Market Snapshot
| Dow | 33556.55 | -127.89 | (-0.38%) | | Nasdaq | 12101.38 | +20.69 | (0.17%) | | SP 500 | 4114.17 | -6.68 | (-0.16%) | | 10-yr Note | +4/32 | 3.40 |
|
| | NYSE | Adv 1044 | Dec 1802 | Vol 1.0 bln | | Nasdaq | Adv 2141 | Dec 2253 | Vol 5.7 bln |
Industry Watch
| Strong: -- |
| | Weak: Energy, Financials, Materials, Information Technology, Consumer Staples |
Moving the Market
-- Modest losses as market participants digest an FOMC decision and commentary from Fed Chair Powell that was less friendly than hoped
-- Regional bank stocks behaving better, helping calm broader market
-- Treasury yields moving lower |
Closing Summary
03-May-23 16:35 ET
Dow -270.29 at 33414.15, Nasdaq -55.18 at 12025.51, S&P -28.83 at 4092.02
[BRIEFING.COM] The stock market registered somewhat modest losses with the major indices all closing near their lows of the day. There was not a lot of conviction in the market ahead of the FOMC policy decision and Fed Chair Powell's press conference.
The market experienced some volatility after participants learned that the FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 5.00-5.25%, which was largely expected. The main indices trended lower, though, as Fed Chair Powell conducted his press conference.
In total, today's FOMC decision and press conference wasn't as market friendly as the market had hoped it would be.
Some of the remarks that participants were presumably reacting to included Mr. Powell's acknowledgement that the process of getting inflation back down to 2.0% has a long way to go. He added that if the Fed's inflation forecast is broadly right, it would not be appropriate to cut rates.
That view stands in contrast to what price action in the fed funds futures market is indicating. The fed funds futures market is pricing in three rate cuts before the end of the year, according to the CME FedWatch Tool.
Notably, the Russell 2000 (+0.4%) was able to log a slim gain today despite losses for other major indices. Earlier strength in the regional bank stocks had the Russell 2000 up by a larger amount, but they reversed course, which cut into today's gains. The SPDR S&P Regional Bank ETF (KRE) declined 1.8%.
All 11 S&P 500 sectors closed with losses ranging from 0.1% (health care) to 1.9% (energy). The health care sector was supported by an outsized gain in Eli Lilly (LLY 431.19, +26.99, +6.7%) after the company shared positive news about a Phase 3 study of its drug to treat early Alzheimer's Disease.
Meanwhile, falling oil prices, which fell more than $3.00 today to $68.53/bbl on growth concerns, kept pressure on the energy sector.
The 2-yr note yield fell two basis points today to 3.95% and the 10-yr note yield fell four basis points to 3.40%. The U.S. Dollar Index fell 0.6% to 101.35.
- Nasdaq Composite: +14.9% YTD
- S&P 500: +6.5% YTD
- Dow Jones Industrial Average: +0.8% YTD
- S&P Midcap 400: +0.9% YTD
- Russell 2000: -1.3% YTD
Reviewing today's economic data:
- The ADP Employment Change showed an increase of 296,000 in April (Briefing.com consensus 142,000) following a revised increase of 142,000 in March (from 145,000).
- The final IHS Markit Services PMI reading for April fell to 53.6 from 53.7.
- The ISM Non-Manufacturing Index for April increased to 51.9% (Briefing.com consensus 51.9%) from 51.2% in March. The dividing line between expansion and contraction is 50.0%, so the April reading reflects continued growth in the services sector at a somewhat faster pace than the prior month.
- The key takeaway from the report is that the majority of respondents are mostly positive about business conditions, yet some see headwinds related to inflation and an economic slowdown. On balance, the views are aligned more at this point with a soft landing outlook than a hard landing.
- The weekly EIA Crude Oil Inventories showed a draw of 1.28 million barrels after last week's draw of 5.05 million barrels.
