Market Snapshot
briefing.com
| Dow | 33676.60 | -8.10 | (-0.02%) | | Nasdaq | 11970.89 | -60.98 | (-0.51%) | | SP 500 | 4101.56 | -8.65 | (-0.21%) | | 10-yr Note | +1/32 | 3.42 |
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| | NYSE | Adv 1314 | Dec 1566 | Vol 809 mln | | Nasdaq | Adv 1703 | Dec 2761 | Vol 4.8 bln |
Industry Watch
| Strong: Energy, Industrials, Materials, Health Care, Real Estate |
| | Weak: Consumer Discretionary, Communication Services, Information Technology |
Moving the Market
-- Core Consumer Price Index (CPI) reflecting year-over-year acceleration in March
-- Ongoing weakness in some mega cap names
-- Pullback in Treasury yields in response to the CPI report and FOMC Minutes
-- Selling picked up after the release of the FOMC Minutes from the March 21-22 meeting, which showed that the Fed is forecasting a mild recession
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Closing Summary
12-Apr-23 16:35 ET
Dow -38.29 at 33646.41, Nasdaq -102.54 at 11929.33, S&P -16.99 at 4093.22
[BRIEFING.COM] The day started on an upbeat note as investors digested the Consumer Price Index (CPI) for March. The S&P 500 and Nasdaq logged gains of 0.6% and 0.9%, respectively, shortly after the open.
Total CPI rose a smaller-than-expected 0.1% month-over-month (Briefing.com consensus 0.3%) and the year-over-year increase slowed to 5.0% from 6.0% in February. Core-CPI, which the Fed closely watches, was in line with month-over-month estimates and accelerated to 5.6% from 5.5% in February.
Early gains dissipated, though, as mega cap stocks rolled over and as Treasury yields also climbed off their post-CPI lows. The 2-yr Treasury note yield, at 4.06% before the CPI report, settled the session at 3.97%. The 10-yr note yield, at 3.44% before the report, settled at 3.42%.
There was a subsequent rebound effort that took root after the S&P 500 dipped below 4,100. The market was moving cautiously forward into the release of the FOMC Minutes from the March 21-22 meeting.
The Minutes revealed that participants agreed that inflation remains too high and that the banking problems increased economic uncertainty. Still, all participants agreed that it was appropriate to raise the target range for the fed funds rate even though the staff economic outlook included a mild recession starting later this year given the potential economic effects of recent banking-sector developments.
Things rolled over again in the late afternoon with mega cap stocks leading that slide. The Vanguard Mega Cap Growth ETF (MGK) declined 0.6% today.
The selling interest was likely also driven more by valuation concerns rather than a negative reaction to the Fed forecasting a mild recession. The cyclical S&P 500 sectors pulled back along with the rest of the market, but still finished the day in a position of relative strength. The industrials (+0.3%), energy (+0.1%), and materials (+0.1%) sectors led the outperformers. The consumer discretionary (-1.5%), communication services (-0.9%), and information technology (-0.6%) sectors were the top laggards, weighed down by mega cap weakness.
Investors may have also been inclined to take some money off the table ahead of Q1 earnings reporting season, which is expected to produce its share of conservative-sounding guidance. The major indices all finished near their worst levels of the day.
- Nasdaq Composite: +14.0% YTD
- S&P 500: +6.6% YTD
- S&P Midcap 400: +2.3% YTD
- Dow Jones Industrial Average: +1.5% YTD
- Russell 2000: +0.7% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index rose 5.3% with purchase applications jumping 8.0% while refinance applications were flat.
- Total CPI was up 0.1% month-over-month (Briefing.com consensus +0.3%) following a 0.4% increase in February. Core-CPI, which excludes food and energy, increased 0.4%, as expected, following a 0.5% increase in February. Services inflation was up 0.3% month-over-month, versus up 0.5% in February, and up 7.3% year-over-year versus up 7.6% in February. Excluding shelter, services inflation was flat, compared to a 0.1% increase in February, and up 6.1% year-over-year versus up 6.9% in February. On a year-over-year basis, total CPI was up 5.0%, versus up 6.0% in February. That is the smallest 12-month increase since May 2021. Core-CPI was up 5.6% year-over-year, versus up 5.5% in February.
