Market Snapshot
briefing.com
| Dow | 34546.12 | -99.87 | (-0.29%) | | Nasdaq | 13804.39 | +30.77 | (0.22%) | | SP 500 | 4462.61 | +0.71 | (0.02%) | | 10-yr Note | +3/32 | 4.256 |
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| | NYSE | Adv 1110 | Dec 1746 | Vol 881 mln | | Nasdaq | Adv 1625 | Dec 2663 | Vol 4.8 bln |
Industry Watch
| Strong: Consumer Discretionary, Utilities, Health Care, Information Technology |
| | Weak: Real Estate, Energy, Materials, Industrials |
Moving the Market
-- Digesting the August CPI, which showed that core inflation improved, but remains sticky, well above the Fed's 2.0% target
-- Relative strength in a some mega cap stocks
-- Keeping a close eye on action in the Treasury market
-- Reacting to news that American Airlines (AAL), Spirit Airlines (SAVE), and Frontier Group (ULCC) all warning about Q3 outlooks
-- S&P 500 failing to break above 50-day moving average (4,480)
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Closing Summary
13-Sep-23 16:25 ET
Dow -70.46 at 34575.53, Nasdaq +39.97 at 13813.59, S&P +5.54 at 4467.44
[BRIEFING.COM] Today's trade was lackluster with the major indices registering only modest gains or losses. The A-D line favored decliners, but there wasn't a lot of conviction overall. The major indices followed the direction of the mega cap stocks, which drove some choppy action in the morning and later in the afternoon.
Briefly, total CPI was up a robust 0.6%, as expected, and core-CPI, which excludes food and energy, was up 0.3% (Briefing.com consensus 0.2%). That left total CPI up 3.7% year-over-year, versus 3.2% in July, and core CPI up 4.3% year-over-year, versus 4.7% in July.
The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
The Treasury market saw some knee-jerk selling in response to the data. Things quickly calmed down, though, which was supportive for the stock market. The 2-yr note yield jumped to 5.07% after the data, but finished at 4.99%, one basis point lower from yesterday's settlement. The 10-yr note yield, which hit 4.34% following the data, fell two basis points from yesterday to 4.25%.
Rate hike expectations did not change much following the CPI report. According to the CME FedWatch Tool, the probability of a 25 basis points rate hike at the November FOMC meeting is 40.1% versus 44.2% yesterday.
Six of the 11 S&P 500 sectors logged a gain. The utilities sector (+1.2%), which was the only sector to gain more than 1.0%, led the lineup, and the real estate sector (-1.0%), which was the only sector to lose more than 1.0%, fell to the bottom of the pack.
Airline stocks were a notable weak spot in the market after Spirit Airlines (SAVE 16.20, -1.08, -6.3%), Frontier Group (ULCC 5.95, -0.56, -9.2%), and American Airlines (AAL 13.31, -0.80, -5.7%) warned about their Q3 outlooks due in part to rising fuel costs. The U.S. Global Jets ETF (JETS) fell 2.7%.
On a related note, the industrial sector (-0.7%) was among the weakest performers, partially due to its weak airline components. Separately, Netflix (NLFX 412.24, -22.45, -5.2%) was a key individual laggard, falling in response to its disclosure that the ad business is not material yet to its overall revenue.
- Nasdaq Composite: +32.0% YTD
- S&P 500: +16.4% YTD
- S&P Midcap 400: +5.5% YTD
- Russell 2000: +4.5% YTD
- Dow Jones Industrial Average: +4.3% YTD
Reviewing today's economic data:
- Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (Briefing.com consensus 0.2%). On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
- The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
- The weekly MBA Mortgage Index was down 0.8% after decreasing 2.9% a week ago. The Refinance Index was down 5.4% while the Purchase Index was up 1.3%.
- The August Treasury Budget showed a surprising surplus of $89.2 billion compared to a deficit of $219.6 bln in the same period a year ago. The surplus in August resulted from receipts ($283.1 billion) exceeding outlays ($193.9 billion). The Treasury Budget data is not seasonally adjusted so the August 2023 surplus cannot be compared to the July 2023 deficit of $220.8 billion.
- The key takeaway from the report is that outlays included impacts from the $319 billion Debt Relief Reversal downward modification to the DOE's Federal Direct Student Loans program. August typically shows a budget deficit (68 times out of 69 fiscal years) since there are no major tax due dates.
