0.3% above fair value, and the Dow Jones Industrial Average futures are up 22 points and are trading 0.1% above fair value.
A dip in Treasury yields in front of the testimony has been mildly supportive of the futures trade. The 2-yr note yield is down six basis points to 4.85% and the 10-yr note yield is down five basis points to 3.93%.
Market participants might be leery of those moves, though, knowing that (a) Powell has yet to testify and (b) similar action before yesterday's open did not persist long before sellers re-emerged and sent yields higher.
We suspect, nonetheless, that this morning's bid in the equity futures and Treasury futures rests on the hope that Fed Chair Powell won't sound more hawkish than the fed funds futures market is already allowing.
To that end, the fed funds futures market is assigning an 85.3% probability to the target range for the fed funds rate being 5.25-5.50% in June versus just 39.3% a month ago, according to the CME FedWatch Tool. The prospect of it rising to 5.50-5.75% in July is the equivalent of a coin toss.
The change in expectations followed the much stronger than expected employment report and sticky CPI data for January, which is why there is some nervous energy in the capital markets ahead of the February employment report this Friday and the February CPI report a week from today.
Those reports will be doing some policy driving, but without the benefit of knowing at today's testimony what they will show, Fed Chair Powell is expected to drive in the middle lane with his remarks, which is to say he is unlikely either to slow down the market's rate-hike expectations or speed them up.
He will likely say that the Fed has made some progress in bringing down inflation but that it has more work to do, that the Fed remains committed to getting inflation back down to its 2.0% target, and that an overly tight labor market poses a risk for sticky, wage-based inflation pressures.
None of that would be surprising to the market based on Mr. Powell's past remarks, which is why we think the market can handle today's testimony so long as the Fed Chair doesn't sound as if he is opening the door to a much higher terminal rate than the market now expects.
Other matters today, like Dick's Sporting Goods (DKS) posting better-than-expected Q4 results, China's relatively weak trade data for February, the Reserve Bank of Australia raising its cash rate by 25 basis points to 3.60%, Meta Platforms (META) reportedly getting set to layoff thousands of employees on top of its prior job cuts, and China's new foreign minister warning of increased potential for conflict if the U.S. doesn't "hit the brakes" on its efforts to restrict China's growth, are being digested as just that: other matters.
The primary matter at hand is Fed Chair Powell's testimony. Nothing matters more than that, because nothing matters more to the stock market these days than the direction of interest rates.
-- Patrick J. O'Hare, Briefing.com
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