Market Snapshot
briefing.com
| Dow | 33803.83 | +17.30 | (0.05%) | | Nasdaq | 12090.18 | +30.64 | (0.25%) | | SP 500 | 4136.58 | +5.52 | (0.13%) | | 10-yr Note | -3/32 | 3.57 |
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| | NYSE | Adv 1309 | Dec 1573 | Vol 914 mln | | Nasdaq | Adv 2055 | Dec 2373 | Vol 4.8 bln |
Industry Watch
| Strong: Consumer Staples, Health Care, Consumer Discretionary, Real Estate, Utilities, Communication Services |
| | Weak: Information Technology, Materials, Financials, Energy |
Moving the Market
-- Digesting latest slate of earnings news
-- Rising Treasury yields
-- Index level improvement coincided with some mega caps reversing early weakness
-- Bank stocks lag the broader market again today
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Closing Summary
21-Apr-23 16:25 ET
Dow +22.34 at 33808.87, Nasdaq +12.90 at 12072.44, S&P +3.73 at 4134.79
[BRIEFING.COM] The major indices managed to eke out a slim gain on this options expiration day, but that wasn't an impressive feat. The market was little changed from yesterday's closing levels for the entire session as investors await earnings reports next week from many of the mega caps.
Amazon.com (AMZN 106.96, +3.15, +3.0%), NVIDIA (NVDA 271.19, +0.15, +0.1%), and Tesla (TSLA 165.08, +2.09, +1.3%) had an outsized influence on a late afternoon push higher that left the market with a positive finish. TSLA was trying to recover from a steep earnings-related loss yesterday.
Gains from AMZN and TSLA propelled the S&P 500 consumer discretionary sector (+1.2%) to first place on the leaderboard today.
In general, outsized moves were limited to individual stocks like Dow component Procter & Gamble (PG 156.07, +5.22, +3.5%), which reported pleasing fiscal Q3 results and affirmed its FY23 EPS outlook, and HCA (HCA 281.21, +10.43, +3.9%), which also reported favorable earnings.
The positive responses to PG and HCA drove gains in the consumer staples (+0.8%) and health care (+0.7%) sectors.
Bank stocks remained under pressure today after underperforming for most of the week. This weakness followed disappointing earnings from Regions Financial (RF 18.36, -0.53, -2.8%). The SPDR Regional Bank ETF (KRE) fell 1.3% and the SPDR Bank ETF (KBE) logged a 1.2% decline. The S&P 500 financials sector (-0.4%) was among the weakest performers.
The materials sector (-0.9%) logged the biggest today decline due to a sizable loss in Freeport McMoRan (FCX 39.66, -1.70, -4.1%) following its earnings report and a loss in Albemarle (ALB 173.75, -19.30, -10.0%) in response to a Reuters report that Chile is planning to nationalize its lithium industry.
The market continues to contend with the notion that the Fed will keep rates higher for longer. Philadelphia Fed President Harker (FOMC voter) said the Fed is going to need to do more to get inflation back down to target, according to Reuters. This followed New York Fed President Williams (FOMC voter) signaling support for another rate hike at the May FOMC meeting and Cleveland Fed President Mester's remarks yesterday, according to CNBC, that policy needs to move somewhat further into tightening territory with the fed funds rate above 5.00%.
Treasury yields took a sharp turn higher around 9:45 a.m. ET when the preliminary IHS Markit Manufacturing and Services PMIs for April were released. The 2-yr note yield, at 4.06% shortly before the release, settled the session down one basis point at 4.16%. The 10-yr note yield, at 3.50% before the release, settled up three basis points at 3.57%.
- Nasdaq Composite: +15.3% YTD
- S&P 500: +7.7% YTD
- S&P Midcap 400: +2.8% YTD
- Dow Jones Industrial Average: +2.0% YTD
- Russell 2000: +1.7% YTD
Reviewing today's economic data:
- April IHS Markit Manufacturing PMI - Prelim 50.4; Prior 49.2
- April IHS Markit Services PMI - Prelim 53.7; Prior 52.6
There is no notable U.S. economic data on Monday.
Energy complex futures settle mixed
21-Apr-23 15:00 ET
Dow +7.74 at 33794.27, Nasdaq +13.28 at 12072.82, S&P +2.42 at 4133.48
[BRIEFING.COM] The major indices still trade in decidedly tight ranges.
Energy complex futures settled the session mixed. WTI crude oil futures rose 1.0% to $77.86/bbl and natural gas futures fell 1.2% to $2.22/mmbtu.
On an energy related note, the S&P 500 energy sector (-0.7%) remains near the bottom of the pack.
