|Market Snapshot |
|Dow ||30632.05 ||-142.62 || (-0.46%) |
|Nasdaq ||11251.15 ||+3.60 || (0.03%) |
|SP 500 ||3790.45 ||-11.40 || (-0.30%) |
|10-yr Note || || || |
|NYSE ||Adv 794 || Dec 2245 || Vol 904 mln |
|Nasdaq ||Adv 1434 || Dec 2798 || Vol 4.4 bln |
|Strong: Information Technology, Consumer Staples |
|Weak: Energy, Financials, Materials, Communication Services, Industrials, Consumer Discretionary |
Moving the Market
|-- Hotter-than-expected PPI data fueling rate hike concerns|
-- Earnings misses for JPMorgan and Morgan Stanley
-- Downward momentum follow through from yesterday
Buyer conviction picks up midday
14-Jul-22 16:30 ET
Dow -142.62 at 30632.05, Nasdaq +3.60 at 11251.15, S&P -11.40 at 3790.45
[BRIEFING.COM] The stock market opened lower and headed even lower after that. Buyer conviction picked up around midday, leaving the S&P 500 and Dow Jones Industrial Average with modest losses. The Nasdaq was able to climb just above the flat line to close in positive territory.
The weak start was owed to several factors:
The lower start sent the S&P 500 back to its low from three weeks ago, but that’s where the market found support and rebounded thanks to strong leadership from the technology sector. Comments from Fed Governor Waller also contributed to the turn in sentiment after he said that his base case remains for a 75-bps rate hike, though he acknowledged that he would support a larger increase if it is warranted by economic data.
- JPMorgan Chase (JPM 108.00, -3.91, -3.5%) and Morgan Stanley (MS 74.69, -0.29, +0.4%) reported weaker than expected results with JPM CEO Dimon repeating his warning about a difficult economic environment.
- The PPI report for June was hotter than expected at the headline level, fueling more speculation about a more aggressive Fed.
- There was renewed political turmoil in Italy after Prime Minister Draghi lost the support of a major coalition partner. Mr. Draghi submitted his resignation, but the country’s president refused to accept the offer, suggesting that the prime minister will maintain his post despite flagging support. The renewed uncertainty could get in the way of the ECB’s tightening plans.
Aside from information technology (+0.9%), the other S&P 500 sectors to close in the green were consumer staples (+0.2%) and utilities (+0.01%). The technology sector got a boost today from semiconductor related names after Taiwan Semi (TSM 83.67, +2.38, +2.9%) beat on earnings and revenue and issued forward guidance above consensus.
As for the consumer staples sector, Costco (COST 511.94, +19.72, +4.0%) offered support after it was upgraded today to Buy from Hold at Deutsche Bank. Holding the sector down was Conagra (CAG 33.15, -2.59, -7.3%), one of the biggest laggards in the S&P 500 today, after the company issued below-consensus guidance.
The remaining nine sectors showed losses ranging from 0.1% (consumer discretionary) to 1.9% (financials).
The advance-decline line showed the midday pick up in buyer interest. Earlier, decliners led advancers by a nearly 9-to-1 margin at the NYSE and a roughly 4-to-1 margin at the Nasdaq. At the close, decliners led advancers by a 14-to-5 margin at the NYSE and a 2-to-1 margin at the Nasdaq.
Treasuries retreated in immediate reaction to the PPI report but most tenors found support above yesterday's lows, narrowing their losses as the day went on. The 10-yr yield rose six basis points to 2.96% while the 2-yr yield slipped one basis point to 3.12%.
More bank earnings will be released ahead of Friday's open with BlackRock (BLK 588.63, -7.75, -1.3%), Citigroup (C 44.14, -1.36, -3.0%), and Wells Fargo (WFC 38.74, -0.33, -0.8%) headlining the list. Major health care component UnitedHealth (UNH 502.43, +1.19, +0.2%) will also report its earnings tomorrow morning.
The market will receive a few more noteworthy economic reports on Friday:
Reviewing today's economic data:
- 8:30 a.m. ET: June Retail Sales (Briefing.com consensus 0.8%; prior -0.3%), Retail Sales ex-auto (Briefing.com consensus 0.6%; prior 0.5%), June Import/Export Prices, and July Empire State Manufacturing survey (Briefing.com consensus -0.9; prior -1.2)
- 9:15 a.m. ET: June Industrial Production (Briefing.com consensus 0.2%; prior 0.2%) and Capacity Utilization (Briefing.com consensus 80.0%; prior 79.0%)
- 10:00 ET: May Business Inventories (Briefing.com consensus 1.2%; prior 1.2%) and preliminary July University of Michigan Consumer Sentiment survey (Briefing.com consensus 49.4; prior 50.0)
- June PPI 1.1% (Briefing.com consensus 0.9%); Prior was revised to 0.9% from 0.8%; June Core PPI 0.4% (Briefing.com consensus 0.5%); Prior was revised to 0.6% from 0.5%
- The key takeaway from the report is that inflationary pressures were most pronounced in the manufacturing sector due to higher energy prices, but the services sector also saw higher prices, coupled with an upward revision to the increase that was reported in May. The June report lifted the yr/yr PPI rate to 11.3%, leaving it just shy of the March peak (11.5%).
