Sunday, September 18, 2022

Aug CPI and FedEx Preannouncement Present Challenging Environment for Investors Weekly Market Update: Aug CPI and FedEx Preannouncement Present Challenging Environment for Investors

9/16/2022 4:02:15 PM

- Trade began this week auspiciously enough, with equity markets and most risk assets holding on to momentum that built late last week. Sentiment was being helped in large part by the recent retreat in market-based inflation expectations into a key US inflation report that was expected to show the first m/m decline in headline consumer prices since the onset of the pandemic in 2020. To the markets chagrin, though, Tuesday’s August CPI reading caught investors well offsides with a significantly hotter than expected print. The core index re-accelerated to a gain of 0.6%, driven by shelter costs. The increase in the owners’ equivalent rent index climbed 0.71%, which is its largest monthly gain of the cycle to date. Worryingly, the upside pressures were broad-based as medical care services, car insurance/maintenance, and food service prices all came in well above expectations. Markets reacted swiftly and convincingly to what some were calling a game-changer of an inflation report. The S&P fell back below 4K, the Dow plunged 1,200 points, Treasury yields jumped led by a surge in shorter rates, and futures markets immediately began to price in the prospects of an even more aggressive Federal Reserve, including perhaps a 100 bps hike at next week’s FOMC announcement. Importantly, March 2023 futures markets started to price in small odds that the fed funds rate could reach 5% next year, surpassing even the most hawkish Fed officials' forecasts to this point.
- As the week progressed, the pall cast by the August CPI never really dissipated, but also opened up a growing debate surrounding two competing inflation narratives. High-profile corporate preannouncements headlined by FedEx were married with multiple mixed real-time economic readings that suggested growing forces of deflation have taken hold in parts of the economy. Worries of a hard landing in the US and a deep global recession grew, leading to calls for the Fed to take some pressure off the brake. Some argued the economy had already broke hard and instead of focusing on the CPI the Fed would be better served to listen to corporate signals while also accounting for the lag with which the economy starts to feel the full brunt of changes in monetary policy. Others argued a stubbornly strong US labor market as exhibited by low weekly claims and rising incidences of labor strife like this week's near miss of a national rail strike will only keep pressure on inflation and the Federal Reserve to rein in demand. Regardless, each view resulted in stocks and risk assets suffering. Treasury curves saw spreads move further into inversion territory while the US 2-year yield reached the highest level since Oct 2007. The US dollar continued to gobble up safe haven flows, pushing USD/CNY above the 7 handle for the first time in two years. Gold prices slumped to levels not seen in two years, as well. For the week the S&P fell 4.8%, the Dow lost 4.1% and the NASDAQ gave back 5.5%.
- In corporate news this week, FedEx shares dropped almost 20% after preannouncing Q1 will come in well below estimates amid a downturn in shipping volumes that ‘accelerated into the final weeks of the quarter,’ a surprising announcement that led to a round of analyst downgrades. Major chemical manufacturers also cut their outlooks, with Eastman noting demand has slowed more than expected in Aug and Sep amid higher costs, while Huntsman was impacted by high energy costs in Europe and Dow noted continued logistics constraints. Metals names also gave some preliminary quarterly outlooks, with both Steel Dynamics and Nucor seeing considerably lower steel operations profits.
- Bank CEOs opined on a wide variety of subjects at several investor conferences this week, with American Express saying they feel 'even better' about their multi-year outlook and JPMorgan adding they see this quarter shaping up to be a solid one for their markets business. Bank of America said their data shows consumer spending rose 10% in Aug, though Citi said it has begun to see a slowdown in global growth amid a shift from goods. A slew of diverse business from Uber to Microship to AT&T also spoke positively about the current business environment.

SUN 9/11
(UR) Ukraine army chief Zaluzhniy: In the Kharkiv direction, our forces began to advance not only to the south and east, but also to the north; Ukrainian forces are 50 kilometers away from reaching the state border with Russia
(EU) ECB governors reportedly see rising risk that they will have to raise key interest rate to 2% to curb inflation; Some members prepare for restrictive policy - press
(DE) ECB's Nagel (Germany, hawk): ECB will need to take more clear steps on rates if inflation doesn't ease; Inflation may peak above 10% in Dec 2022 and may stay above 6% in 2023
(US) Expected that the US will expand the restrictions of semiconductor chip sales to China for chips used in AI and Chipmaking
(EU) EU's Sefcovic: EU has offered to reduce border controls on Northern Ireland; Hope new UK PM Truss ready to do a deal on post-Brexit trade arrangements in Northern Ireland - FT