Ahead of the open on Monday, Coca-Cola (KO), Philips (PHG), and Bank of Hawaii (BOH) will report earnings.
Baxter higher ahead of earnings, Pool gains on upgrade
21-Apr-23 14:30 ET
Dow +17.30 at 33803.83, Nasdaq +30.64 at 12090.18, S&P +5.52 at 4136.58
[BRIEFING.COM] The major averages have topped out at highs in the last half hour, the S&P 500 (+0.13%) now in second place.
S&P 500 constituents Baxter Int'l (BAX 45.00, +1.75, +4.05%), DaVita (DVA 85.68, +2.56, +3.09%), and Pool (POOL 343.63, +11.24, +3.38%) dot the top of the S&P. BAX moves higher today despite a dearth of corporate news with earnings due out next week (4/27), DVA caught a target raise out of UBS this morning, and POOL was upgraded to Overweight at Stephens.
Meanwhile, Connecticut-based insurance firm W.R. Berkley (WRB 57.76, -5.60, -8.83%) is underperforming after earnings.
Gold settles below $2K level
21-Apr-23 14:00 ET
Dow +17.26 at 33803.79, Nasdaq +21.88 at 12081.42, S&P +5.22 at 4136.28
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+0.18%) is atop the standings, all three major averages have now sneaked into positive territory in the last half hour.
Gold futures settled $28.60 lower (-1.4%) to $1,990.50/oz, ending down -1.26% on the week but clinging to gains of +0.22% on the month, juxtaposed against the specter of the Fed continuing to raise rates as the economy shows signs of cooling.
Meanwhile, the U.S. Dollar Index is narrowly lower at $101.82.
Intel, Dow underperforming in DJIA on Friday
21-Apr-23 13:30 ET
Dow -39.01 at 33747.52, Nasdaq -8.90 at 12050.64, S&P -3.74 at 4127.32
[BRIEFING.COM] The Dow Jones Industrial Average (-0.12%) is the worst-performing major average, down only 39 points.
A look inside the DJIA shows that Intel (INTC 30.33, -0.53, -1.72%), Dow (DOW 54.78, -0.92, -1.65%), and Caterpillar (CAT 218.84, -2.23, -1.01%) are underperforming.
Meanwhile, Merck (MRK 115.37, +1.20, +1.05%) is near the top of the standings.
The DJIA is on pace to end the week down about -0.41%.
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PPG Industries sets 52-week highs after crushing its raised Q1 EPS forecast (PPG)
PPG Industries (PPG) quickly set 52-week highs out of the gate this morning before paring back some initial gains. Today's upward swing was sparked by the paints, coatings, and specialty materials manufacturer's massive bottom-line beat in Q1, crushing its previous forecast, which it just raised earlier this month. PPG also introduced its FY23 earnings outlook, which, to a less enthusiastic degree, merely met analyst expectations.
- PPG's in-line FY23 earnings guidance contributed to its rather quick pullback from 52-week highs earlier today. Given the sizeable bottom-line beat, coming in $0.27 above the midpoint of its recently raised outlook, we would have liked to see PPG provide a less conservative full-year forecast, especially since its Q2 earnings guidance topped consensus.
- However, PPG remains cautiously optimistic on its near-term view, expecting macroeconomic conditions to be fairly consistent with Q1 with stabilizing economic activity in Europe and modest improvements in China. However, in the U.S., PPG anticipates a sequential economic slowdown within specific end-use markets, particularly construction-related fields.
- On a side note, while only 40% of PPG's sales stem from the U.S., giving the company more of a cushion to weather the slowing conditions domestically, it is not a good sign for Sherwin-Williams (SHW), which derives around 80% of its revs from the U.S.
- Conversely, given that Axalta Coating Systems (AXTA) depends on the U.S. about as much as PPG, its business may be similarly cushioned.
- AXTA and SHW report Q1 earnings on April 24 and 25, respectively.
- Revenue growth of 1.7% yr/yr to $4.38 bln in Q1 was decent. Aerospace and automotive OEMs leading the charge was consistent with PPG's remarks earlier this month. Latin America was also a bright spot, which PPG also alluded to when it raised its Q1 EPS forecast on April 3.
With shares of PPG receiving a fresh coat of green paint earlier this month following its raised Q1 earnings guidance, its Q1 results last night were mainly already priced in. The few pleasant surprises, such as earnings coming in even higher than PPG expected just two weeks ago, aerospace and Latin America enjoying accelerated demand, and supply chain disruptions continuing to diminish, helped the stock gap even higher. However, uncertainties are still on the horizon, particularly surrounding construction end markets in the U.S. and general economic uneasiness, keeping a lid on further upside today.
