Updated: Nov 14, 2022
Happy Sunday, friends! We have a busy week of data and earnings, with plenty of Fed speakers interspersed into the mix. On top of all that we have volatility product and options expiration!
We saw an impressive rally in many S&P 500 components, and particularly some of the mega cap technology stocks with MSFT leading the way, up 11.62% and on the other side TSLA sliding 5.54%.
Cooler than expected CPI data encouraged a powerful upward move from Thursday on and weaker than expected University of Michigan Consumer Sentiment led to a continuation of the rally through the familiar "bad news is good news" theme.
In the more defensive areas of the market, like the healthcare sector, there was some downward pressure in drug manufacturers and healthcare providers. The aerospace sector also saw some pressure to the downside in packaged consumer staples.
High beta outperformed low volatility by 9.62% last week, showing a ferocious appetite for riskier stocks. In particular, some of the lowest quality components of the market, from unprofitable tech to the most shorted stocks (and everything in-between) was well bid.
Several key commodities and and equity indices showed impressive strength last week, led by palladium, cocoa, the NASDAQ, copper, DAX, gold, and the S&P 500. Heating oil, natural gas, 30-day S&P 500 implied volatility, and orange juice fell the most.
We also saw curiously strong performance from the Japanese yen and Swiss franc. Whether that continues or if this is presenting an opportunity in each currency to fade these moves remains to be seen.
The week ahead promises key economic data, as well as a litany of Fed speakers, in case you missed the never ending parade of central bankers giving us their views on all things finance and economics.
Tuesday brings us PPI, which is a key measure of inflation at the producer level. We may see some of the commodity price appreciation bleed through that occurred during October in energy.
Last month's reading saw increases in foods, energy, and trade, with a small drop in transportation and warehousing. If PPI comes in hotter than expected it signals that there's potential for more cost push inflationary pressure that would likely be seen in CPI and PCE within the next reading or two.
Retail sales comes out on Wednesday, and it will be important to watch to see what consumers are spending or not spending on. The last reading showed some interest returning in general merchandise ahead of the holiday shopping season, which is a promising sign as many retailers have an inventory glut they are trying to work through.
We also saw the interest in autos level off in September's reading after a surge in August. It's likely this weakness may continue in new car sales, but used car sales may see some interest as consumers try to save money with prices falling for pre-owned vehicles.
When adjusted for inflation retail sales have been flat to down since May of 2021, meaning that most have been spending more to get the same as they were previously. This is important as nominal retail sales measures during a period of high inflation become less meaningful.
We will get building permits and housing starts data on Thursday, which are both important metrics for the housing sector. Up until October building permits had been falling ever since they peaked in February of 2022 at 1.9M. The October reading brought an upside surprise print of 1.56M after September's lower than expected print of 1.52M. November's data will be important to watch to see if the downward trend in building permits has abated. But if it has that is likely to be only temporary.
Housing starts are a key metric for the home building industry, and they have been seeing some downward pressure since April of 2022, falling from a reading of 1.79M to 1.44M in October. It's likely that this downward trend in housing starts continues as home builders slow their pace of development with demand sinking. Rising rates and consumers facing high inflation are both limiting the appetite for home purchases.
Friday brings us existing home sales, which have been falling since February of 2022 from 6.5M to the last reading of 4.71M in October of 2022. The forecast is for 4.37M homes sold. Further weakness here below the forecast could put pressure on home builder stocks.
We have a light week of auctions ahead of us, with just a $15B 20-year bond and $15B 10-year TIPS sale scheduled on Wednesday and then Thursday respectively.
With a light week of auctions the Treasury market will be keying off the day-to-day signals from macro data and flows of funds in and out of debt markets.
The week ahead brings us a lot of important earnings that are worth watching in a variety of sectors, from technology to staples, retail, and energy.
Earnings highlights to look for next week from Bloomberg:
Monday: Tyson Foods (TSN US) is due premarket. The biggest US meat company by revenue is projected to see single-digit improvement in volume for most segments, with chicken, beef and international sales seen growing. The upbeat consensus on volume differs from the note of caution sounded by the owner of Ball Park hot dogs in August over shrinking export demand and tight live-hog inventories, Bloomberg Intelligence wrote. That said, adjusted EPS for the fiscal fourth quarter could fall by 26% due to soaring costs, they added. Newly appointed CFO John R. Tyson — recently in the news after an arrest for public intoxication — may address the earnings call, where management could expect questions from investors over capacity utilization and the impact from the bird flu.
Tuesday: Walmart (WMT US) releasing its third-quarter results before the bell, is projected to benefit from a strong back-to-school season and a consumer shift to value amid rising costs, per Bloomberg Intelligence. Still, inflation is causing a shift in the mix of sales and margins as customers spend more on food and less on discretionary items. The company’s inventory will be of note, as it tried to sell-through excess stock and minimize markdown risk ahead of the holiday season. Generally, retail sales fell in October, as more promotions from inventory-laden sellers led to falling net sales despite increased traffic. Still, Walmart, along with peer Target (TGT US) due to report on Wednesday, saw October non-cash sales that were up year-over-year, aided by the flight to value.