- Weekly crude oil inventories increased by 3.954 mln barrels after decreasing by 6.307 mln barrels a week ago.
Thursday's economic calendar features some potentially market-moving releases. The weekly jobless claims report, the August Producer Price Index, and the August Retail Sales report will be released at 8:30 a.m. ET. Other data includes:
- 10:00 ET: July Business Inventories (Briefing.com consensus 0.1%; prior 0.0%)
- 10:30 ET: Weekly natural gas inventories (prior +33 bcf)
Treasury yields settle modestly lower
13-Sep-23 15:30 ET
Dow -106.69 at 34539.30, Nasdaq +30.80 at 13804.42, S&P +1.13 at 4463.03
[BRIEFING.COM] The S&P 500 briefly slipped into negative territory recently.
The 2-yr note yield settled one basis point lower at 4.99%. The 10-yr note yield fell two basis points to 4.25%.
Thursday's economic calendar features some potentially market-moving releases. The weekly jobless claims report, the August Producer Price Index, and the August Retail Sales report will be released at 8:30 a.m. ET. Other data includes:
- 10:00 ET: July Business Inventories (Briefing.com consensus 0.1%; prior 0.0%)
- 10:30 ET: Weekly natural gas inventories (prior +33 bcf)
Market takes sharp turn lower
13-Sep-23 15:05 ET
Dow -99.87 at 34546.12, Nasdaq +30.77 at 13804.39, S&P +0.71 at 4462.61
[BRIEFING.COM] The major indices fell sharply over the last half hour.
Energy complex futures gave up some ground today. WTI crude oil futures fell 0.4% to $88.57/bbl and natural gas futures fell 2.4% to $2.68/mmbtu.
The S&P 500 energy sector sports the largest decline, down 1.1%.
Budget in August shows surplus after student loan program reversal
13-Sep-23 14:30 ET
Dow -1.59 at 34644.40, Nasdaq +63.68 at 13837.30, S&P +11.01 at 4472.91
[BRIEFING.COM] The major averages fell modestly following the release of the August Treasury Budget, which showed a surplus in what is otherwise a typical deficit month without any major tax due dates; to this point, the S&P 500 (+0.25%) is in second place with the Dow Jones Industrial Average (flat) briefly fading into the red.
The Treasury Budget for August showed a surplus of $89.3 bln versus a deficit of $219.6 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the August surplus cannot be compared to the deficit of $220.8 bln for June.
Total receipts of $283.1 bln fell 6.8% compared to last year while total outlays of $193.9 bln declined about 63% compared to last year. This month's budget outlays include impacts from the $319 billion Debt Relief Reversal downward modification to the Department of Education Federal Direct Student Loans program, resulting in a surplus of $89 billion for August 2023.
The total year-to-date budget deficit now stands at $1.52 trln vs $945.72 bln at this point a year ago.
Gold slips as inflation shows improvement
13-Sep-23 13:55 ET
Dow +21.95 at 34667.94, Nasdaq +83.53 at 13857.15, S&P +14.61 at 4476.51
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.61%) is atop the major averages; as a reminder, the August treasury budget due out at the top of the hour.
Gold futures settled $2.60 lower (-0.1%) to $1,932.50/oz, little changed following this morning's CPI data.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $104.65.
Page One
Last Updated: 13-Sep-23 09:01 ET | Archive
Keeping a close eye on Treasuries after CPI report
Yesterday's weakness was attributed in part to some nervousness in front of today's release of the Consumer Price Index for August. Well, that report is out and what it showed is that there was legitimate reason to be a little nervousness in front of it.
Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (Briefing.com consensus 0.2%).
On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
According to the CME FedWatch Tool, the probability of a 25 basis points rate hike at the November FOMC meeting is at 43.3% versus 44.2% yesterday.
There was some knee-jerk selling interest in the equity futures market and Treasury market immediately after the report's release, but things have settled down some since then.
Currently, the S&P 500 futures are up four points and are trading 0.1% above fair value, the Nasdaq 100 futures are up six points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 24 points and are trading 0.1% above fair value.
The 2-yr note yield, which traded as high as 5.07% after the CPI report, is back down to 5.00%, unchanged from yesterday. The 10-yr note yield, which jumped to 4.34%, is at 4.29%, up three basis points from yesterday.
Where things go from here in the Treasury market is important for where things go from here in the stock market.