SAP delivers upside report as cloud transformation drives higher growth and improved profits (SAP)
After four consecutive EPS misses, German enterprise software company SAP (SAP) beat 1Q23 top and bottom-line estimates as the company's cloud transformation kicks into a new phase. Last quarter, SAP CEO Christian Klein commented that SAP's transition into a cloud software company reached a tipping point and that its cloud momentum was continuing at a fast pace. That assertion played out in Q1 as cloud revenue jumped by 24% yr/yr to €3.18 bln, boosted by a 77% revenue surge in S/4HANA, the company's flagship enterprise resource planning platform.
- SAP did lower its FY23 outlook for cloud revenue and for cloud and software revenue to €14.0-14.4 bln and €26.9-27.4 bln, from €15.3-15.7 bln and €28.2-28.7 bln, respectively.
- However, the reason for the guidance cut is solely due to the anticipated divestiture of experience management company Qualtrics (XM). Otherwise, SAP reaffirmed its FY23 guidance for its underlying continuing operations, explaining why the stock isn't reacting negatively to the lowered outlook.
To the contrary, the stock is trading sharply higher, reaching new 52-week highs in the process.
- In addition to SAP's revenue growth accelerating to nearly 10% from about 6% last quarter, the company's improving profitability is also catching investors' attention. Specifically, Non-IFRS operating profit was up 12% yr/yr to €1.87 billion as cloud gross margin expanded by 2.9 ppt to 71.4%. A key factor in the margin improvement is the impact of greater efficiencies as the scale of SAP's cloud business grows.
- Leading the charge in SAP's cloud transformation are two primary products: RISE and S/4HANA.
- RISE, which bundles existing SAP products that help companies accelerate their cloud adoptions, was particularly strong in the large cloud transaction category. In fact, transactions with a value north of €5 mln contributed 45% of the company's cloud order entry, primary due to strength in RISE.
- Meanwhile, SAP added more than €200 mln to its S/4HANA cloud backlog for a total of €3.4 bln. Altogether, SAP's current cloud backlog grew by 25% to €11.15 bln.
Lastly, we believe that investors are pleased with SAP's decision to divest its Qualtrics stake. The sale of Qualtrics will enable SAP to further enhance its focus on its cloud growth and profitability, while simplifying its business structure.
Overall, this was a solid quarterly report for SAP that not only highlighted its progress in its cloud transition, but also provided a positive data point for IT spending in general. Earlier this week, competitor IBM (IBM) also reported an earnings beat, while only slightly lowering its FY23 revenue outlook. When combined, the two earnings reports from these two software bellwethers offer some reassurance that IT spending isn't spiraling significantly lower in 1H23.
CSX rolling higher on strong Q1 report; CSX posted strong merchandise and coal volume growth (CSX)
CSX (CSX +3.2%) is rolling higher after the railroad operator reported strong upside with its Q1 report last night. In fact, this was CSX's largest EPS beat since 3Q21 plus it reported strong revenue upside on merchandise and coal volume growth, strong pricing and higher fuel recovery. However, intermodal has been a trouble spot for the industry plus railroad operators have been facing scrutiny as a result of the recent derailments.
- CSX saw positive growth in automotive, but customer production issues impacted volumes in the quarter. On the positive side, CSX sees production issues moderating and expects a strong outlook for automotive volumes through the remainder of the year. Minerals and metals both outperformed, driven largely by very strong aggregates and steel demand. CSX also benefitted from favorable contract repricing and higher fuel surcharges.
- Coal is a big market for CSX. Coal revenue increased 19% yr/yr, on 19% higher volume and flat revenue per unit. Export volumes were strong and CSX benefited from lapping reduced capacity at its Curtis Bay Terminal. Shipments also improved on utility restocking demand and improved rail capacity. Looking ahead, CSX sees the international coal market continuing to be supported by healthy commodity prices although it could get more challenging if natural gas prices remain low. Intermodal was not great with revenue down 5% yr/yr. International intermodal markets have been weak due to slowing import activity as demand has softened and retail inventories remain elevated. However, CSX expects 2H23 yr/yr headwinds to moderate.
- In terms of the outlook for the balance of 2023, strong demand for grains, metals, minerals and automotive, combined with significant new customer wins give CSX increasing confidence that it will deliver solid volume growth for the year in merchandise. CSX is also off to a strong start to the year for coal, aided by healthy export demand. However, international intermodal activity remains challenged. Intermodal contributes less than one-fifth of revenue but roughly half of volume.