- The key takeaway from the report is the disinflation seen in March. That trend doesn't necessarily take a rate hike at the May FOMC meeting off the table, especially with core-CPI tipping slightly higher, but it is fostering a belief that a rate hike in May could be the last hike in the Fed's tightening cycle.
- The weekly EIA Crude Oil Inventories showed a build of 0.597 million barrels versus last week's draw of 3.74 million barrels.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 a.m. ET: March Producer Price Index (Briefing.com consensus +0.1%; prior -0.1%) and core Producer Price Index (Briefing.com consensus +0.2%; prior 0.0%)
- 8:30 a.m. ET: Weekly initial jobless claims (Briefing.com consensus 236,000; prior 228,000) and continuing claims (prior 1.823 million)
- 10:30 a.m. ET: Weekly EIA Natural Gas Inventories (prior -23 bcf)
S&P 500 hits new session lows
12-Apr-23 15:30 ET
Dow -52.98 at 33631.72, Nasdaq -93.54 at 11938.33, S&P -17.34 at 4092.87
[BRIEFING.COM] The S&P 500 has broken below its early session low (4,095), hitting 4,087 recently.
The 2-yr Treasury note yield fell eight basis points to 3.97% today and the 10-yr note yield fell one basis point to 3.42%.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 a.m. ET: March Producer Price Index (Briefing.com consensus +0.1%; prior -0.1%) and core Producer Price Index (Briefing.com consensus +0.2%; prior 0.0%)
- 8:30 a.m. ET: Weekly initial jobless claims (Briefing.com consensus 236,000; prior 228,000) and continuing claims (prior 1.823 million)
- 10:30 a.m. ET: Weekly EIA Natural Gas Inventories (prior -23 bcf)
Cyclical sectors continue to lead
12-Apr-23 15:10 ET
Dow -8.10 at 33676.60, Nasdaq -60.98 at 11970.89, S&P -8.65 at 4101.56
[BRIEFING.COM] The S&P 500 is fighting to maintain a position above the 4,100 level.
Investors may be reacting to the Fed including a mild recession in its outlook, but price action in economically-sensitive sectors suggest that may not be the case. The energy (+0.3%), industrials (+0.3%) and materials (+0.2%) sectors continue to lead the market higher.
The U.S. Dollar Index sank 0.7% to 101.49 recently.
S&P 500 finds resistance at 4,125
12-Apr-23 14:30 ET
Dow +75.60 at 33760.30, Nasdaq -42.29 at 11989.58, S&P -0.43 at 4109.78
[BRIEFING.COM] The indices remained confined to tight trading ranges, showing almost no reaction to the release of the March Treasury Budget and the FOMC Minutes for the March 21-22 meeting at the top of the hour, before pulling back with the S&P 500 encountering resistance in the 4,125 area.
The monthly Treasury Budget showed a wider than expected deficit of -$378.1 billion (Briefing.com consensus -$253.0 billion) with receipts totaling $313.2 billion and outlays totaling $691.3 billion. The fiscal year-to-date deficit stands at $1.1 trillion (and the fiscal year is only half over).
The FOMC Minutes, meanwhile, didn't produce any surprises. Participants agreed that inflation remains too high and that the banking problems increased economic uncertainty. Still, all participants agreed that it was appropriate to raise the target range for the fed funds rate even though the staff economic outlook included a mild recession starting later this year given the potential economic effects of recent banking-sector developments.
Separately, the Vanguard Mega-Cap Growth ETF (MGK) is down 0.1% while the Invesco S&P 500 Equal Weight ETF (RSP) is also down 0.1% in a market that has shown resilience to selling efforts but tempered conviction on the buy side.
Semiconductors lag broader market
12-Apr-23 13:55 ET
Dow +149.44 at 33834.14, Nasdaq -1.62 at 12030.25, S&P +12.12 at 4122.33
[BRIEFING.COM] Things are little changed in the last half hour. The main indices are mostly moving sideways.