Cardinal Health (CAH), ConocoPhillips (COP), Anheuser-Busch InBev (BUD), Paramount Global (PARA), Constellation Energy (CEG), Kellogg (K), Aptiv (APTV), Stanley Black & Decker (SWK), Wayfair (W), Peloton (PTON), Moderna (MRNA), Shopify (SHOP) are among the more notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Preliminary Q1 Productivity (Briefing.com consensus -0.1%; prior 1.7%), preliminary Q1 Unit Labor Costs (Briefing.com consensus 3.9%; prior 3.2%), March Trade Balance (Briefing.com consensus -$68.7 bln; prior -$70.50 bln), weekly Initial Claims (Briefing.com consensus 245,000; prior 230,000), and Continuing Claims (prior 1.858 mln)
- 10:30 ET: Weekly natural gas inventories (prior +79 bcf)
Earnings after the close/ahead of tomorrow's open
03-May-23 15:35 ET
Dow -224.56 at 33459.88, Nasdaq -30.21 at 12050.48, S&P -21.27 at 4099.58
[BRIEFING.COM] The market trades at the lows of the day following Fed Chair Powell's press conference.
After the close, MetLife (MET), Allstate (ALL), Qualcomm (QCOM), Etsy (ETSY), Qorvo (QRVO), Marathon Oil (MRO), Albemarle (ALB), and Cognizant Tech (CTSH) are among the more notable earnings reports.
Cardinal Health (CAH), ConocoPhillips (COP), Anheuser-Busch InBev (BUD), Paramount Global (PARA), Constellation Energy (CEG), Kellogg (K), Aptiv (APTV), Stanley Black & Decker (SWK), Wayfair (W), Peloton (PTON), Moderna (MRNA), Shopify (SHOP) are among the more notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Preliminary Q1 Productivity (Briefing.com consensus -0.1%; prior 1.7%), preliminary Q1 Unit Labor Costs (Briefing.com consensus 3.9%; prior 3.2%), March Trade Balance (Briefing.com consensus -$68.7 bln; prior -$70.50 bln), weekly Initial Claims (Briefing.com consensus 245,000; prior 230,000), and Continuing Claims (prior 1.858 mln)
- 10:30 ET: Weekly natural gas inventories (prior +79 bcf)
Volatility continues during Powell press conference
03-May-23 15:10 ET
Dow -127.89 at 33556.55, Nasdaq +20.69 at 12101.38, S&P -6.68 at 4114.17
[BRIEFING.COM] The market volatility continues while Fed Chair Powell's press conference progresses.
Some key remarks so far include Mr. Powell's acknowledgement that the "case of avoiding recession more likely in my assessment than having one." He also reiterated that the Fed is "trying to reach and then stay at a -- for an extended period a level of policy -- a policy stance that is sufficiently restrictive to bring inflation down 2% over time."
Separately, energy complex futures settled lower. WTI crude oil futures fell 4.4% to $68.53/bbl and natural gas futures fell 2.3% to $2.35/mmbtu.
FOMC raises rates by 25 basis points, as expected; says banking system is sound and resilient
03-May-23 14:30 ET
Dow +79.14 at 33763.58, Nasdaq +106.48 at 12187.17, S&P +21.02 at 4141.87
[BRIEFING.COM] The market has been volatile over the past half hour after the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate 25 basis points to 5 to 5-1/4 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. Currently, the S&P 500 (+0.51%) is at session highs, higher by about 21 points.
Getting more granular, the FOMC said economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
Further, the FOMC statement held that the U.S. banking system was sound and resilient. The FOMC thinks that tighter credit conditions for households and businesses would likely weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
Gold settles higher ahead of FOMC decision
03-May-23 13:55 ET
Dow +25.36 at 33709.80, Nasdaq +57.15 at 12137.84, S&P +11.92 at 4132.77
[BRIEFING.COM] With about two hours to go on Wednesday afternoon the tech-heavy Nasdaq Composite (+0.47%) is atop the standings.
Gold futures settled $13.70 higher (+0.7%) to $2,037.00/oz in front of the FOMC policy decision today at the top of the hour wherein market participants are largely expecting a 25 basis points rate hike to bring the target range for fed funds rate to 500-5.25%.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $101.41.
Steady with an asterisk ahead of FOMC decision
Another large batch of March quarter earnings results has been released since yesterday's close, yet those results have been subjugated it seems to other items, namely the continued fallout in the regional bank stocks and today's FOMC decision.
The two have been conjoined in a certain respect, as the steep losses seen yesterday in the regional bank stocks (and other banks) has fueled chatter that the Fed might be/should be compelled to hold off on a rate hike today due to concerns related to financial stability.