- An important growth driver in recent years has been to shift market share from trucking to rail. After the pandemic supply chain problems, companies have been looking to bring capacity closer to their key end markets. CSX has seen an acceleration in activity with manufacturers committing capital to build capacity in the Eastern US. CSX sees a great opportunity because its network connects the major population centers of the Northeast with fast-growing manufacturing areas of the Southeast.
- CSX also touched on safety issues. Relative to the enormous number of ton miles, freight railroads are very safe as compared to other forms of transportation. In 2023, CSX is installing 53 additional hot box detectors to identify high-bearing temperatures and transmit real-time data for when a bearing is hot and a train needs to stop. Also, newly hired employees attend extensive training.
Overall, this was a solid quarter for CSX and was pretty similar to Union Pacific's (UNP) strong beat yesterday morning. It also bodes well for Norfolk Southern (NSC), which reports on April 26. Most of CSX's markets are doing quite well, with intermodal being the notable exception. Also, CSX's outlook sounds pretty bullish, which surprised us given all the macro headwinds.
Procter & Gamble's upbeat MarQ report reflects consistent brand loyalty; sets bullish tone (PG)
Assisted by further price hikes, Procter & Gamble (PG +3%) topped earnings and sales estimates in Q3 (Mar), reflecting the relative inelasticity of its brands. The consumer staples giant, which owns brands Tide and Pampers, registered its widest beat in two years on decent 3.5% sales growth yr/yr, a reversal from the negative growth posted last quarter. Meanwhile, PG reiterated its FY23 (Jun) earnings guidance while raising its reported revenue forecast.
- Volumes still slipped 3% yr/yr as PG's 10% price increase weighed on consumers. However, the 3% decline was a significant improvement from the 6% volume contraction last quarter. Also, the drop was inconsistent across PG's portfolio, with its Fabric & Home Care and Baby, Feminine & Family Care businesses experiencing the most extensive declines at 5% and 4%, respectively. Meanwhile, volumes were mostly stable from the year-ago period within categories that tend to be more difficult to trade off from, such as Beauty, Grooming, and Health Care.
- The combination of improving sequential volumes and continual price adjustments fueled PG's 3.5% sales growth yr/yr to $20.07 bln, surpassing analysts' expectations easily. On a reported and organic basis, sales grew across each of PG's segments, with six of its seven geographic regions enjoying solid gains. Notably, Europe-focused markets were up 8% on an organic basis, while China's organic sales expanded by 2% as the region started showing signs of recovery from COVID lockdowns.
- Although PG has passed along its higher costs to consumers for several quarters, there has been a lag with the associated benefits flowing through to its P&L, not seeing operating margin growth since 3Q21. This finally changed in Q3, as PG expanded its operating margins by 40 bps yr/yr.
- Looking ahead, PG continues to project adjusted EPS of $5.81-6.04 for FY23. Meanwhile, the solid sales growth in Q3 allowed PG to up its FY23 sales forecast to +1% yr/yr from its prior -1% to 0% target.
Along with constant volume declines, a few negatives should be pointed out. PG forecasts persistent volatility over the near term, with pronounced pressures in Europe. Although the region delivered decent organic growth in Q3, it was primarily from pricing as volumes tumbled around 7%, underpinning heightened trade-down into private labels. PG expects the region to remain a headwind for the foreseeable future. Also, elevated costs and FX impacts remain problematic; PG expects a combined $1.40 per share hit to its FY23 earnings from these headwinds.
Still, PG's Q3 results demonstrated its resilient brand power, positioning the firm nicely to weather the near-term economic storm. Lastly, PG's improving volumes and positive sales growth underpin a global economy prioritizing name-brand staples, an encouraging sign ahead of MarQ reports over the next two weeks from many of its peers, including Colgate-Palmolive (CL), Kimberly-Clark (KMB), Church & Dwight (CHD), and Clorox (CLX).
The Big Picture
Last Updated: 21-Apr-23 15:36 ET | Archive
Recession is coming, but it will have to wait
The coming week will feature the release of the Advance GDP report for the first quarter. Currently, the Atlanta Fed's GDPNow model estimate for real GDP growth in the first quarter is 2.5%. That is slightly lower than the 2.6% real GDP growth seen in the fourth quarter but well ahead of the Fed's longer-run projection for the change in real GDP of 1.8%.
Oh, it is also a long way from a recession, but that makes sense considering that the unemployment rate of 3.5% is at a 54-year low.
The latter point notwithstanding, other indicators, like the inverted yield curve, the Leading Economic Index, a contracting money supply, and faltering manufacturing PMI readings, have led many to conclude that a recession in the U.S. is inevitable.
