Market Snapshot
| Dow | 33308.18 | +255.31 | (0.77%) | | Nasdaq | 13058.79 | +207.56 | (1.62%) | | SP 500 | 4241.62 | +47.82 | (1.14%) | | 10-yr Note |
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| | NYSE | Adv 1886 | Dec 933 | Vol 484 mln | | Nasdaq | Adv 2254 | Dec 2006 | Vol 3.6 bln |
Industry Watch
| Strong: Information Technology, Communication Services, Utilities, Consumer Discretionary, Energy |
| | Weak: Materials, Industrials, Consumer Staples |
Moving the Market
-- Relative strength in the mega cap space
-- A drop in market rates, which is in response to the Treasury's refunding announcement and this morning's economic release,
-- Reacting to the FOMC decision and Fed Chair Powell's press conference
-- A sense that the market is still due for a bounce
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Stocks continue to climb after yields settle lower
01-Nov-23 15:35 ET
Dow +255.31 at 33308.18, Nasdaq +207.56 at 13058.79, S&P +47.82 at 4241.62
[BRIEFING.COM] The rally is picking up strength ahead of the close.
The 2-yr note yield fell 11 basis points to 4.97% and the 10-yr note yield fell nine basis points to 4.79%. This follows the FOMC's decision to leave rates unchanged and Fed Chair Powell acknowledge the potential for future rate hikes.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 214K; prior 210K), Continuing Claims (prior 1.790 mln), preliminary Q3 Productivity (Briefing.com consensus 3.6%; prior 3.5%), and preliminary Q3 Unit Labor Costs (Briefing.com consensus 1.5%; prior 2.2%)
- 10:00 ET: September Factory Orders (Briefing.com consensus 1.0%; prior 1.2%)
- 10:30 ET: Weekly natural gas inventories (prior +74 bcf)
Testing highs while Powell speaks
01-Nov-23 15:05 ET
Dow +243.56 at 33296.43, Nasdaq +168.56 at 13019.79, S&P +42.21 at 4236.01
[BRIEFING.COM] Volatility continued for stocks as Fed Chair Powell started his press conference. The major indices are testing session highs now.
Mr. Powell reiterated the Fed's view that slower growth and softer labor market conditions are needed to fully restore price stability.
He also acknowledged that "We have come very far with this rate-hiking cycle."
Fed leaves rates unchanged; economic activity grew at "strong pace", inflation remains "elevated"
01-Nov-23 14:30 ET
Market is Closed
[BRIEFING.COM] The major averages were jostled after the Fed unanimously voted to keep rates unchanged at 5.25-5.50%, as widely expected. The S&P 500 (+0.48%) is in second place, having essentially whipsawed into flat action over the prior half hour.
Some key excerpts from the Fed's decision included:
- Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
- The opinion that the U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
- The Committee also said it would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Yields tripped up a bit after the decision, the yield on the benchmark 10-yr note now slips 13 bps to 4.805%. Also, the yield on the 2-yr note briefly fell below 5% for the first time since early October.
Gold lower ahead of FOMC decision
01-Nov-23 13:55 ET
Dow +65.71 at 33118.58, Nasdaq +80.71 at 12931.94, S&P +15.40 at 4209.20
[BRIEFING.COM] The Nasdaq Composite (+0.63%) is today's best-performing major average ahead of the FOMC policy decision due out in about 5 minutes at the top of the hour.
Gold futures settled $6.80 lower (-0.3%) to $1,987.50/oz, this juxtaposed against a modestly higher dollar and modest weakness in treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $107.00.
Microsoft, Visa outperforming in DJIA on Wednesday
01-Nov-23 13:30 ET
Dow +35.74 at 33088.61, Nasdaq +77.80 at 12929.03, S&P +13.66 at 4207.46
[BRIEFING.COM] The Dow Jones Industrial Average (+0.11%) hovers just above Tuesday's close, moving mostly sideways over the prior half hour.
A look inside the DJIA shows that Microsoft (MSFT 344.09, +5.98, +1.77%), Visa (V 237.37, +2.27, +0.97%), and Amgen (AMGN 257.91, +2.21, +0.86%) show decent strength.
Meanwhile, Nike (NKE 100.46, -2.31, -2.25%) is underperforming.
The DJIA is now about +2.36% higher off last week's near eight-month lows.