Rising rates are a headwind for equities, which are also contending this morning with Q3 warnings from American Airlines (AAL), Spirit Airlines (SAVE), and Frontier Group (ULCC) that were attributed in part to higher costs, a JPMorgan downgrade of Oracle (ORCL) to Neutral from Overweight after the stock's big drop yesterday, and a report that mortgage applications hit their lowest level since 1996.
Meanwhile, oil prices remain elevated at $89.19 per barrel, up 0.4%, and continue to be a focal point of concern as it relates to inflation expectations, profit margin pressure, and a slowdown in discretionary spending.
-- Patrick J. O'Hare, Briefing.com
American Airlines, Spirit Airlines, and Frontier next up to cut outlooks as demand slows (AAL)
One week after United Airlines (UAL), Southwest Airlines (LUV), and Alaska Air (ALK) warned that rising fuel costs are creating a headwind, another set of airlines raised the alarm on higher fuel prices this morning. Specifically, American Airlines (AAL), Spirit Airlines (SAVE), and Frontier Group (ULCC) joined that list, but there's another more concerning issue that's developing in the industry. After two plus years of strengthening travel demand, evidence is emerging that momentum is beginning to fade as consumers pull back on spending.
- The first indication came last week when LUV cut its revenue per available seat mile (RASM) guidance lower, forecasting RASM to decline by 5-7% compared to its prior outlook of a drop of 3-7%. While LUV also stated that it still expects to achieve record operating revenue in Q3, the RASM guidance cut and increased fuel cost outlook took center stage, as reflected in the stock's 5% drop since its update.
- Those concerns of softening travel demand were amplified this morning when AAL, SAVE and ULCC lowered their Q3 outlooks. SAVE and ULCC in particular painted a troubling picture, with ULCC commenting that its updated guidance reflects a "recent significant change in booking trajectory along with higher fuel prices and a greater volume of recent operational cancellations than forecast."
- Meanwhile, SAVE said that it's seeing heightened promotional activity with steep discounting for travel booked for the second half of Q3 through the pre-Thanksgiving travel period.
- All three airlines significantly reduced their profitability expectations for Q3 with AAL slashing its EPS guidance to $0.20-$0.30 from $0.85-$0.95.
- However, there is an important distinction to be made between AAL and the budget carriers of ULCC and SAVE: namely, demand seems to be holding up better for AAL. The airline essentially reaffirmed its Q3 total revenue outlook and only slightly lowered the midpoint of its TRASM guidance by 0.5 points to -6.0%.
- AAL's stronger resilience to the spending slowdown is a function of a higher percentage of bookings coming from corporate and international travel, and a more affluent customer base, relative to SAVE and ULCC.
- Instead of a steeper decline in bookings, AAL's earnings guidance was mainly impacted by a retroactive pay expense of about $230 mln resulting from the ratification of a new collective bargaining agreement with its pilots. This item impacted its EPS outlook by $0.23 with the remainder of the cut related to higher fuel costs.
The clear skies that airlines have been enjoying are starting to gather some storm clouds. Rising fuel costs are problematic, but signs that travel demand is starting to crack is a more pressing concern. So far, the major airlines (UAL, DAL, AAL, LUV) haven't experienced a significant downturn in bookings activity. However, the fear is that the more pronounced weakness seen at the low-cost carriers is a harbinger of things to come for the industry as a whole.
Sealed Air potentially finding a bottom; receives an upgrade at Credit Suisse today (SEE)
Sealed Air (SEE) is trying to escape from its downbeat momentum over the past year after catching an upgrade to "Outperform" from "Neutral" at Credit Suisse today. The upgrade is the first since SEE registered underwhelming Q2 results last month, which triggered a downgrade at UBS shortly thereafter. However, zooming out, SEE has now seen three upgrades over the past two months.
Briefing.com notes that shares of SEE have steadily slid throughout 2023, continuously carving out new 52-week lows. Most recently, SEE slashed its FY23 guidance, reflecting lingering weaknesses within its Protective segment (~40% of annual revs), compounded by the ongoing destocking cycle that will likely persist throughout the rest of the year.
Nevertheless, underlying strengths within SEE's business make current price levels attractive over the medium to long run.
- Starting with the downtrodden Protective unit, where packaging protects goods during transit and is particularly valuable to e-commerce, consumer goods, pharmaceutical, and industrial end markets, the company is amid a strategic review. Recently, the company closed its cable thermal temperature assurance business as it continues hunting for areas to optimize. Although Protective will remain under pressure as global economic weaknesses persist, the market has likely priced in much of this bearish sentiment.