Now, the fed funds futures market has been relatively slow to embrace that thinking. The CME FedWatch Tool currently shows an 85.4% probability of a 25 basis points rate hike today to 5.00-5.25%. We suspect the FOMC will act in accordance with the majority view of the fed funds futures market, assuming the Senior Loan Officer Survey, which will be released publicly soon, hasn't given the Fed quite the credit tightening scare.
The market should be able to tolerate another rate hike since that has been the consensus view for some time now, but what it likely won't tolerate well is a directive and/or a Fed Chair that fails to dangle the carrot of a pause in its tightening effort at the next meeting.
Alas, the narrative ahead of the FOMC decision at 2:00 p.m. ET is that the Fed will be "walking a fine line," trying to temper concerns about financial stability risk while ensuring it doesn't sound as if it is going soft on fighting inflation, which is still well above the Fed's 2.0% target, yet not pre-committing to further rate hikes.
It is quite possible, too, that any decision today won't be reached unanimously. That would keep the market guessing, so to speak, about what comes next for the economy and monetary policy, which would in turn keep the capital markets in a choppy state.
To be sure, Fed Chair Powell, speaking at 2:30 p.m. ET, will have quite the communication job on his hands today, knowing as well that the debt ceiling matter is still unresolved and is quickly becoming a bigger matter based on Treasury Secretary Yellen's latest X-date guidance.
Separately, yesterday's shocking action in the regional bank stocks is making many market participants think there could be a bigger matter afoot in the banking industry. The stocks have been volatile this morning in pre-market action, although many are working their way back now from larger, pre-market losses, which has helped keep the equity futures somewhat stable.
Currently, the S&P 500 futures are up three points and are trading slightly above fair value, the Nasdaq 100 futures are up 14 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are down two points and are trading in-line with fair value.
The steady behavior comes despite a 7% decline in Advanced Micro Devices (AMD) after it issued tepid Q2 guidance and a 4% decline in Starbucks (SBUX) after it comfortably exceeded fiscal Q2 estimates but only reiterated its FY23 guidance.
Eli Lilly (LLY), which said donanemab significantly slowed cognitive and functional decline in a Phase 3 study of early Alzheimer's Disease, has provided some offsetting support with a 5% gain.
The April ADP Employment Change Report, meanwhile, stood as an offset to hard landing concerns, showing that 296,000 jobs were added to private-sector payrolls (Briefing.com consensus 142,000). That was well ahead of expectations. The growth was driven by small (+121,000) and medium (+122,000) businesses and it occurred across both the goods-producing (+67,000) and service-providing (+229,000) sectors.
The Treasury market took this news in stride, comforted somewhat by the added indication that pay growth continued its nearly year-long slowdown. The 2-yr note yield is down two basis points to 3.95% and the 10-yr note yield is down four basis points to 3.40%.
Any market move ahead of today's FOMC decision, however, should probably have an asterisk next to it, because it is happening without the context of knowing the Fed's thinking. Those asterisks, though, will come off starting at 2:00 p.m. ET.
-- Patrick J. O'Hare, Briefing.com
CVS Health slips to new 52-week lows as investors home in on its reduced FY23 EPS outlook (CVS)
CVS Health (CVS -3%) is slipping to new 52-week lows today as its trimmed FY23 adjusted earnings outlook takes center stage, shrouding the retail pharmaceutical giant's top and bottom line beats in Q1. CVS's reduced FY23 earnings forecast of $8.50-8.70, down from $8.70-8.90, resulted from an approximately $0.35/share headwind from the associated financing of its $10.6 bln Oak Street Health $8.0 bln Signify Health purchases, which both closed recently. The headwind was partially offset by underlying strength across CVS's businesses.
Incorporating today's move, shares of CVS have now tumbled over 24% on the year, dwarfing rival Walgreens Boots Alliance's (WBA) ~13% decline. CVS has faced intense scrutiny over its recent high-price tag acquisitions, especially since they followed the company's reduced 2023 Star Rating for its Aetna National PPO plan, which stoked fears of missing bottom-line estimates. Although CFO Shawn Guertin repeatedly noted that CVS is taking the appropriate measures to mitigate any potential impacts, heightened M&A activity only increased the possibility of the company falling short of its EPS targets.
