US EARLY MORNING: Equity futures are lower as traders focus on earnings; MSFT outlook disappoints, weighing on NDX

SNAPSHOT:

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  OVERNIGHT: After a mixed performance on Wall Street Tuesday, MSFT reported after the bell, and was initially buoyed but eventually slumped after it later issued guidance on call. Asia-Pac stocks traded mixed as the region digested firmer-than-expected CPI data from Australia. European equities started out on a flat footing with traders focussed on corporate earnings; and are currently trading a little south of neutral.


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  US PREMARKETS: Equity futures are lower, with the tech-heavy Nasdaq-100 leading the losses following soft guidance from Microsoft (MSFT); the tech sector will also note some of the cautious commentary from Dutch semiconductor ASML Holdings (ASML), while Texas Instruments’ outlook was also soft. Traders will continue to focus on earnings, with today’s docket packed, and includes updates from AT&T (T), Tesla (TSLA), IBM (IBM) and Abbott (ABT) – we go through the major talking points below. Treasury yields are at session lows, lower by 1-3bps across the curve, with the long-end outperforming; Tuesday’s auction of 2s was well received, and there will be attention on how the 5s auction performs later today. Desks have noted that the Treasury index extension for month-end is +0.08 years, in line with recent averages. The Dollar Index is around flat, but currently above 102.00. Oil benchmarks are lower after the API reported a larger-than-expected build for headline crude stocks; DoE data is due later today.


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  DATA RELEASED: Overnight, Australian CPI rose 7.8% in Q4 (exp. 7.5%, prev. 7.3%), the highest since 1990; the December data saw a rise to 8.4% Y/Y (exp. 7.6%, prev. 7.3%). Westpac said hospitality services were the most important factor in the upside surprise, but with the Trimmed Mean broadly as expected, which suggests the pace of core inflation is generally unfolding as it expected. In Europe, UK PPI output prices eased to 14.7% Y/Y in December (prev. revised to 17.5%), while the core measure pared to 12.4% Y/Y in the month (prev. 13.3%); a Reuters poll Tuesday revealed analysts expect the BoE will lift the Bank Rate by 50bps next week, with rates expected to peak at 4.25%. From Germany, Ifo reported business morale picked-up in January, with the Business Climate index at 90.2 from 88.6 (in line with expectations); Current Conditions missed expectations at 94.1 from 94.4 (exp. 95.0), although the forward-looking expectations measure rose by more than expected to 86.4 from 83.2 (exp. 85.0); Ifo warned that GDP will likely shrink in Q1 due to consumption, but does not think there will be a recession in Germany.

DAY AHEAD:

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  US DATA: Weekly MBA Mortgage Applications data is due; last week, mortgage application activity rebounded strongly in the first full week of January, with both refinances and purchases activity increasing by double-digit percentages W/W, which included the New Year’s holiday observance, MBA’s Chief Economist said, but added that despite the gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels.


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  BOC PREVIEW (15:00GMT/10:00EST): The BoC is expected to lift rates by 25bps, potentially the last rate rise of the cycle, taking its policy interest rate to 4.50%. There will be eyes on the statement to see if the Bank explicitly signals an end of the hiking cycle, but it is expected to keep forward guidance unchanged after altering it in the December confab for the BoC to consider further hikes based on the data. There will also be an accompanying MPR with attention to inflation and growth forecasts, as well as the output gap. Note, this meeting will also see the BoC offer minutes from the meeting for the first time, which will be released on February 8th, although analysts do not expect the minutes to reveal too much. Full Newsquawk preview can be accessed here.


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  AUCTIONS: The US will auction 5yr notes following another solid 2yr auction on Tuesday, which continued the trend of no tails and strong primary market demand; Treasury auction history can be obtained in Monday’s G7 bonds preview here.


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  ENERGY INVENTORIES: Weekly DoE energy inventory data is due; after hours on Tuesday, the API reported crude stocks +3.4mln (exp. +1.0mln), Cushing +3.9mln, gasoline inventories +0.6mln (exp. +1.8mln), while stocks of distillates -1.9mln (exp. -1.1mln).


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  EARNINGS: Today’s major US corporate earnings will come from ELV, T, ADP, ABT, BA, NEE, TSLA, and IBM) - see below for the major themes to watch as these earnings are published. (see here for estimates).


• Our full day ahead calendar can be accessed here. Our full daily earnings estimate sheet can be accessed here.

TALKING POINTS FOR TODAY’S MAJOR US EARNINGS:

• Our full sheet of earnings expectations can be accessed here.


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  ABT: From the Medical Device companies, RBC notes: (1) expectations that Q4 seasonality and FX reversals will support EPS, even though the bank believes that there were some transitory items to consider (like China, the COVID and flu season, as well as staffing) that likely offers an opportunity to buy quality names; (2) RBC expects the puts and takes around 2023 guidance to drive these stocks, but notes that it expects initial outlook to be conservative with typical wide ranges; (3) RBC continues to like the overall set up for medical devices for the FY, supported by its survey work, as it expects macro pressures to continue to ease (inflation, supply, staffing) which should help continued procedure volume recovery and growth, easing margin pressures and expansion Y/Y.