Page One
Last Updated: 01-Nov-23 09:04 ET | Archive
Market digesting a lot of inputs as November begins
Today marks the start of a new trading month for the market, but the early disposition of the futures market isn't overly enthusiastic about that understanding.
Currently, the S&P 500 futures are up one point and are trading in-line with fair value, the Nasdaq 100 futures are up six points and are trading fractionally above fair value, and the Dow Jones Industrial Average futures are down 39 points and are trading 0.1% below fair value.
That's not a particularly strong leaning. If anything, it seems to reflect a general lack of buying interest more than a strong determination to sell. There is also some analysis paralysis in the mix as there are a lot of inputs firing at market participants this morning.
Some are known, like the earnings results; some are unknown, like the Israel-Hamas War; and some of the unknown, like the October ISM Manufacturing Index at 10:00 a.m. ET and Fed Chair Powell's FOMC press conference at 2:30 p.m. ET, will soon be known.
We left the actual FOMC policy decision out of the "unknown," because it is effectively known. According to the CME FedWatch Tool, there is a 0.8% probability of a rate hike today. That leaves all the intrigue about the Fed's monetary policy thoughts to the press conference.
There isn't any more intrigue regarding the Treasury's quarterly refunding announcement. It was released at 8:30 a.m. ET and it was deemed better than feared as it relates to upcoming issuance of longer-term debt. The Treasury said:
"Based on projected intermediate- to long-term borrowing needs, Treasury intends to continue gradually increasing coupon auction sizes in the upcoming November 2023 to January 2024 quarter... Treasury plans to increase the auction sizes of the 2- and 5-year by $3 billion per month, the 3-year by $2 billion per month, and the 7-year by $1 billion per month. As a result, the auction sizes of the 2-, 3-, 5-, and 7-year will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of January 2024. Treasury plans to increase both the new issue and the reopening auction size of the 10-year note by $2 billion and the 30-year bond by $1 billion. Treasury plans to maintain the 20-year bond new issue and reopening auction size."
This news appeared to placate the Treasury market some. The 10-yr note yield dropped from 4.89% ahead of the announcement to 4.85% in its wake, but has returned to 4.89%. The equity futures market improved as the 10-yr note yield dropped.
The latter point notwithstanding, it is hard to get overly excited by the refunding news. Granted it might be better than feared, but the fact of the matter is that there is a load of new debt issuance on the way (an estimated $776 billion this quarter and an estimated $816 billion in the first quarter of 2024). The nettlesome point is that all this debt issuance is projected before there has been any real economic slowing seen in the U.S.
Recall that the Fed believes we need a period of below-trend growth to help tame inflation. That may be, but below-trend growth -- or a recession -- will curtail tax receipts that presumably will increase borrowing needs without any spending offsets. We digress, but suffice to say, that isn't a celebratory consideration.
Overall, the stock market doesn't appear to be in much of a celebratory mood over the latest round of earnings results or the ADP Employment Change Report for October. The mood summation is more "meh" than "ahhhh."
Adv. Micro Devices (AMD), CVS Health (CVS) DuPont (DD), Estee Lauder (EL), Paycom Software (PAYC), Yum! Bands (YUM), and Norwegian Cruise Line Holdings (NCLH) have been among the earnings reporters, which have elicited mixed and company-specific reactions.
Meanwhile, the ADP report showed 113,000 jobs were added to private-sector payrolls in October (Briefing.com consensus 100,000) following an unrevised 89,000 in September. The market acknowledged the headline, but didn't get caught up in it, knowing that this report hasn't been a very good gauge of late with respect to the government's nonfarm payrolls number, which will be released this Friday.
-- Patrick J. O'Hare, Briefing.com
CVS Health tries to recover from an initial sell-off sparked by bearish color surrounding FY24 (CVS)
CVS Health (CVS -2%) is steadily getting healthier today, recovering from lows of -6.5% earlier in the session. The retail pharmaceutical giant delivered Q3 results consistent with its recent past performance. That is, CVS exceeded top and bottom-line estimates and reiterated its FY23 earnings outlook of $8.50-8.70.
So why are shares not looking more lively today? The next couple of years have played a much more heightened role in price action over the previous several months than FY23. As such, CVS stating that it would be prudent to ground expectations for FY24 adjusted EPS at the low end of its previously trimmed $8.50-8.70 range weighed on initial sentiment.