Therefore, by CVS cutting its FY23 adjusted EPS projection by $0.20, investors' worries came to a head today, sparking additional selling pressure.
- It was not all doom and gloom, though. CVS kept its bottom line from slipping extensively in Q1, experiencing just a 1.0% decline yr/yr to $2.20. The company also grew its revs more than twice the rate analysts expected, boasting 11% yr/yr growth to $85.28 bln.
- CVS also announced resegmentation, reporting its results through three primary segments: Health Care Benefits, Health Services (formerly Pharmacy Services), and Pharmacy & Consumer Wellness (formerly Retail/LTC).
- A notable highlight was within Health Benefits, where medical costs were kept in line with expectations, with membership expanding by 1.0 mln members. CVS also expects roughly 12% membership growth in its Medicare Advantage (MA) business in FY23 and is working to improve its competitive position to return to market growth in 2024.
- Additionally, Pharmacy & Consumer Wellness revs grew by nearly 8% yr/yr despite macroeconomic challenges and normalizing COVID trends, with front store comps reaching almost +8%.
- Although FY23 is shaping up to be less upbeat than initially anticipated, CVS did reiterate its $9.00 and $10.00 earnings targets for 2024 and 2025, respectively. However, the company cautioned that recent developments in the 340B Drug Pricing Program create challenges for its pharmacy benefits business. Furthermore, COVID contributions could dissipate more rapidly than previously thought.
Overall, CVS's Q1 numbers underscored a reasonably resilient economic backdrop. Also, its clipped FY23 earnings guidance resulted from an early close of Oak Street and financing costs for its two major acquisitions instead of underlying weakness within the general economy. Meanwhile, CVS remained committed to its FY24 and FY25 earnings targets. Therefore, we think today's selling pressure is an overreaction. CVS's recent M&A moves will provide extensive diversification, taking pressure off its slowing retail business, and give the company added credibility in the MA space.
Starbucks brews up strong results as China rebounds, but cautious outlook disappoints (SBUX)
Coming off a disappointing Q1 report in early February in which it missed on both the top and bottom lines, Starbucks (SBUX) reported much better results for Q2, beating analysts' expectations across the board.
- The key difference maker was China, SBUX's second-largest market, which performed much better than expected as comps increased by 3% compared to last quarter's 29% plunge. That steep decline in Q1 was mainly a function of rising COVID-19 cases after China lifted most of its zero COVID-19 policies. With new virus cases moderating, enabling SBUX to reopen many of its locations that closed during Q1, sales rebounded significantly.
For new CEO Laxman Narasimhan, who took the helm on March 20, 2023, the upside earnings report looks like a solid start and a good building block to work from. Yet, the stock is selling off sharply despite the improved results.
There are two primary reasons for the weakness.
- First, a sell-the-news reaction is playing out after the stock had gained about 16% since the end of March. Based on that rally, investors were clearly anticipating a stronger report from SBUX.
- Second, and perhaps more importantly, SBUX chose not to raise its FY23 comp guidance, even though it comfortably topped analysts' comp estimates for this quarter. Instead, the company only reiterated its guidance of +7-9% U.S. comp growth, with an expectation of hitting the high end of that range on a global basis.
- For context, U.S. comps in Q2 were +12%, while global comps were +11%.
It seems that the company wasn't comfortable with increasing its outlook due to its expectation that sales growth will slow in China. During the earnings call, CFO Rachel Ruggeri stated that growth in average weekly sales in China will likely be at a more moderate pace in the second half of the year.
The good news is that business in North America and the U.S. is very healthy.
- A major driver for the robust growth in these markets is the success of SBUX's loyalty program. Starbucks Awards Membership added more than 400,000 members in Q2 and rewards members now account for 57% of U.S. company-operated revenue -- the highest contribution in the company's history.
- Additionally, productivity improvements and pricing actions are paying dividends as GAAP operating margin expanded 280 bps yr/yr to 15.2%.
Overall, SBUX delivered solid results for Q2 and business seems to be quite healthy, especially in the U.S. However, its cautious outlook for the rest of the year is disappointing investors and creating an excuse to take some gains off the table after the stock's nice run.