Semiconductor stocks are a pocket of weakness in the market. The PHLX Semiconductor Index (SOX) is down 0.8% with most components showing losses. NVIDIA (NVDA 268.23, -3.33, -1.2%), TSMC (TSM 87.92, -1.33, -1.5%), and Micron (MU 62.58, -0.99, -1.6%) are among the more notable laggards from the space.
Separately, copper futures rose 1.4% to $4.09/lb today.
March CPI goes the Fed's way and the market's way
It has been a grind for the S&P 500 so far this week, but at the same time it has been a good week so far for the market. To wit: the market-cap weighted S&P 500 is up 0.1% for the week but the Invesco S&P 500 Equal Weight ETF (RSP) is up 1.3%. Separately, the Russell 2000 has jumped 1.8% and the S&P Midcap 400 has increased 2.1%.
The struggle for the S&P 500, if you will, has been related to the underperformance of the mega-cap stocks. The Vanguard Mega-Cap Growth ETF (MGK) is down 0.9% so far this week.
There should be no such struggles for the S&P 500 at today's open -- or for the rest of the stock market for that matter.
Currently, the S&P 500 futures are up 23 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 91 points and are trading 0.8% above fair value, and the Dow Jones Industrial Average futures are up 154 points and are trading 0.5% above fair value.
The catalyst for the positive bias has been the March CPI report, which went the Fed's way, meaning it also went the market's way.
Total CPI was up 0.1% month-over-month (Briefing.com consensus +0.3%) following a 0.4% increase in February. Core-CPI, which excludes food and energy, increased 0.4%, as expected, following a 0.5% increase in February. Services inflation was up 0.3% month-over-month, versus up 0.5% in February, and up 7.3% year-over-year versus up 7.6% in February. Excluding shelter, services inflation was flat, compared to a 0.1% increase in February, and up 6.1% year-over-year versus up 6.9% in February.
On a year-over-year basis, total CPI was up 5.0%, versus up 6.0% in February. That is the smallest 12-month increase since May 2021. Core-CPI was up 5.6% year-over-year, versus up 5.5% in February.
The key takeaway from the report is the disinflation seen in March. That trend doesn't necessarily take a rate hike at the May FOMC meeting off the table, especially with core-CPI tipping slightly higher, but it is fostering a belief that a rate hike in May could be the last hike in the Fed's tightening cycle.
The Treasury market responded in kind to this consideration. The 2-yr note yield, sitting at 4.05% just ahead of the release, dropped to 3.88% in its wake. It is currently at 3.91%, down 14 basis points from yesterday's settlement. The 10-yr note yield, at 3.45% before the release, dropped to 3.34% in its wake and currently sits at 3.37%, down six basis points from yesterday's settlement.
The U.S. Dollar Index, which was little changed in front of the CPI report, is now down 0.6% at 101.62 due to a hard-charging euro, which is up 0.5% against the dollar.
Few things excite the stock market more than the idea of the Fed being done raising rates. The question that will be at the center of the Fed debate now is, how long will it be until the Fed starts cutting rates?
The fed fund futures market is currently assigning a 68.8% probability to the first rate cut happening in July. The Fed for its part hasn't been talking rate cuts at all before the end of the year. That could ultimately become a source of frustration for the stock market, but for today the vision of rate cuts dancing in the market's head will drive buying efforts when the opening bell rings.
There may not be some straight-line appreciation, however, given that valuation headwinds will be blowing as the S&P 500 tests the top end of its nine-month trading range just ahead of the Q1 earnings reporting period, which is apt to have its fair share of conservative-sounding guidance.
-- Patrick J. O'Hare, Briefing.com
Shopify bags solid gains following an upgrade from JMP Securities today (SHOP)
Shopify (SHOP +3%) is bagging meaningful gains today following an upgrade to "Market Outperform" from "Market Perform" at JMP Securities. Today's upgrade follows a less bullish rating from Needham yesterday, which initiated a "Hold" rating on SHOP, citing downside risk to its more consumer-dependent segment, Merchant Solutions.