 
 
Cry recession long enough and there will eventually be a recession. The U.S. has had 11 recessions since 1950, according to the National Bureau of Economic Research (NBER). The recession dating by the NBER, however, always happens in hindsight.
What isn't difficult to predict, though, is that a weak labor market will make for difficult economic times, so a read of the economic future can begin and end there.
A Better Indicator
We are not suggesting the unemployment rate is the be all-end all indicator for predicting a recession. It can't be. It is a lagging indicator.
Still, it is a signpost that influences perceptions about economic conditions, spending decisions, political decisions, and, ironically, job decisions. If the unemployment rate is rising and/or high, one may be more inclined to stay at one's current job even if one doesn't like it for any number of reasons, knowing it could prove difficult to find another job.
The better employment indicator is weekly initial jobless claims. They are timelier, they are published more often, and they offer some insight into where the unemployment rate itself is likely headed.
Therefore, initial jobless claims have been accorded leading indicator status. Given that status, it strikes us that the level of initial jobless claims today (4-wk moving average 239,750) is still well below average levels seen in prior recessions.
Recession Period Initial Claims Average Unemployment Rate Average | Jan. 1980 - July 1980 | 512,000 | 7.0 | | July 1981 - Nov. 1982 | 554,000 | 9.0 | | July 1990 - March 1991 | 434,000 | 6.1 | | March 2001 - Nov. 2001 | 416,000 | 4.8 | | Dec. 2007 - Jan. 2009 | 376,000 | 5.9 | | Feb. 2020 - April 2020 | 2,405,167 | 7.5 | Source: NBER; FactSet
Staking a Claim
The COVID recession period was obviously a unique period and one we should all hope is never seen again even though it was the shortest recession on record. Weekly initial jobless claims reached 6.137 million in April 2020 and the unemployment rate spiked to 14.7%, yet it wasn't long before everything was quickly on the mend in terms of the labor market as fiscal and monetary stimulus efforts took root and COVID vaccines hit the scene.
Prior to that recession, weekly initial jobless claims were running close to 210,000 in January 2020 and the unemployment rate was 3.50%. We have, in a sense, come full circle on both fronts.
Earlier this year, weekly initial jobless claims were just 194,000, and while weekly initial jobless claims have started to trend higher of late, the chart below (which omits the COVID claims spike) shows they are near their lowest level over the last 43 years and certainly still well below average levels seen in every recession since 1980.
The concern in the market is that initial jobless claims are destined to rise further and to keep increasing, partly because of what other indicators are suggesting but mostly because of the Fed's aim to bring down inflation with higher interest rates aimed at weakening aggregate demand.
The continued strength in the labor market has been a paradoxical source of angst for the Fed, which isn't necessarily fretting about a wage-price spiral as much as it is fretting about inflation staying persistently high because of a tight supply of labor.
The Fed's dual mandate is maximum employment and price stability, but with a 3.5% unemployment rate running below the Fed's longer-run projection of 4.0%, we suspect the Fed feels as if it has overshot on its maximum employment charge, hurting its chances of achieving price stability at its 2.0% target since aggregate demand won't be tempered quickly with such low unemployment.
The Fed for its part is anticipating that its rate hikes will curtail demand and, in turn, curtail the strength of the labor market as companies adjust to lower demand. That has started to happen, evidenced by the uptick in initial jobless claims and continuing jobless claims reaching their highest level since December 18, 2021.
Nonetheless, initial jobless claims have a lot more ground to cover before they elicit fear of an imminent recession. Those fears are unlikely to resonate until weekly initial jobless claims start printing something in the neighborhood of 350,000 or more on a consistent basis.
What It All Means
The ongoing strength of the labor market is a key reason why the Fed is not discussing any likelihood of cutting rates before the end of the year. In fact, we would argue that it is the basis for why the Fed, which we expect to raise rates again in May, will keep rates higher for longer.
Employed workers are engaged consumers. If there is income coming in from one's job, there is spending going out from one's paycheck. With initial jobless claims close to their lowest level in 43 years and the unemployment rate at a 54-year low, consumer spending isn't going to hit a wall even if it might hit some speed bumps because of inflation and because of the talk about a recession coming.
To be sure, a recession is coming. It is part of the business cycle. When it is coming is open for debate, and what profile it will have -- deep or shallow -- is going to hinge on labor market trends.
There are other indicators not boding well for the economic outlook, but weekly initial jobless claims -- the key indicator -- are still running at levels that suggest the recession (and any rate cuts) will have to wait.
-- Patrick J. O'Hare, Briefing.com
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