Ford bounces back with strong Q1 report; also first quarter with new reporting segments (F)
Ford Motor (F +1%) is higher following its Q1 report last night despite reporting upside EPS and revenue. Ford also reaffirmed FY23 guidance with adjusted EBIT of $9-11 bln and adjusted FCF of about $6 bln. This was also an exciting quarter because it was its first report after changing its business segment reporting. Ford segments now consist of Ford Model e (EV segment), Ford Blue (gas and hybrid vehicles), and Ford Pro (commercial vehicles).
- Starting with its largest segment, Ford Blue, revenue rose a robust 21% yr/yr to $25.1 bln with 10.4% EBIT margin. Ford says it's capitalizing on a red-hot product lineup with great pricing power. That includes the F-150, the new Maverick, the new Bronco, and of course, the Mustang. Ford noted that it just introduced the Bronco less than three years ago, and already it's neck-and-neck in sales with the Jeep Wrangler, and it has higher transaction prices.
- Looking ahead, Ford is excited about 2023, which it sees as one of the strongest product years coming for Ford Blue. It has a new Escape, including a new hybrid. Next week, Ford will reveal the all-new Ranger and the highly-anticipated Ranger Raptor. That will be followed by an all-new Mustang and high performance Dark Horse Mustang this summer. Ford also teased that it cannot get into details yet, but it has upcoming exciting news about the F-150 and the Explorer later this year.
- Turning to the Ford Pro segment, it was larger than we expected with Q1 revs of $13.2 bln, up 28% yr/yr. Ford says it has strong order books in North America and Europe. In Q1, Ford Pro increased market share and Ford won a contract to deliver more than 9,000 E-Transit vans to the US Postal Service.
- Finally, Ford Model e is small with revs of just $700 mln, down 27% yr/yr. Volumes were impacted by F-150 Lightning needing to stop production to fix a battery problem. However, Ford is now shipping Lightnings again, taking new orders, and increasing production to an annual rate of 150,000 units, about double what it does now.
- It's very helpful to see this segment's performance broken out. We want to monitor its growth over the coming years since its's such an important part of Ford's growth story. This segment currently operates more like a start-up. The good news is that it's on track this year towards a contribution margin approaching break-even, and for its first generation products to be EBIT margin positive by the end of next year.
Despite the muted response today, we think this was a good report from Ford and a nice bounce back from a disappointing Q4 result. Also, investors need to understand that Ford is going through a transformation, overhauling its industrial system, product development, manufacturing and supply chain management. That will take some time. As such, GM is definitely performing better right now. Hopefully, Ford can see some improvement as 2023 progresses. But we do like the new segment breakout, it is very helpful.
Advanced Micro sells off as its Q2 sales guidance comes in lighter than rival INTC's last week (AMD)
Advanced Micro's (AMD -6%) Q1 report may have looked strikingly similar to rival Intel's (INTC +2%) last week, surpassing earnings and sales estimates while guiding Q2 sales in line with consensus. However, the post-earnings reactions could not be more different, with shares of AMD selling off while INTC gapped significantly higher.
Why are investors reacting so negatively today? The midpoint of AMD's Q2 revenue forecast of $5.0-5.6 bln missed analyst expectations, a glaring weak point, especially after the center of INTC's Q2 sales outlook was nicely ahead of consensus. Secondly, even though AMD cautioned that Data Center revs would decline yr/yr in Q1, the street anticipated positive growth, likely due to the surging popularity of AI applications. Also, on Data Center, AMD's 22% sequential decline was outshined by INTC's 14% decline, stoking worries that perhaps AMD is losing market share. Lastly, the stock is not helped by AMD's relatively pricey 21x FY24 earnings valuation, a premium compared to INTC at 17x.
- Still, AMD registered decent headline results, delivering adjusted EPS of $0.60 on revs of $5.35 bln, both topping consensus. Sales did fall 9.1% yr/yr, underpinning persistent weaknesses within the global economy, particularly surrounding AMD's Client and Gaming segments, which saw revs fall 65% and 6%, respectively.
- However, a considerable drop in Client sales growth was expected; AMD previously noted it would ship below consumption to reduce downstream inventory. The good news is that, like INTC, AMD believes Q1 marked the bottom for its client processor business.