Briefing.com notes that shares of SHOP have tracked nicely higher since October lows, appreciating by nearly 100%. However, zooming out reveals a lengthy consolidation pattern after tumbling over 75% when pandemic-induced tailwinds began dissipating and the Federal Reserve set out on its rate-raising campaign in late 2021.
Still, there are a few encouraging developments worth uncovering, which could keep SHOP's recent momentum trending positively.
- Small and medium-sized businesses (SMBs) depend on SHOP's features for their online presence. One of the main reasons SMBs turn to SHOP is that it acts as a one-stop shop, helping users build their websites and allowing them to attach add-ons like Shopify Payments. At the same time, SHOP sells physical hardware, like Point-of-Sale Go, a mobile device offering merchants a quick checkout feature.
- Given the time and resources SMBs expend building out their e-commerce footprints, the industry in which SHOP operates has high switching costs. As a result, it is imperative to offer the most straightforward and least intimidating set of offerings to just get in the door with potential merchants. This is a strategy SHOP remains focused on to capture share from competitors, like BigCommerce (BIGC) and Amazon (AMZN). Management discussed this during previous calls, noting that it is committed to simplifying commerce.
- Speaking of Amazon, the e-commerce mammoth expanded its "Buy with Prime" feature to all U.S. merchants earlier this year, which raised concerns that SHOP could see some drop in its GMV rates soon. However, SHOP commented last month that Amazon's move resembles moves made by similar firms such as PayPal (PYPL) several years ago, which only resulted in a higher overall GMV. The reason is that giving merchants additional payment choices tends to manifest in an overall net benefit for all parties involved.
There are still some risks worth considering. For one, SHOP trades at a pricey 10x forward sales multiple, which, although not as rich as the ~35x multiple in November 2021, can still weigh on shares going forward, especially while interest rates remain high. Secondly, SHOP's primary clientele, SMB owners, are at a higher risk of failure than established enterprises. If economic conditions deteriorate meaningfully from now, SHOP could see a material reduction in its customer base, which primarily operates in the highly discretionary retail sector.
Bottom line, SHOP boasts plenty of positive developments that can keep the fire under its stock ignited. Still, significant risks could keep shares from returning to record highs seen over a year ago, such as potentially worsening economic conditions. Therefore, it may be better to take a wait-and-see approach, given the elevated economic uncertainty.
Apogee wraps up FY23 on a decent note, EPS guidance was good (APOG)
Apogee Enterprises (APOG) is trading roughly flat after wrapping up FY23 on a decent note with a mixed Q4 (Feb) earnings report. We like to keep an eye on Apogee because it is a major supplier and installer of windows for commercial buildings. As such, we view APOG as a gauge on conditions in the non-residential construction market generally.
- Apogee beat slightly on EPS but missed slightly on revs. Probably the highlight of the report was some pretty robust guidance for FY24. Analysts were expecting a modest adjusted EPS decline in FY24, but the mid-point of Apogee's guidance of $3.90-4.25 was above analyst expectations and points to some modest growth in FY24. Given all the macro fears about inflation, rising rates, companies getting more cautious, layoffs in the tech sector etc., Apogee's outlook was more bullish than we expected.
- The key to the quarter was that its largest segment by far, Architectural Framing Systems (AFS), posted the strongest growth of any segment with revs up 13% yr/yr to $148.6 mln. The slight negative is that sales were primarily driven by inflation-related pricing, but it also benefitted from an improved mix as APOG continues to move away from lower margin products. This was partially offset by lower volume. Taken all together, APOG says improved pricing for the segment more than offset the impact of inflation. So that was good to see.
- Its Architectural Services (AS) segment saw revenue decline, reflecting lower volume due to the timing of projects in backlog. APOG said that segment results were softer than expected as it continues to work through the Sotawall integration. Architectural Glass (AG) segment sales rose a robust 12% yr/yr to $81.4 mln, driven by improved pricing and mix as APOG continues to shift its focus toward premium higher value added products.
