Happy Sunday! We've got a somewhat less busy week ahead of us than last week, but still plenty of moving parts to keep an eye on. But first, let's talk about what just happened!
We had a cooler than expected CPI reading on lucky Tuesday the 13th, which led to a pre-market pop that quickly faded leading into Fednesday, where the FOMC statement and press conference were more hawkish than the market anticipated.
Retail sales came in on Thursday weaker than forecasted, but jobless claims were also lower, illustrating that the labor market remains rather tight while consumers are stepping back a bit.
We also had the ECB and Bank of England policy decisions on Thursday. Then on Friday we had a triple witching OpEx with $4.2T of notional exposure rolling off, making for a rather volatile day.
The resulting tumult had equity markets falling last week, led by the high beta NASDAQ index, which shed 2.7%. Oil on the other hand was bid up 4.6%, but remains close to flat year-to-date after a rather volatile 2022.
Bonds seemed to see a bit of a flight to safety bid for part of the week, and managed to stay positive, closing the up 0.6%. The positive correlation between bonds and stocks seems to be breaking, at least in the short-term. That could be set to continue as end of quarter rebalancing is likely to favor selling stocks and buying bonds.
The S&P 500 was rejected at key areas, including the descending upper trend line from the beginning of the year, the 200-day and then 50-day moving average, as well as the key psychological 3900 level.
Across the S&P 500 we saw broad distributive pressure, except for the energy sector which closed green on the week. Tesla shares showed noteworthy weakness, losing 13.58% on the week as investors become more nervous about Musk's management, lackluster sales in China, and a low order backlog.
The Fed raised rates by 50 bps on Wednesday, along with the Bank of England and ECB on Thursday. The Fed and ECB seemed to be more hawkish than markets anticipated, which led to further declines across US and European equities. The European central bank plans to start their QT program in March at a rate of 15 billion euros per month, drawing down their 5.3 trillion euro balance sheet.
We also saw rates surge across the Eurozone, as bond markets repriced the ECB's willingness to stay in a tightening posture despite a rather weak economic backdrop.
On Thursday we also saw retail sales slump, with general merchandise not seeing the sort of pickup in demand that retailers were hoping for over the holidays. Many of whom have inventories of the same that they were hoping to sell down with more aggressive pricing. Perhaps we'll see some more significant holiday sales in the week ahead.
Either way, consumers are largely spending on what they need, rather than what they desire. A sign that many are not confident in the economy nor do they have the budgetary elasticity to splurge on non-essentials.
The week ahead is heavy with housing data, and Friday caps off the week with the Fed's favorite flavor of inflation econometric data: PCE. Delicious!
I expect that we may continue to see signs of weakness in the residential real estate market. Mortgage rates are still quite high and home buyer sentiment remains near historic lows. Home builders are showing signs of significant slowdowns in new orders and their backlog of orders both falling by about 20%. All of this points to a rather rough ride for the industry next year in my view.
Friday's PCE data will be critical, as not only does the Fed watch this data set closely, but it is also a more accurate reflection of the inflation situation in my opinion. The Cleveland Fed Nowcast expects headline PCE to come in at 5.52% year-on-year and 0.14% month-on-month, with core coming in at 4.72% year-on-year and 0.26% month-on-month.
I imagine we'll probably see a strong reaction from the market with any cooler or hotter than expected data. What was interesting last week was that even though CPI seemed encouraging, the market sold down the whole pre-market rally. Some of which started even before the data was released to the public...
A rather light week in the Treasury auction market, with just $12B of 20-year bonds, and $19B of 5-year TIPS being sold.
After a rather disappointing 10-year note and 30-year bond auction last week, I will be watching the 20-year bond auction for signs of a continuing lack of appetite for US sovereign duration.
Earnings will also be relatively light in the week ahead, though there are some majors reporting, like FDX, GIS, MU, NKE, and RAD.