Home Depot (HD US) is due before the bell, and is expected to report resilient same-store sales growth for the third quarter, with consensus calling for around 3%, due to increasing retail sales at home centers, according to Bloomberg Intelligence. The growth could be supported by higher prices, partly due to inflation, which would offset a sixth quarter of declines in the number of transactions. Still, though Home Depot’s exposure to professional customers will help it outperform peer Lowe’s (LOW US), which reports its own results Wednesday, overall industry demand is expected to fall through the end of the year and into 2023 given the housing market decline amid rising mortgage rates.
Wednesday: Nvidia (NVDA US) results are due after the closing bell, and the most valuable chipmaker in the US is expected to deliver year-over-year drops in both revenue and earnings for the first time in two years. Its gaming segment may take the biggest hit as economic conditions continues to weigh on demand which could call for cuts to guidance, according to Bloomberg Intelligence. Investors will look for commentary about the company’s elevated exposure to China, where it originates about 25% of sales, after the Biden administration expanded restrictions on semiconductor sales to the country last month. Earlier this week, Nvidia announced it began the production of a new chip that is said to conform to the new export rules, hoping to recover revenue put at risk by government action. The company has lost almost half its value this year, following three straight years of gains in the stock market.
ESG in focus: The chipmaker’s advances in “green computing,” the practice of limiting the environmental impact of computer chips, has the potential to help address energy usage concerns at data centers, as data traffic continues to increase. Nvidia estimates that companies could save as much as 19 terawatt-hours of electricity a year, equivalent to taking 2.9 million cars off the roads for a year, if artificial intelligence and high performance computing were run on its more efficient chips. Read more in this week’s ESG Stock Watch.
Thursday: Gap (GPS US) reports after the closing bell. Investors will seek signs of earnings growth after the owner of Old Navy and Banana Republic brands pulled its full-year guidance and ended its partnership with Kayne West and his Yeezy Gap label. Bloomberg consensus is calling for adjusted EPS of $0.01 for the third quarter, down 83% from last quarter’s surprise profit. The apparel retailer’s turnaround, which includes an ongoing CEO search, the axing of 500 corporate jobs and an impairment charge to address inventory glut, will take several quarters to complete, according to analysts at Argus Research.
Alibaba (BABA US) is due before the opening bell. The Chinese e-commerce behemoth could report its first year-on-year expansion in adjusted Ebita margin since 2019, thanks to narrower losses expected at its online food delivery platform Ele.me and its Southeast Asian arm Lazada, Bloomberg Intelligence wrote. Yet, marring the Singles’ Day shopping event wrapping up this week, China’s Covid-Zero policy could also force Alibaba to focus on boosting profits rather than top-line growth. In the upcoming fiscal second-quarter report, Wall Street analysts are expecting sales to grow by 4.3% — down from the 29% gain seen in the same period last year — mirroring revenue concerns raised by JPMorgan when they cut the price target in September.
Friday: JD.com (JD US) reports before the market open. Third-quarter results from China’s second-largest online retailer will come on the heels of the Singles’ Day shopping spree and peer Alibaba’s earnings, with Bloomberg consensus projecting the highest gross margin in two years. Improved product mix and platform fees could compensate for higher fulfillment expenses stemming from the country’s mobility curbs, Bloomberg Intelligence wrote. Nevertheless, BI also pointed out that potentially weaker business sentiment in China could drag down service revenue contribution in the current quarter.
Wednesday brings us VIXperation or volatility products expiration, and Friday will be options expiration for the month of November.
These can be volatility catalysts, especially given that we've seen a lot of wild action in the options market in the last several weeks. What will be most interesting is how we see single stock and index skew take shape afterward.
Whether or not we still see significant skew toward puts on single stocks will give us a sense as to the collective mood of smaller traders. If the skew toward puts in single stocks continues it may suggest that there's still a reasonable level of fear.
On the other side, index skew, which has been falling more and more this year, will be interesting to monitor to see whether or not hedging activities from larger traders and institutions resumes. So far those hedges haven't worked well so they've not been as popular as the year goes on.
The reaction to CPI and UoM Consumer Sentiment may have been a bit on the extreme side. The Fed is still likely to hike 50 bps in December, remarking recently that they were less sensitive to near-term inflation data. The market was looking for a reason to rally as put concentration and short positioning in some parts of the market had become extremely high.
With that relief out of the way and likelihood that the dollar begins to firm up again along with rates, we may see some level of consolidation or selling pressure return with any negative event catalyst, such as stronger than expected economic data, a very bad earnings report or guidance from a key company, or options expiration and how the market trades through it.
The week ahead is likely to bring us more volatility, particularly as we approach options expiration. As always during weeks like these I try to manage my risk carefully as I expected wider price ranges and more erratic movements in the markets.