MON 9/12
*(UK) JULY MONTHLY GDP M/M: 0.2% V 0.3%E; GDP 3M/3M: 0.0% V 0.1%E
ELUXB.SE Initiates a cost reduction program on the back of weaker-than-expected market demand and weak earnings in Q3; Market demand for core appliances in Europe and the US so far decreased at a significantly accelerated pace q/q
(UR) Ukraine Presidential Advisor Arestovich: Ukrainian counteroffensive operation continues not only in the East, but also in the Kherson region in the South; The myth of the invincibility of the Russian army is broken
(US) Reportedly US freight railway workers halting shipment of some cargo to gain leverage ahead of this week's deadline to negotiate labor agreements - press
(DE) German IFO Institute raises 2022 CPI forecast from 6.8% range to 8.1% (consecutive raise); Now sees recession in 2023; Assumes that there will be sufficient gas available in winter; Energy prices should start falling again from spring 2023 at the latest
(US) NY Fed Survey of Consumer Expectations: August one year ahead expected inflation 5.7% v 6.2% m/m
(US) USDA World Agricultural Supply and Demand Estimates (WASDE) Crop Report; End 2022/2023 US Stocks Soybeans: 200M bu v 240Me bu
AXP Exec: We feel 'even better' about our multi-year outlook we provided back in January - Barclays conf
NXPI Exec: Since our earnings call we have NOT seen any real change in our overall business trends - GS conf
BAC CEO: Seeing consumer spending up 10% in Aug, continues to spend - Barclays conf comments
ORCL Reports Q1 $1.03 v $1.07e, Rev $11.4B v $11.5Be
(JP) Japan Aug PPI (CGPI) M/M: 0.2% v 0.3%e; Y/Y: 9.0% v 8.6%e

TUES 9/13
(DE) German Chancellor Scholz: By end-2023, Germany will be able to import all the gas that we need using LNG terminals; Power-price cap to be implemented with great speed; Also looking at introducing cap on gas prices
(EU) Daily 3-month Euribor Fixing: 1.000% v 0.988% prior (highest since Feb 2012)
(CN) China July smartphone shipments at 19.1M -31.2% y/y v +9.1% prior; YTD smartphone shipments 152.9M -23% y/y - CAICT
EMN Cuts Q3 Adj ~$2.00 v $2.60e (prior EPS 'solid growth' v $2.46 y/y), as demand has slowed more than expected in Aug and Sep as well as higher than expected costs
CNM Reports Q2 $0.67 v $0.53e, Rev $1.86B v $1.72Be; Raises FY22 outlook
(LT) ECB's Simkus (Lithuania): See at least a 50bps rate increase in Oct; Terminal rate not important at this point
*(US) AUG CPI M/M: +0.1% V -0.1%E; Y/Y: 8.3% V 8.1%E (annual pace matches higher end of analysts' expectations, but records second straight decline)
(US) Atlanta Fed Aug Sticky-CPI annualized 7.7% v 5.4% m/m, core 7.5% v 5.2% m/m
JPM Exec: Q3 shaping up to be a solid quarter for markets business, Expects Q3 trading revenue up 5% - Barclays conf comments
(TW) Reportedly US is in early stage talks on sanctions aimed at deterring China from invading Taiwan; Taiwan is pushing EU to prepare potential sanctions package against China - press
C Exec: Starting to see slowdown in global economic growth; Inflation has caused consumer demand to shift from goods
SBUX Raises targets for FY23-'25 adj EPS growth to +15-20% (prior: +10-12%) - investor day