- Meanwhile, SEE's other segment, Food (~60% of annual revs), is helping cushion the company from more pronounced declines. In Q2, Food sales climbed 3% higher yr/yr on an organic basis, driven by higher prices, while volumes remained flat. Retail demand remains unfavorable. However, SEE's automation and organic fluids businesses are exhibiting sustained demand, boasting slightly higher volumes yr/yr. In fact, automation grew by double-digits yr/yr in all regions during Q2, with APAC climbing by over 50%.
- On a side note, SEE's automation division can continue enjoying outsized growth over the long haul as companies turn to alternatives to expensive labor costs.
- SEE also launched Reinvent SEE 2.0, its revitalized version of its former Reinvent SEE cost savings program, which resulted in over $300 mln in annualized savings. With Reinvent SEE 2.0, SEE is targeting $140-160 mln of additional annual savings to be fully realized by the end of 2025. With SEE's original cost-savings program adding over 270 bps to margins, its updated initiative should provide a decent margin boost, positioning the company for reaccelerated growth once the economic landscape improves.
The inflationary environment has had its claws on nearly every sector and end market, with SEE being no exception. The company has struggled as discretionary spending has triggered decelerating market demand, with consumers trading down from premium to lower-priced goods, particularly proteins like red meat, a meaningful component of SEE's total annual revs. However, after trimming its FY23 outlook to more reasonable figures, shares down over 30% on the year, and valuations similar to 2020 levels, SEE may be finding a bottom.
CVS Health sees relief from ailing shares on reaffirmed FY23 targets; may be turning a corner (CVS)
CVS Health (CVS +3%) sees relief from its ailing stock price following its reiterated FY23 EPS and free cash flow guidance, as well as encouraging remarks from management during its Morgan Stanley Global Healthcare Conference today. The retail pharmacy and health insurance giant has struggled over the past year following a series of setbacks, including a Star Rating cut, withdrawn FY25 EPS guidance, and a lost contract with Blue Shield of California. Although shares are potentially running into resistance at their 50-day moving average (70.86) today, perhaps the worst of CVS's headwinds are behind it, setting up for a turnaround over the next several quarters.
- Over the past year, CVS has made two monumental acquisitions, purchasing Signify Health for $8.0 bln and Oak Street Health for $10.6 bln. The market did not respond overwhelmingly positively toward these deals, especially since they coincided with macroeconomic headwinds within CVS's retail business. However, the company noted today that it has been constantly identifying synergies across Signify and Oak Street and has started seeing positive results.
- The Star Rating cut regarding CVS's Medicare Advantage business was a concerning development. However, CVS has been pouring resources into improving its overall Stars performance. There are a few more weeks until the final CMS results are released, which could produce a volatile trading day. However, based on internal indicators, management was optimistic about where it would land.
- There were concerns last quarter regarding a 350 bp uptick yr/yr in CVS's medical benefit ratio (MBR), the percent of premiums spent on clinical services. CVS repeated today that it assumes utilization pressure would persist for the rest of the year, seeping into 2024, albeit to a much lesser degree.
- On a side note, a rising MBR could adversely impact other health insurers, such as UnitedHealth Group (UNH) and Humana (HUM), which have already touched on this dynamic in recent quarters.
- The lost Blue Shield contract was disappointing, but CVS did not express much concern, stating that it was just an unbundling of PBM services. In fact, CVS commented that Blue Shield continues to engage with the company surrounding specialty services, winning business in Massachusetts and Tennessee. Also, because of the magnitude of the Blue Shields California contract, it carried lower margins.
CVS has had to clear plenty of hurdles over the past year. However, despite the numerous obstacles, CVS remains committed to generating double-digit EPS growth over the long haul. Although its FY24 earnings target translates to flat yr/yr growth, as benefits from improving pharmacy growth and expense actions will be canceled by headwinds in Health Care Benefits and retail, CVS may finally get back on track for FY25, albeit not at double-digits.
While its primary rival, Walgreens Boots Alliance (WBA), manages through a CEO departure and a cloudy roadmap regarding its several acquisitions, CVS may be finally turning a corner, potentially giving it a leg up to capture market share. With shares recently hitting multi-year lows, CVS is beginning to look attractive as a turnaround play.