At the same time, CVS expects its previously announced decline in its Star Ratings for 2024 will pressure Medicare Advantage (MA) and anticipates elevated utilization in MA to persist. Furthermore, CVS estimates a lower contribution from COVID -- similar to recent remarks from rival Walgreens Boots Alliance (WBA) -- consumer softness in its retail business and the 340B Drug Pricing Program headwind to annualize in 2024.
While these obstacles should not easily be shrugged off, given CVS's YTD decline of over 25%, many may already be priced in. Additionally, there were pockets of strength from Q3, possibly providing a good balance of tailwinds.
- In Q3, adjusted EPS of $2.21 was a decent 5.7% improvement yr/yr, assisted by a 30 bp jump in gross margins and reflecting early success in ongoing cost-cutting initiatives, such as reducing its workforce. In fact, CVS mentioned that its actions should result in FY24 benefits toward the upper bound of its $700-800 mln of savings guidance.
- Revenue of $89.76 bln, a 10.6% pop yr/yr, exceeded analyst targets and was fueled by broad-based strength. Health Care Benefits grew nearly 17% to over $26.0 bln, Health Services was up over 8% to $47.0 bln, and Pharmacy & Consumer Wellness was up a moderate 6% to $29.0 bln.
- In Health Care Benefits, CVS's health insurance division, the company's medical benefit ratio (MBR) continued to climb, up 2.3 pts yr/yr to 85.7% due to aforementioned elevated utilization trends in MA, primarily in outpatient procedures and supplemental benefits, like behavioral health.
- A bubbling MBR has been a slightly concerning trend throughout the health insurance field, with giants like UnitedHealth Group (UNH) and Humana (HUM) touching on the development recently. It will be important to keep an eye on this metric going forward as it is already pressuring CVS's MA offering.
- In Health Services, CVS's commitment to lower drug costs resonated with consumers. For the 2024 selling season, the company's renewals are mostly complete, and its retention remains strong in the high 90s, excluding the outgoing Centene (CNC) contract.
- Turning to Pharmacy & Consumer Wellness, CVS's retail segment, same-store pharmacy sales increased nearly +12.0%, with prescription comp growth, excluding COVID, expanding by +3.5%.
CVS is still facing an uncertain path, given its numerous headwinds. However, as 2024 approaches and conditions have not worsened, shares look more attractive, especially stacked against WBA, which is up against more significant challenges.
Wayfair furnishes another big earnings beat as margins improve, but demand remains soft (W)
For the third consecutive quarter, online furniture company Wayfair (W) cruised past earnings expectations on a combination of cost cutting measures and gross margin expansion, but the news on the top-line isn't quite as positive. While Wayfair generated yr/yr revenue growth for the first time since 2Q21, the 3.7% increase in Q3 fell a bit short of expectations and its Q4 guidance of flat to positive low-single-digit growth also disappointed.
A couple other key metrics illustrate how the pullback in discretionary spending is affecting Wayfair's results.
- Average order value (AOV) slid by 8.6% yr/yr to $297 as customers reined in spending on home decor and home improvement projects. Wayfair anticipates that AOV will show further compression in Q4 on a yr/yr basis, but the company believes Q4 will likely be the trough.
- Active customers declined by 1.3% yr/yr to 22.3 mln, although on sequential basis, the company added about 500,000 new active customers. Also, orders per customer were steady yr/yr at 1.83.
Despite the tough business climate and unfavorable macro conditions, Wayfair continues to make solid progress in terms of profitability. Back in January, the company announced a major restructuring program that included the elimination of 1,750 employees. That initiative continues to provide a bottom-line boost as operating expenses decreased by nearly 11% in Q3, but there are a couple other drivers behind the improvement.
- Gross margin expanded by 210 bps yr/yr to 31.1% due to greater efficiencies within the supply chain, favorable merchandising and mix, and efforts to scale penetration within the existing sales base. Looking at Q4, Wayfair expects gross margin of 30-31%.
- Wayfair has outperformed its competitors, and it expects that it will continue to outpace the market in terms of unit growth. For instance, the company has fared better than RH (RH) and Williams-Sonoma (WSM) with those two companies posting sales declines of 19% and 13% in Q2, respectively.