WEDS 9/14
*(UK) AUG CPI M/M: 0.5% V 0.6%E; Y/Y: 9.9% V 10.0%E (13th month above target but moves off recent 40-year highs)
(EU) EU Commission Von der Leyen: Targets €140B from windfall taxes on energy companies; Energy market is not functioning anymore, have to decouple gas and electricity prices; Having discussions on price caps; Russia sanctions are here to stay - State of the Union address
IEA Monthly Oil Report (OMR); US poised to replace Russia as Europe’s top crude supplier; Trims oil demand forecast amid China lockdowns and slowing growth in OECD countries
JNJ Affirms FY22 outlook; Announces $5B share buyback (1.2% of market cap)
ASH Affirms FY22 outlook; Notes robust demand continues in Q4 as financial result in July and Aug above expectations; SEP order book strong; Targets FY26 Rev >$3.2B, EBITDA $900M - investor slides
NUE Cuts Q3 $6.30-6.40 v $7.97e (prior to decrease q/q), due to considerably lower steel mills earnings q/q
TD Exec: Expect some moderation in loan growth - Barclays investor conf comments
WMT Walmart-backed fintech co to begin offering banking for shoppers and employees - press
*(US) AUG PPI FINAL DEMAND M/M: -0.1% V -0.1%E; Y/Y: 8.7% V 8.8%E (second straight negative M/M print and decline in annual pace)
DOW Cuts Q3 Rev ~$600M lower, implies $13.7-14.2B v $14.2Be (prior $14.3-14.8B) - conf comments
MRNA Moderna open to supplying COVID vaccines to China after holding talks - press citing CEO
(US) FDA and NIH Launch Public-Private Partnership for Rare Neurodegenerative Diseases; Partnership is a key component of FDA's Action Plan announced in June
(CN) Some major China State-run banks said to be cutting personal deposit rates beginning from Thurs, Sept 15th **Note: 1st such cut the since 2015) - Chinese press
(US) Association of American Railroads weekly rail traffic report for week ending Sep 10th: 464K total units, -0.9% y/y
ARNC Cuts FY22 outlook: Rev $9.2-9.5B v $9.74Be (prior $9.6-10B); reflects the impact of operational issues and the combination of demand declines and higher unhedged energy costs in Europe
(CN) Senate Foreign Relations Committee approves Taiwan legislation - press

THURS 9/15
HMB.SE Reports Q3 (SEK) Rev 57.5B v 58.1Be; Notes Q3 got off to a weak start, better start for autumn collections than last year
US consumer watchdog CFPB plans to regulate 'buy-now, pay-later' companies; Notes already seeing deterioration in credit performance on BNPL loans - press
ADBE Reports Q3 $3.40 v $3.33e, Rev $4.43B v $4.43Be
ADBE Confirms to acquire Figma for $20B in nearly half cash-half stock deal; To grant 6M additional restricted stock units to Figma; Cash part to be financed through cash on hand and, if necessary, a term loan
*(US) SEPT EMPIRE MANUFACTURING: -1.5 V -12.9E; New Orders: +3.7 v -29.6 prior; Notes sharp rebound also in shipments
STLD Reports prelim Q3 adj $5.33-5.37* v $4.86e, earnings significantly lower than Q2 due to lower flat rolled steel ops earnings
(US) Atlanta Fed GDPNow: Cuts Q3 GDP to 0.5% from 1.3% prior
SMG CEO: Sees more job cuts as business activity slows and cash is dwindling - press
(US) Los Angleles Port Chief Gene Seroka: Port imports fall 12% to ~404K units y/y
(US) FTC announces it plans to target 'unfair competition that harms gig workers'
FDX Cuts Q1 $3.44 v $5.06e, Rev $23.2B v $23.7Be; Withdraws FY earnings outlook, amid 'global volume softness that accelerated in the final weeks of the quarter'
NCR To Separate Into Two Independent, Industry-leading Companies (**Reminder: had been in PE talks with Veritas but financing was said to be an issue)
*(CN) CHINA AUG RETAIL SALES Y/Y: 5.4% V 3.2%E; YTD Y/Y: 0.5% V 0.2%E

FRI 9/16
ROSN.RU (DE) Germany Econ Ministry announces Rosneft's German refinery unit and its owned oil refineries is now under trusteeship of Federal Network Agency
(EU) EU27 Aug New Car Registrations: +4.4% v -10.4% prior (1st increase in 14 months)
*(UK) AUG RETAIL SALES (EX-AUTO/FUEL) M/M: -1.6% V -0.7%E; Y/Y: -5.0% V -3.5%E
(CN) China Foreign Ministry spokesperson Mao: China will impose sanctions on Raytheon's CEO and Chairman Gregory Haye and Boeing Defense, Space & Security President and CEO Ted Colbert; China opposes US arms sales to Taiwan and urges US to stop; It violates 'One China' principle
(DE) ECB's Nagel (Germany, hawk): ECB will continue to raise rates to tame inflation
(IQ) Oil exports from Iraq's Basra port reportedly halted due to spill; Spill reportedly is 'huge' and could take over a week to contain - press