- Weekly Initial Claims 244K (Briefing.com consensus 239K); Prior 235K; Weekly Continuing Claims 1.331 mln; Prior was revised to 1.372 mln from 1.375 mln
- The key takeaway from the report is that while still low relative to longer-term averages, initial claims have been inching higher in steady fashion since they reached a low of 167,000 at the end of March and are now at their highest level since early February.
- Weekly EIA Natural Gas Inventories showed a build of 58 bcf vs a build of 60 bcf last week
- Dow Jones Industrial Average: -15.7% YTD
- S&P 400: -20.5% YTD
- S&P 500: -20.5% YTD
- Russell 2000: -24.0% YTD
- Nasdaq Composite: -28.1% YTD
Market near session highs ahead of the close
14-Jul-22 15:35 ET
Dow -109.22 at 30665.45, Nasdaq +28.20 at 11275.75, S&P -6.84 at 3795.01
[BRIEFING.COM] The three main indices have come down from their highs but remain well above session lows.
Copper futures made big downside moves today, settling down 2.5% to $3.24/lb.
The 2s10s spread became more inverted today with the 2-yr note yield settling the session down one basis point to 3.12%. The 10-yr note yield was down six basis points to 2.96%.
A few sectors lifting with the broader market
14-Jul-22 15:00 ET
Dow -149.06 at 30625.61, Nasdaq +7.54 at 11255.09, S&P -11.79 at 3790.06
[BRIEFING.COM] The market is continuing its ascent in recent action with the Nasdaq (+0.3%) trading in positive territory.
The information technology (+1.0%) and consumer staples (+0.1%) S&P 500 sectors have both entered positive territory. Information technology is getting a boost from the outperforming semiconductor stocks. Several individuals in the sector are trading above their 20-day moving average, including Applied Materials (AMAT 91.80, +2.72, +3.1%), NXP Semiconductors (NXPI 159.53, +4.42, +2.3%), and Enphase Energy (ENPH 196.19, +3.56, +1.9%).
With the market recouping, WTI crude oil futures are trading up 0.4% to $96.72/bbl.
Cintas outperforms on down day following earnings
14-Jul-22 14:25 ET
Dow -178.25 at 30596.42, Nasdaq -5.55 at 11242.00, S&P -16.73 at 3785.12
[BRIEFING.COM] The major averages have moved to session highs in the last half hour, the tech-heavy Nasdaq Composite (-0.05%) narrowly breaking above flat lines for a brief period, while the benchmark S&P 500 (-0.44%) sits firmly in second place.
S&P 500 constituents Moderna (MRNA 159.67, -11.57, -6.76%), Caesars Entertainment (CZR 35.92, -2.22, -5.82%), and CF Industries (CF 80.30, -5.24, -6.13%) pepper the bottom of today's standings. Vaccine names, along with MRNA, trade lower on Thursday, CZR continues recent weakness stemming from yesterday's KeyBanc Capital Markets downgrade, while CF caught a bearish Credit Suisse initiation this morning and the overall materials (-2.18%) space remains weaker.
Meanwhile, Ohio-based garment and related products company Cintas (CTAS 386.30, +8.73, +2.31%) trades modestly higher in a down market following earnings/guidance.
Gold dented by stronger dollar
14-Jul-22 14:00 ET
Dow -325.99 at 30448.68, Nasdaq -64.73 at 11182.82, S&P -34.55 at 3767.30
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.58%) holds the shallowest declines.
Gold futures settled $29.70 lower (-1.7%) to $1,705.80/oz, pressured once again by a stronger dollar.
Meanwhile, the U.S. Dollar Index is up about +0.7% to $108.75.
Taiwan Semi ticks higher after solid Q2 results; bodes well for the semiconductor industry (TSM)
Updated: 14-Jul-22 13:20 ET
Taiwan Semi (TSM +1%) is steadily chipping higher today following its fourth consecutive earnings beat in Q2 and upbeat Q3 revenue guidance. As the world's largest contract manufacturer of semiconductors, its solid Q2 numbers set a positive tone for the semiconductor industry ahead of earnings season.
With higher interest rates, soaring inflation, and deteriorating consumer sentiment, TSM's Q2 results are a breath of fresh air. They also bode well for the semiconductor industry overall. However, TSM still expects supply to remain tight in 2022, so earnings results in the coming weeks may boil down to an organization's success in navigating supply chain disruptions while facing fierce macroeconomic headwinds.