- Bolstered by this combination of margin expansion and market share gains, adjusted EBITDA and free cash flow are heading higher. In Q3, adjusted EBITDA swung to a positive $100 mln from ($124) mln in the year-earlier period, while free cash flow saw an even more dramatic reversal at positive $42 mln from ($538) mln.
Overall, it's a mixed bag for Wayfair as the company continues to navigate through a challenging environment. The company is executing well considering the circumstances as reflected by the improving profitability picture, but demand is soft, and Wayfair's Q4 revenue guidance suggests that sales will remain sluggish during the holiday season.
Yum! Brands trades flat despite nice EPS upside; industry sentiment trending lower (YUM)
Yum! Brands (YUM) is trading roughly flat despite reporting another healthy EPS beat for Q3 this morning. However, YUM missed slightly on revenue. Following somewhat cautious comments from McDonald's (MCD) when it reported on Monday that customer traffic continued to slow, we wanted to check in with YUM to see how this fast food chain (KFC, Taco Bell, Pizza Hut) was doing. Total comps in Q3 were solid at +6%, but down from +9% in Q2.
- Its largest unit by far is KFC. Comps were a healthy +6% despite lapping a tough +7% comp last year. KFC performed especially well in international and emerging markets, including Africa, Australia, and Latin America. In terms of the menu, hand breaded original recipe nuggets represented a new category entry point to attract customers. After a successful launch in the US, KFC expanded nuggets to its Latin American and Caribbean market where it was met with strong demand. KFC plans to expand the offering to several more places around the world.
- The highest comp came from Taco Bell at +8% even as it lapped +6% last year. It was much stronger than Q2's +4% comp. The segment delivered value with fan favorites like the $5 box. The brand has benefitted from growth in its chicken offerings and it plans to further expand the launch of its cantina menu. YUM says another component of this brand's success is digital, which includes loyalty. Taco Bell loyalty customers spend 40% more per year than a traditional customer. Taco Bell will enhance its loyalty program further in 2024.
- Pizza Hut was a bit of a laggard with comps at just +1% and that is despite lapping easy +1% comps last year. Comps in Q2 were +4%. The good news is that Pizza Hut is the smallest of YUM's three primary brands.
- In terms of the consumer, YUM says it has been managing through some consumer pressures around the world. China is having its challenges, but there are challenges in every market. There are pressures on franchisees but YUM thinks they do better than most in terms of navigating those pressures. In the US, YUM says its industry has softened a little bit but the industry is doing better than most industries. It helps that Taco Bell plays value well with the $5 box. YUM says it's seeing plenty of demand.
Overall, investors are pretty ho-hum regarding YUM's Q3 report. YUM has now reported large back-to-back EPS beats in Q2-Q3 after misses in 5 of the 6 prior quarters. However, we think the sentiment in the restaurant space has gotten more bearish in recent months. Many stocks, including YUM, have pulled back in recent months. MCD and SYY talked about slowing traffic this week. YUM said today that the industry has softened in the US. Even a good EPS beat is not enough to get investors buying shares again. Investors want to hear a more bullish outlook.
Advanced Micro advances higher as FY24 Data Center GPU guidance offsets mild Q4 outlook (AMD)
Advanced Micro (AMD +7%) advances higher today, rebounding off initial lows of close to -5%, sparked by mild Q4 revenue guidance. The chip maker, competing with NVIDIA (NVDA) for the biggest slice of the AI pie, did surpass analyst earnings and revenue projections in Q3, delivering modest upside, a trend consistent with its past several quarters. However, the market was initially turned off by AMD's Q4 sales outlook of $5.8-6.4 bln, the midpoint of which missed analysts' targets.
Nevertheless, investors quickly warmed up to AMD once it provided additional forward-looking commentary during its earnings call. Most notably, AMD anticipates Data Center GPU revenue to reach $2.0 bln in 2024, accelerating quarterly from $400 mln expected in Q4. CEO Lisa Su commented that the 2024 forecast was primarily driven by AI technology.
- Sustained AI demand was an underlying factor in AMD's solid headline results in Q3. Total revenue edged 4.2% higher yr/yr to $5.8 bln, reversing two straight quarters of yr/yr declines, largely fueled by record server CPU revenue and robust Ryzen processor sales, i.e., improving PC market conditions. Multiple prominent hyperscale customers committed to deploying AMD's Instinct MI300 accelerators, popular for AI throughput.