Earnings highlights to look for next week from Bloomberg:
Monday: Heico Corp (HEI US) may report its second consecutive quarter of record revenue, based on consensus estimates, as the aerospace parts manufacturer continues to benefit from increased demand for its commercial products amid rebounding airline demand. Increased travel, coupled with supply-chain issues constraining deliveries of new jets from Airbus SE and Boeing Co., has led to more upkeep on fleets, according to Bloomberg Intelligence. American Airlines and United Airlines, which account for around 10% of Heico’s revenue, according to Bloomberg’s supply chain analysis, reported record-high maintenance materials expenses in the third quarter as passenger volumes continued to recover. Analysts expect Heico to grow earnings per share by around 12% from a year ago to about $0.70, its highest since the first quarter of 2020. Heico’s fourth-quarter results are due after the close.
Tuesday: Nike Inc. (NKE US), reporting after the bell, is projected to report a second quarter of shrinking profits, with consensus calling for a drop of about 19% year-over-year, nearly matching last quarter’s decline, and gross margin is also expected to contract for the third period in a row. The company’s results may be hit by ongoing weakness in its Chinese operations and escalated promotions due to excess inventory, according to Bloomberg Intelligence. China comprised about 13% of Nike’s sales in the first fiscal quarter of 2022, with footwear contributing $1.2 billion of the company’s $1.66 billion Greater China revenue. Though apparel sales fell in November,“footwear was the one bright spot,” BI said. Analysts will be listening for commentary on China, early holiday reads and consumer sentiment, as US retail sales fell the most in nearly a year in November despite some of the biggest shopping days of the year.
FedEx Corp (FDX US) has taken decisive action to help reign in costs in the face of waning delivery demand, moving to furlough some its freight workers and park a portion of its jet fleet in response to the slowdown. Having already withdrawn its full year outlook, the probability that the courier issues weak third-quarter guidance is “elevated”, said Citi analysts, due to the deteriorating macro and seasonal trends. The cost saving moves come as part of the recently appointed CEO’s plan to cut up to $2.7 billion in the current fiscal year, which will also include deferred projects and office closures. FedEx expects to save $700 million in its fiscal second quarter as part of the initiative. Despite the cost cutting measures, operating expenses are seen climbing by around 3% year-over-year to $22.4 billion, slightly less then record levels two quarters ago. Analysts expect the courier’s EPS to fall by around 42% from a year ago to about $2.81, the lowest level since the Covid-19 pandemic began. FedEx’s second quarter results are due after the bell.
ESG in Focus: General Mills (GIS US), expected to report its second-quarter results premarket, is increasingly looking to fortify its supply chain through investments in regenerative agriculture initiatives and partnerships. Already this year, the company committed $5.3 million to scale programs that track the farms’ environmental and help accelerate their transition to regenerative practices. Around 60% of the company’s carbon emissions come from agriculture, and regenerative farming is central to its goal of achieving carbon-neutral operations by 2050. General Mills expects to have 350,000 acres of regenerative agriculture within its supply chain by the end of the year, the company said during its fourth quarter earnings call, with the aim to enroll 1 million acres by 2030. There may also be a marketing opportunity to growing greener for the company, with its Annie’s brand touting, “This mac helps protect our planet,” on limited edition boxes of its mac & cheese that contained pasta made with ingredients grown using regenerative practices.
Wednesday: Micron Technology (MU US), due to give first-quarter results postmarket, may report its first loss-per-share since fiscal 2016, with consensus calling for a plummet of about 100% year-over-year. The company announced production cuts last month, adding that it is planning additional capital spending cuts, due to its weaker outlook for 2023. The reduction may help the chipmaker regain its balance, but not without pressuring revenue and profitability, according to Bloomberg Intelligence. The move suggests that the company has limited visibility into demand, and it may provide more downward earnings revisions.
Thursday: CarMax Inc. (KMX US), expected to report its lowest EPS and revenue in more than a year, could be hit by dampening demand for used vehicles, according to Bloomberg Intelligence. Used-car prices fell again last month amid rising interest rates, and car dealers are contending with dropping profits and rising inventories. “A dramatic loss in auto leasing” could cause CarMax to lose $3.7 billion in sales through 2025 “from a decline in off-lease returns funneled to the pre-owned pool.” The market may also look for comment from the company’s new COO, who was appointed last month.
2022 has been a year full of ups and downs, but the most recent iteration of face ripping bear market rallies appears to be experiencing a rather unceremonious end. I suspect that the path of least resistance from here is lower, and while we may see some pops along the way down, I do feel that the rejections we've seen of late are meaningful and should be noted.