- AMD also predicted a decline in Gaming revs last quarter, consistent with seasonality. The company's semi-custom SoCs also witnessed solid demand due to sustained premium console sales from Microsoft (MSFT) and Sony (SONY) following the holiday season.
- Helping partially offset total sales from tumbling further was AMD's Embedded revenue rocketing 163% higher yr/yr. However, the explosive growth was largely priced in as it was primarily fueled by AMD's Xilinx acquisition. Nonetheless, it was uplifting to hear AMD see resilience across most of its embedded markets, with particular strength stemming from industrial, health care, communications, aerospace, and automotive verticals.
- Over the near term, AMD continues to see mixed demand signals caused by a highly uncertain macro environment. As a result, its Q2 guidance was light, expecting flat revenue growth sequentially.
- Conversely, the second half of the year should be much brighter. AMD remains confident in its ability to deliver positive growth in 2H23, driven by improving demand trends within the PC market as well as accelerating demand from HPC and AI. Gross margins are also expected to expand from roughly 50% during 2H23.
- On a side note, AMD has placed AI at the center of its longer-term roadmap, stating that it is its top strategic priority.
Bottom line, although silver linings existed, such as further signs of a bottom in the PC market and a potentially strong back half of the year, they were more than overshadowed by AMD's more extensive sequential Data Center decline than INTC, its mild Q2 outlook, and its relatively pricey valuation.
DuPont's exposure to consumer electronics weighs on outlook, sending shares sharply lower (DD)
Materials and chemicals company DuPont (DD) beat 1Q23 top and bottom-line estimates mainly due to strength in its water and safety solutions businesses, but a soft outlook for Q2 and FY23 is overshadowing those results, sending shares sharply lower. The company's exposure to the sluggish consumer electronics market, which is undergoing a painful inventory correction, weighed on its outlook.
- For FY23, DD cut its EPS forecast to $3.55-$3.70 from its prior guidance of $3.50-$4.00, while lowering the high end of its revenue outlook to $12.5 bln from $12.9 bln. The low end remained the same at $12.3 bln.
- DD may not be the first name that comes to mind when thinking about the consumer electronics market, but the company is a major supplier of components and materials to OEMs.
- For example, the Semiconductor Technologies business, which operates within the Electronics and Industrial segment, provides circuit fabrication for memory and logic semiconductors.
- Also, the Interconnect Solutions business manufacturers circuit packaging film and laminate materials used in printed circuit boards and electronic finishing applications.
- Altogether, the Electronics and Industrial segment accounted for about 45% of DD's total revenue in FY22.
- In Q1, organic sales declined by 13% for Electronics and Industrial while operating EBITDA margin slipped by 310 bps to 27.9%. Both the Semiconductor Technologies and Interconnect Solutions' businesses experienced lower volumes resulting from weaker end market demand and channel inventory destocking.
- CFO Lori Koch commented that DD continues to see weakness and channel inventory destocking in the near term, which pushed out the electronics recovery by about one quarter.
On the positive side, Koch expects strength to continue throughout the year for categories such as water, automotive, aerospace, and healthcare.
- On the topic of healthcare, DD also announced a definitive agreement to acquire Spectrum Plastics Group, a manufacturer of critical components and devices primarily into medical end-markets, for $1.75 bln. Following this acquisition, which was financed with existing cash balances, approximately 10% of DD's total revenue will be derived from healthcare.
- Meanwhile, Water & Protection should remain solid as DD continues to benefit from pricing actions taken last year to offset inflation. Organic sales growth was 4% for Water & Protection in Q1 driven by higher prices for water filtration and purification products.
The main takeaway is that DD is facing mixed end markets with its exposure to consumer electronics manufacturers creating a stiff headwind. Based on DD's soft guidance, it seems that conditions in the Electronics and Industrial segment aren't likely to improve much in Q2, while macroeconomic/growth concerns are also ratcheting up as the regional banking industry comes under fire again.
The Big Picture
Last Updated: 28-Apr-23 12:01 ET | Archive
X-date marks the climactic debt ceiling spot
In life, we are always aiming to raise the ceiling. We advocate to raise the ceiling on our children's learning; we aim to raise the ceiling in our relationships; we work to raise the ceiling on our careers; we attempt to raise the ceiling with our travel experiences; and we train to raise the ceiling for our personal fitness.