Overall, we think APOG's report keeps us more on the cautious side for the non-residential construction space as we enter earnings season. Some of APOG's good results, especially the strong EPS guidance, appear to be related to APOG's company-specific goal of shifting to more premium, higher margin product categories. We think that is why APOG was able to provide the solid EPS guidance. So we cannot really extrapolate that to the non-res construction industry more generally.
Furthermore, APOG said on the call that it was being cautious about a potential slowdown in non-res construction in the second half of its fiscal year. This could impact volumes, especially in its short cycle Framing business. However, even with flat to declining revenue, APOG expects continued margin improvements in FY24 after that metric rose to 8.7% in FY23 from 6.3% in FY22. APOG is making progress toward its goal of 10% operating margin.
Triton International sails to all-time highs after agreeing to be acquired by Brookfield (TRTN)
Triton International (TRTN +32%) will end its lengthy run as a public company after agreeing to be acquired by Brookfield Infrastructure (BIP) today in a take-private transaction valued at $13.3 bln. BIP agreed to pay $85.00 per TRTN share -- a nearly 35% premium compared to yesterday's closing price -- consisting of $68.50 in cash and $16.50 in BIPC class A exchangeable shares. Although both tickers are Brookfield Infrastructure, there is a slight difference between the two. Mainly, BIPC's structured differently for tax purposes. The transaction is expected to close sometime during 4Q23.
Unsurprisingly, TRTN is soaring toward the agreed-upon price today, while BIP and BIPC are not enjoying similar gains. Clearly, Brookfield investors are not pleased with the price the firm paid to acquire TRTN. However, at roughly 9x forward earnings, Brookfield is paying a reasonable premium to acquire TRTN, which will substantially bolster its transportation portfolio.
- TRTN is the world's largest intermodal container lessor, boasting 4.2 mln containers and chassis, representing 7.2 mln twenty-food equivalent units, or TEUs. The company's footprint is vast, spanning 46 countries, with a customer base comprised of some of the world's most prominent container shipping lines.
- Given how shipping and container utilization rates have trended since the pandemic, TRTN has enjoyed exceptional returns over the past few years, witnessing multiple quarters in a row of double-digit revenue gains yr/yr. The consistently sturdy quarterly numbers have helped send shares of TRTN over 185% higher since pandemic lows, crushing the major indices over that timeframe.
- With TRTN being taken private, not many public container leasing companies remain. One of TRTN's main rivals is Textainer (TGH), which also happens to be the world's second-largest container leasing firm measured in TEUs. TGH has also seen its shares flourish since the pandemic, boasting gains similar to TRTN over the past three years.
- However, like TRTN, TGH is exposed to the risk of major shipping lines outright purchasing their containers instead of continually leasing. Also, the container leasing industry has been consolidating over the years, forming organizations with better access to capital and a better ability to lower rates and provide more favorable lease terms.
Although investors can still gain exposure to the world's largest container lessor by owning shares of BIP or BIPC, they would give up the excellent 4.4% dividend yield TRTN carried. Also, although TRTN would massively bolster Brookfield's transportation segment, it still boasts several other divisions, including utilities, midstream, and data. As such, investors would not be purely invested in the shipping container space. Lastly, it is worth noting that given the heavy consolidation within the container leasing industry and many firms being taken private over the years, TGH may be next on the list of firms to be taken private. Its shares are currently soaring on the day.
Whirlpool shares aided by an upgrade at Goldman today; continue to find support around $125 (WHR)
Whirlpool (WHR +4%) is gapping higher today following an upgrade at Goldman Sachs to "Buy" from "Neutral." Per Briefing.com's coverage, Goldman's upgrade today was the first analyst rating in 2023 and the first upgrade since October 2021.
Briefing.com notes that given the state of the housing market, which the household appliance maker heavily depends on, it may not be too surprising that analysts have not warmed up much to WHR. However, homebuilders like KB Home (KBH) and Lennar (LEN) are starting to signal a bottoming out in the housing market, evidenced by improving demand and normalizing cancellations as the year progresses. As such, we suspect further upgrades may be on the horizon.