- Alongside a strong earnings beat, TSM also topped revenue expectations, posting 43.5% growth yr/yr to NT$534.14 bln. The sizeable leap in revs was due to broad-based strength, particularly in the three industries that have demonstrated resiliency during the current environment: automotive, high-performance computing (HPC), and internet-of-things (IoT).
- Automotive revs grew 14% yr/yr in the quarter. Although this division accounted for just 5% of overall sales, the double-digit gains are a good sign for automotive manufacturers as well as other chip makers with exposure to the automotive industry, such as Broadcom (AVGO), Marvell (MRVL), and NVIDIA (NVDA).
- Another stand out was HPC sales, which expanded by 13% yr/yr. Like what we saw with MRVL in late May with its 131% yr/yr explosion in data center revs, the data center industry is continuing to boom. TSM's double-digit growth in HPC indicates that this backdrop has not shifted. Therefore, we expect robust data center sales growth for chip makers in the coming weeks.
- Meanwhile, IoT sales also jumped by double-digits, increasing 14% yr/yr.
- On a less positive note, smartphone and consumer electronics sales lagged significantly, growing just 3% and 5%, respectively. However, this should have already been priced in after numerous chip makers began seeing softness in these markets during Q1. Also, MU noticed a similar deceleration in MayQ. This slowdown is something to keep an eye on and whether it will significantly impact PC and chip makers with greater exposure to these markets, like HP Inc. (HPQ), Dell (DELL), and Advanced Micro (AMD).
JPMorgan Chase heads lower on earnings miss and share buyback pause (JPM)
Updated: 14-Jul-22 11:55 ET
JPMorgan Chase (JPM -4%) is heading lower today after its missed on Q2 EPS and revenue. Also, given its performance in the recent stress tests, JPM has decided to pause share buybacks for the time being. However, the banking giant was fairly upbeat on its earnings call this morning, which was a bit of a surprise.
Overall, JPM was pretty bullish on the consumer, but investors are not happy with JPM reporting its second EPS miss in a row. Also, we saw a miss from Morgan Stanley (MS) this morning, which is causing some jitters for bank stocks generally. Plus JPM's net charge offs were a bit high.
- In its Consumer & Community Banking (CCB) segment, combined debit and credit card spend was up 15% with travel and dining spend remaining robust. Card loans were up 16% with strong new account originations. In the Corporate & Investment Bank (CIB) segment, Markets revenue was up 15%. However, global IB fees were down 54% yr/yr as JPM was lapping a record last year. Commercial Banking (CB) loans were up 7% on strong new loan originations.
- The provision for credit losses was $1.1 bln, including $657 mln of net charge-offs and a net reserve build of $428 mln, primarily reflecting loan growth as well as a modest deterioration in the economic outlook.
- JPM insists that credit is still quite healthy, and net charge-offs remain historically low. JPM says it has yet to see a pullback in discretionary spending, including in the lower income segments. There also continues to be positive trends in loan growth with average loans up 7% yr/yr and 2% sequentially. However, not surprisingly, home lending revenue was down 26% yr/yr due to higher interest rates.
- JPM notes that the US economy continues to grow and both the job market and consumer spending remain healthy. However, geopolitical tension, high inflation, waning consumer confidence, concerns about higher rates are "very likely" to have negative consequences on the global economy sometime down the road.
CEO Jamie Dimon was quite positive on the call and pushed back on some tough questions during the Q&A portion. However, investors remain skeptical and the pause on share buybacks is spooking them a bit both from a lack of support for the share price but also it's a signal that management feels the need to be cautious with its money. Typically, banks should perform well in a rising rate environment, but concerns about the economy and the consumer down the road are more than offsetting that.
Conagra is in a pickle after its MayQ results pale versus GIS's MayQ report last month (CAG)
Updated: 14-Jul-22 11:14 ET
Conagra (CAG -8%) is in a pickle today after leaving investors hungry for more than its slight bottom-line upside in Q4 (May) and downbeat FY23 earnings guidance. We cautioned that after General Mills (GIS) set an upbeat tone with its double-digit earnings beat and solid sales upside in Q4 (May) last month, CAG, which owns many familiar brands like Slim Jim and Vlasic, would be expected to follow suit.
Why were CAG's Q4 results insufficient? The culprit was the same headwind plaguing numerous industries: inflation. CAG has been proactive in its price hikes, first discussing the expectation of inflationary pressures beginning to impact margins in 2Q21 (November 2020 quarter). However, even with CAG upping prices across many categories, it was not enough to erase the strong inflationary forces in Q4. As a result, operating margins dipped 310 bps yr/yr to 7.4%.