To raise the ceiling, metaphorically speaking, is to allow room to move into a higher and better position.
Not metaphorically speaking, Congress always raises the debt ceiling.
History To Repeat Itself?
In recent years, the process of raising the debt ceiling has devolved at times into a not-so-pretty process. 2011 was the most jarring case in point, inviting an historic downgrade of the nation's debt rating by Standard & Poor's in response to the political brinkmanship that created unnecessary waves of angst about the U.S. defaulting on its debt.
Unfortunately, there is a burgeoning sense that history could repeat itself this year given the divided Congress and entrenched viewpoints on what should be done to raise the debt ceiling.
Republicans are coalescing around a platform that calls for spending cuts in exchange for raising the debt ceiling by $1.5 trillion or until March 31, 2024, whichever comes first. Democrats, meanwhile, are coalescing around a platform that calls for raising the debt ceiling without any strings attached.
So, what's it going to be? That is the $31.4 trillion question and then some.
The nation's current debt ceiling is $31.4 trillion. We hit the ceiling in January, prompting Treasury Secretary Yellen to warn lawmakers then that the Treasury Department would be taking "extraordinary measures" to keep paying the bills, but that such measures would eventually run dry. The day they do would be the climactic "X-date."
Treasury Secretary Yellen at the time did not think the payment well would run dry before early June, but some strategists have suggested the X-date could be in early June instead of the July-August period that had been widely mentioned because tax receipts have not been as strong as originally forecasted.
To be fair, others are prognosticating that tax receipts will be enough to get past early June and that estimated tax payments made by June 15 will buy the Treasury some more time with its extraordinary measures, perhaps even into August or a bit later before the U.S. looks at the "Big D" -- and we don't mean Dallas -- in the event there is no agreement to raise the debt ceiling.
Changes of Note
The monthly Treasury Budget statement, which is rarely a market mover, is apt to carry market-moving status on May 10 when the April report is released, showing income tax receipts for April that will shape expectations for when the X-date will be reached. The Treasury market might be moved more initially by that understanding than the stock market.
Already we are seeing some changes that reflect the growing concerns about the rancor in Congress, where Republicans and Democrats alike are saying they will not let a default happen before then telling the other party what it needs to do to ensure a default doesn't happen.
Credit default swap spreads are rising and there has been a notable divergence at the front of the yield curve.
A 3-month T-bill matures in July, meaning close to the possible X-date or, egad, after it. Accordingly, the 3-month T-bill yield has been rising with concerns about a default weighing on buying interest. The 1-month T-bill, though, has been in greater demand, partly because of the banking issues but also because its maturity date remains in a "safe zone" that predates any X-date.
To be sure, shorter-dated Treasury securities will be in the crosshairs of any default drama, so their behavior in the ensuing weeks will be a good gauge of the market's belief -- or lack thereof -- in Congress working out an agreement to raise the debt ceiling before there is a default.
What It All Means
Just about everyone asked to comment on what would happen in the event the U.S. defaults on its debt says it will be calamitous for capital markets and ruinous for the nation's credit standing, ensuring demands for higher rates from creditors for years to come, making the interest the U.S. pays on that debt all the more expensive and a drag on growth.
We won't dispute the idea that the U.S. defaulting on its debt would be an awful situation. Frankly, it is hard to fathom all the bad that could come because of it, but as one talks/thinks about this notion, it is often addressed as if the default situation won't be remedied.
Undoubtedly, it will be remedied. It should be remedied before there is a default, but if partisan politics do take us into a default situation, it stands to reason that the reaction in the capital markets will quickly drive an agreement on the debt ceiling.
That's not to say it wouldn't be a tough couple of days or weeks, but knowing a worst-case scenario won't be allowed to fester is why longer-dated Treasury securities could ironically be seen as a safe haven amid any debt default turmoil. That's how they were viewed in 2011.
We should all hope that we don't have to endure a U.S. default for any length of time -- not even for a second. Alas, if we do, we are reminded by Winston Churchill that "Americans will always do the right thing, only after they have tried everything else."
-- Patrick J. O'Hare, Briefing.com
|