Furthermore, shares have continually found support around the $125 mark over the past six months, paving the way for potential upside to outweigh the downside, especially if interest rates level off and inflationary pressures subside.
- WHR's turnaround will rely most on improving conditions in North America, given this region comprises around 60% of its global appliance business. It helps that WHR manufactures approximately 80% of the products it sells in the U.S. within the U.S., putting less pressure on global supply chains, which remain disrupted.
- Past supply chain issues, such as a one-off disruption that occurred during Q4 and has since been resolved, were primarily within WHR's control. Although that makes past blunders reflect poorly on management, it also means that WHR could take swift action, putting out whatever fires were caused due to internal missteps. It also heightened management's focus on better execution in its supply chain, which is one of its priorities in 2023, meaning that WHR will be more aggressive in dual sourcing and guaranteeing stability within its supply chains.
- Reducing complexity will also be a vital component of WHR's potential turnaround, and divesting its EMEA operations earlier this year was a significant part of this strategy. Further examples, such as reducing the number of components, eliminating some of the various platforms used across appliances, and condensing the overall portfolio, will also play a hand in simplifying operations, which should lead to improved margins.
- Also assisting margin growth would be a continuation of falling raw material costs. WHR reiterated its view of $300-400 mln of raw material deflation in FY23 last month, an encouraging sign that input costs have not reversed course since the company first initiated this outlook in late January. Although WHR tends to lock in key commodities with contracts, they are of varying timelines as opposed to the more-annual agreements of the past, allowing the company to secure lower prices quicker if costs continue to ease.
With Q1 earnings coming up on April 24, WHR will have plenty on its plate. Investors will be looking for healthy progress on the above developments before possibly igniting a turnaround in WHR's shares, which have been trending downward for nearly two years.
ADTRAN under pressure on guidance; inventory correction and supply chain issues hurt Q1 (ADTN)
ADTRAN (ADTN -25%) is under pressure today after significantly lowering its Q1 revenue guidance to just $322-326 mln from $355-375 mln. This supplier of communications platforms, software, and services for the broadband access market cited customer inventory corrections as the primary cause for the lowered outlook.
- Basically, its customers, which are primarily cable/telecom network operators, are concerned over inventory stocking levels. As a result, customers want to use their current inventory before buying more product. This impacted ADTN's Subscriber Solutions product line.
- Inventory corrections were not the only problem. ADTN was also hurt by supply constraints, which prevented it from meeting customer demand across all categories. These issues are not only hurting sales, but they are suppressing margins. ADTN expects non-GAAP operating margin to be between -1% and -2.5% vs prior guidance of 5.0-6.5%. ADTN did not guide for Q1 EPS but a negative operating margin suggests a loss appears likely. Analysts had been expecting a profit in Q1.
- Unfortunately, ADTN expects this over-supply condition in CPE products will continue into Q2. It was not all bad news as revenue for its Access and Optical Networking products grew sequentially. But again, supply constraints limited ADTN's flexibility to clear past-due backlog across all product categories. However, ADTN expects the inventory impact is transitory with some improvement expected during Q2. ADTRAN made a huge acquisition in July 2022 when it bought ADVA Optical Networking, so it is good to see this segment doing fairly well.
Clearly, the lowered guidance is not great to see. However, ADTN does not see any material changes to its near-term opportunities or its long-term growth catalysts. Carriers around the world continue to race to upgrade their networks to fiber. And ADTN is a play on that trend. The massive buildout of fiber broadband networks paired with the deployment of mesh Wi-Fi systems in the home should help drive sales in the years ahead.
From everything ADTN is saying today, it sounds less like a demand issue and more like a strategic shift by customers to work down inventories, which makes sense in this macro environment. However, the stock has been quite weak in recent months, so we would use caution if bottom fishing here until the share price can stabilize. ADTN's comments about Q2 make us wary in the near term.
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