Meanwhile, due to a lag associated with pricing initiatives, since retailers need to work through their inventory, higher price tags take multiple quarters before having a material effect on CAG's financials. For example, in Q3 (Feb), CAG noted that its action on pricing throughout the year will not go into effect until 1Q23 (Aug), with additional hikes not taking effect until 2Q23 (Nov).
Overall, the inflationary environment is proving a challenge to CAG, especially compared to GIS. Perhaps GIS's pet food business is more resilient to inflationary pressures, evidenced by a 12 pt jump in volumes despite higher prices in MayQ. GIS may also benefit from stronger brand loyalty as its 3 pt volume decline in its North America Retail segment in MayQ was less than half the volume dip in CAG's similar categories.
- There were still many bright spots in the quarter. CAG managed to expand earnings by 20.4% yr/yr to $0.63. Also, revenue growth of 6.2% yr/yr to $2.91 bln barely missed estimates. In fact, revenue topped analyst expectations when excluding negative FX impacts and the sale of CAG's Egg Beaters business, jumping 6.8% yr/yr.
- As was the case for GIS, eat-at-home trends were on display for CAG in Q4, evidenced by sales increasing 7.2% yr/yr in its Grocery & Snacks segment. Furthermore, in Refrigerated & Frozen, organic sales climbed 4.3% yr/yr.
- However, countering these solid numbers was a significant decline in volume for both segments. For example, Grocery & Snacks saw a 7.2% drop in volume, while Refrigerated & Frozen volume fell 8.1%.
- Although at-home consumption remained robust, CAG's Foodservice business shined, leaping 21.5% yr/yr to $287 mln despite facing challenging comps of +20.8% in the year-ago period. Encouragingly, volumes were also up 4.5% while restaurant traffic continued to recover.
- Slightly more mixed was CAG's FY23 outlook. The company expects EPS growth of just +1-5%, falling short of estimates. However, organic net sales growth is predicted to jump +4-5% yr/yr. Inflation is clearly acting like a double-edged sword as higher costs are eating into CAG's margins, hindering earnings growth. At the same time, CAG passing these costs onto consumers is helping revenue at the expense of volume growth.
Bottom line, for other consumer packaged goods companies like Kellogg (K), J.M. Smucker (SJM), and Campbell Soup (CPB), which report earnings on August 4, 25, and 31, respectively, brand loyalty will play a vital role.
Unity Software tumbles on its merger agreement with app monetization provider ironSource (U)
Updated: 13-Jul-22 13:43 ET
Unity Software (U -17%) is amid a sell-the-news reaction today as it flirts with all-time lows reached after lackluster Q1 results in early May. Investors are clearly not pleased with the price tag on Unity's planned merger with app-monetization platform provider ironSource (IS +51%). Unity agreed to an all-stock deal, valuing ironSource at roughly $4.4 bln, a 74% premium to the 30-day average exchange ratio. Although an all-stock agreement, where each IS share will be exchanged for 0.1089 Unity shares, the company noted that the merger is highly accretive, estimated to deliver a run rate of $1 bln in adjusted EBITDA by FY24 and $200 mln in annual EBITDA synergies by year three.
One of the primary problems plaguing Unity in Q1 was monetization. Unity's monetization model focuses on pay-for-performance end-user acquisition, where advertisers pay based on set targets, such as the number of installs. However, due to a fault in Unity's Audience Pinpointer tool, which helps drive installs at scale, its accuracy was reduced in Q1. Meanwhile, Unity saw an approximately $110 mln hit to annual revenue in FY22 due to losing the value of a portion of its data after ingesting bad data from a large customer.
As a result, investors may be disappointed in Unity choosing to spend billions of dollars through an all-stock transaction to help improve monetization instead of working to fix and improve its own set of tools.
Furthermore, ironSource's near-term outlook is underwhelming. The company does operate in the black, posting earnings of $0.05 in Q1. However, revenue growth is expected to decelerate considerably. ironSource guided to Q2 revs of just $180-185 mln, translating to +35% growth at the midpoint, well below its previous quarterly rates of over +45%. Meanwhile, ironSource trimmed its FY22 sales outlook, going from +46% growth yr/yr at the midpoint to only +38%. The company pointed to the typical headwinds affecting most of its peers, such as seasonal trends and overall macroeconomic uncertainty, as the factors impeding future sales.
Overall, Unity's merger agreement with ironSource is facing severe criticism today. Also, even with the premium valuation, the merger is merely a consolation prize for ironSource shareholders, as the stock still trades around 75% below record highs set in September. With Unity trading at 8x forward sales, the company operates in priced-to-perfection territory given the current rising-rate environment. As such, paying a sizeable premium for an organization focused on monetization, which Unity has repeatedly noted is one of its strengths, will not help turn around its falling share price, which is now down over 75% on the year.