WestRock boxes up some gains as company agrees to merge with packaging giant Smurfit Kappa (WRK)
Packaging company WestRock (WRK) is trading sharply higher after agreeing to merge with Ireland-based Smurfit Kappa (SMFKY) in a cash and stock deal worth about $20 bln. Last Wednesday night, the Wall Street Journal first reported that the two packaging companies were in talks regarding a potential merger, sparking a rally in WRK shares the following day.
Based on the terms of the deal and Smurfit Kappa's closing price from yesterday, WRK shareholders would receive the equivalent of $43.51/share in cash ($5/share) and stock (one new Smurfit WestRock share), representing a premium of about 36% versus WRK's unaffected closing price from September 6. However, that premium is diminishing as Smurfit Kappa's stock drops in the wake of the merger announcement.
- The merger comes at a time when the highly cyclical paper and packaging industry is struggling from a downturn in consumer spending. This weakness was evident when WRK reported Q3 results on August 3. Although the company beat EPS expectations, the better-than-expected earnings were mainly driven by cost-cutting measures as revenue fell by 7% yr/yr to $5.1 bln. Consolidated adjusted EBITDA also slid lower by more than 20% to $204 mln.
- By combining, WRK and SMFKY would become a global packaging leader with market leadership across Europe and in U.S., with a strong presence also in Brazil and Mexico. That geographic diversity, along with the expected improvement in operating efficiencies due to greater scale, should bolster the combined company's earnings growth in this challenging environment.
- On that note, SMFKY expects the deal to be high single-digit accretive to its EPS on a pre-synergy basis by the end of the first year following completion.
- Despite the anticipated EPS accretion, shares of SMFKY are selling off on the merger news. Investors may be balking at the structure of the deal, which includes stock, but also includes debt financing to fund the cash portion of the transaction. It's also notable that WRK holds over $9.0 bln in total debt as of June 30, 2023, which now becomes the combined company's burden.
The clear advantage to this deal is that it would add significant scale to the combined company in an industry in which scale is of utmost importance. Together, WRK and Smurfit Kappa generated adjusted revenue of $34 bln over the last twelve months, making the combined company a packaging powerhouse. The merger, though, still needs to gain shareholder approval, and based on the stock action in Smurfit Kappa today, it's apparent that its investors aren't enthusiastic about the deal.
Oracle under pressure as weak guidance provides a reason to lock in some profits (ORCL)
Oracle (ORCL -12%) is under some pressure today following its Q1 (Aug) results last night. Oracle reported decent results with EPS upside, but not as large as last quarter. Also, revenue grew 8.8% yr/yr to $12.45 bln, but that was a bit shy of analyst expectations. Probably the biggest issue was the Q2 (Nov) guidance, especially on the top line, which was below analyst expectations.
- Let's start with some positives. Q1 Cloud Revenue (IaaS plus SaaS) rose 30% yr/yr to $4.6 bln while Cloud Infrastructure (IaaS) revenue jumped 66% yr/yr to $1.5 bln. In Q1, RPO climbed to nearly $65 bln with the portion excluding Cerner up 11%. Oracle noted that it has now signed several deals for OCI greater than $1 bln in total value. Approximately 49% of total RPO is expected to be recognized as revenue over the next 12 months.
- Non-GAAP operating margin is a metric we like to track. In Q1, including Cerner, it grew to 41% from 39% a year ago, although down from 44% in Q4 partially due to a smaller revenue base. As Oracle continues to benefit from economies of scale in the cloud and drive Cerner profitability to Oracle standards, ORCL expects it will grow operating margin.
- Turning to the guidance. Oracle says it has a great line of sight into the trajectory of the business given the bookings momentum. The company is extremely confident about its revenue acceleration for the year, even though in any quarter, there may be small fluctuations. Also, because it has far more demand than it can supply, ORCL says its biggest challenge is building data centers as quickly as possible.
- Another issue is that Oracle is in an accelerated transition of its Cerner unit to the cloud. This transition is resulting in some near-term headwinds to Cerner's growth rate as customers move from license purchases, which are recognized upfront, to cloud subscriptions, which are recognized ratably. Excluding Cerner, Oracle remains committed to accelerating its total revenue growth rate this fiscal year.
The stock is being hit pretty hard, we think the Q2 guidance is spooking investors a bit. Overall, demand seems good but transitioning Cerner clients to cloud subscriptions is creating a headwind for near term revenue recognition. We also think, as we said in our preview, that expectations were running quite high heading into this report. The stock had more than doubled from its lows in early October 2022 and it had made a strong move since mid-July. The guidance is presenting a reason to lock in some profits.
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