- Data Center sales were still flat yr/yr at $1.6 bln as EPYC processor sales were eclipsed by sliding SoC (system-on-chip) data center products. Still, flat growth shined compared to Intel (INTC), which reported a 10% yr/yr sales decline in its Data Center and AI segment in Q3. AMD also noted that it gained server CPU revenue share during the quarter.
- Breaking down the segment, cloud demand was mixed as hyperscalers continued to optimize their spending. Meanwhile, enterprise demand stayed soft but did enjoy a double-digit percentage sales improvement sequentially.
- AMD's Client segment was the star in Q3, expanding revenue by 42% yr/yr and 46% sequentially. AMD's newest Ryzen processors, featuring AI, witnessed explosive demand during the quarter as inventory levels in the PC market normalized and demand reverted to seasonal patterns. Like INTC, AMD was excited about the future of the AI PC, working closely with Microsoft (MSFT) on the next-gen of Windows that will take advantage of on-chip AI engines.
- Gaming sales remained dull, down 8% yr/yr, primarily due to lackluster semi-custom revenue -- chips used on gaming consoles from MSFT and Sony (SONY). While the current gaming console generation continues tracking significantly higher than the prior generation, AMD expects weak semi-custom sales to persist.
- As expected, AMD's Embedded segment posted a 5% contraction in revenue yr/yr as lead times normalized and customers remained committed to reducing their inventory levels. AMD anticipates the segment to remain in decline through 1H24 as customers continue working through elevated inventories.
Offsetting its relatively soft Q4 sales outlook with an uplifting FY24 Data Center GPU revenue estimate is providing a jolt to AMD today. AI remains in high demand as organizations globally jump on board to, at the least, not fall behind. Meanwhile, the PC market is beginning to show signs of a turnaround, all positive developments ahead of NVDA's OctQ report on November 21.
JetBlue Airways suffers a hard landing as slowing demand and rising fuel costs combine in Q3 (JBLU)
JetBlue Airways (JBLU) is experiencing some major turbulence today after reporting disappointing Q3 results that fell short of EPS and revenue expectations, while also issuing downside EPS and revenue guidance for Q4. Like every other airline, JBLU contended with higher-than-expected fuel costs during the quarter, but the much bigger concern has to do with demand.
- In the earnings press release, JBLU cited air traffic control disruptions and unfavorable weather conditions as two key headwinds that negatively impacted revenue. In fact, the company had already warned back on September 28 that those two issues were taking a toll on the top-line, causing it to cut its guidance.
- Specifically, JBLU warned that Q3 revenue would be near the low end of its prior guidance range.
While those issues were anticipated, what seems to be catching market participants off guard is the more organic drop in demand.
- Last week, competitor -- and potential merger partner -- Spirit Airlines (SAVE) posted a Q3 earnings beat with revenue matching estimates, but the budget airline offered some cautious commentary regarding current demand trends.
- The company stated that it continues to see discounted fares through the pre-Thanksgiving period and that it has not seen the anticipated return to a normal demand and pricing environment for the peak holiday season.
- Making matters worse, U.S. flying capacity has been on the rise, putting additional pressure on pricing. This is reflected in JBLU's yield per passenger metric, which slid by nearly 14% yr/yr.
- Unlike the big four carriers -- Delta Air Lines (DAL), American Airlines (AAL), United Airlines (UAL), and Southwest Air (LUV) -- JBLU doesn't have the wiggle room to significantly lift prices since it operates in the lower-priced carrier market.
- With the exception of LUV, those bigger airlines are also able to offset the slowing domestic demand by adding more international flights. When DAL reported Q3 earnings on October 12, it disclosed that international passenger revenue jumped by 35% yr/yr. Unfortunately for JBLU, the airline doesn't have a vast international footprint.
Separately, the government's antitrust case against JBLU and SAVE also began today.
- Regulators are attempting to thwart the $3.8 bln merger over concerns that a combination of the two would lead to higher ticket prices for consumers, with more limited flight options. The companies argue that they would be better able to compete against the big four as a combined company. At this point, it seems unlikely that the merger will be cleared for completion.
The main takeaway is that JBLU and other low-cost carriers are bearing the brunt of a slowdown in consumer spending, making it difficult to mitigate the impact of rising fuel and labor costs.
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