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  BA: Analysts at Benchmark said that the current environment, where passenger air traffic continues to outpace expectations, along with a constrained but improving supply chain, benefits BA’s Free cash flow profile. “BA’s ability to deliver built but undelivered 737-MAX’s and 787’s provides a smoothing FCF effect while supply chains recover,” it says, adding that “the pending Air India order is also likely to include parked 737-MAX’s designated for China; however, market dynamics dictate attractive re-sale values and upside FCF contribution to BA in our view.” The industrial giant’s defense group remains a risk point after 3Q 2022’s inflation and supply chain challenges, Benchmark says. The brokerage sees BA’s FCF outpacing expectations in the near-term, and provides a creditable road to BA’s target of USD 10bln in the 2025/2026 year.


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  ELV: Barclays says with the backdrop that we still expect 2023 Managed Care Organisation industry Medical Loss Ratios to be flat or slightly better vs 2022; the bank recently fine-tune some of its quarterly MLR projections for Q4 and Q1 to reflect the “Tripledemic” and early flu spike in Q4 that has now rapidly dissipated in Q1.


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  IBM: UBS says “We remain positive on the stock given a strong software portfolio (AI, security), ongoing mainframe refresh and improving currency environment.” The USD weakened throughout the quarter, and UBS’ analysis suggests that only around a 7 points impact on Q4 vs guidance of a 8-9 point hit; UBS notes that IBM hedges cash flow, not revenue, so the impact to its P&L is more significant than some other large multi-nationals. Demand trends will also be in focus; UBS expects demand held up well, with particular strength in its Hybrid Infrastructure and Business Transformation units, reflecting the sticky nature of these businesses and importance to digital transformation projects. Red Hat demand is likely to have remained firm driven by continued share gain and cross/up-sell opportunities, UBS says; the bank looks for macro weakness within the Consulting unit, but still expects stability. Finally, 2023 guidance will be eyed: “We think investors will be focused on IBM’s 2023 free cash flow guidance (we estimate USD 11bln), following the completion of Kyndryl-related payments,” UBS says, “we view IBM’s mid-term model of mid-single digit, constant currency revenue growth (2022-2024) as achievable given the company’s exposure to growth areas in software, shift in comp plans to target revenue growth and cash flow and increased focus on net new customer acquisition.”


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  NEE: The renewable energy company is expected to report a rise in quarterly revenues. There will be attention on cost levels; subsidiary Florida Power & Light has already proposed to recover costs associated with higher fuel prices and hurricane responses, and has said that the two hurricanes and higher natural gas prices are expected to impact customer bills. FPL said that fuel bills from 2022 already paid by FPL, but not yet recovered, would be spread over 21 months. Analysts will be looking out to see how much it sees cost lowered, and to what extent this provides any offset.


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  NOW: RBC says it is looking for “slight upside to constant currency results due to US enterprise and federal exposure while we believe FX could be a slight Q/Q tailwind since guidance was provided.” RBC Says investors will be eying the FY23 guidance, and believes NOW will likely guide in-line with consensus estimates, but notes that the year will be back-end loaded. “While IT spending patterns are likely to remain choppy in 2023, we think NOW has the ability to consolidate customer spend and drive margin improvements,” RBC adds.


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  NSC: Analysts will be focussed on guidance. Writing at the end of last year, UBS said “NSC provided a solid framework for multi-year financial performance including mid single digit revenue growth ex. fuel, high single digit operating income growth, and low double digit EPS growth,” but “management was not willing to provide expectations for 2023 which reflects limited visibility due to an inflation headwind and cyclical softness in a portion of their business.”


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  T: Credit Suisse said that AT&T has dramatically improved execution under CEO John Stankey, and increased investor comfort with operating momentum in wireless. CS says the key remains its 2023 FCF guide, adding that conversations it has had with investors suggests that expectations have dropped to a more reasonable USD 15-16bln range; CS says “that whether capex will actually drop off as guided in 2024, how much of a postpaid slowdown would come from AT&T’s growth pace, and the ability of investors to settle on a reliable valuation metric given management FCF misses capitalised interest, preferred dividends, wireless minority interest and includes low-quality DirecTV cash flow (including return of capital).”


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  TSLA: Tesla has been cutting prices, with its CEO stating that prices had become “embarrassingly high” and could hurt demand. WSJ reported that Tesla’s price cuts were drawing “mixed reactions from investors and Wall Street analysts, with some suggested the move was made in response to waning demand, while others viewed it as Tesla squeezing competitors by sacrificing some of its strong operating-profit margins—which are larger than most car companies—while also lowering prices enough to qualify many models for a USD 7,500 federal tax credit.” Analysts will be looking out for details on demand trends, particularly in China. Shares came under pressure after the automaker reported disappointing delivery data for Q4. “The major worry now overhead for Tesla is that the demand story especially out of China is showing heavy cracks in the armour at a time that EV competition is steadily increasing domestically with NIO, BYD, Xpeng, and others fighting for a smaller pie with the Chinese consumer weakening,” Wedbush writes, “with China representing 40%+ of the global growth story for Tesla, this is a heavy concern for the Street which will likely result in more significant price cuts over the coming months to spur demand as a potential pricing war takes place to gain market share in a darker macro backdrop.” Wedbush says that this leaves investors with more questions than answers on the Tesla story, particularly since global demand tilts into an uncertain direction this year.

EQUITY SPECIFIC NEWS:

TECH:

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  Microsoft Corp (MSFT) - After initially rising in afterhours trade, Microsoft eventually slumped after it gave a downbeat outlook amid signs of softer cloud demand amid client caution. Q2 adj. EPS 2.32 (exp. 2.30), Q2 revenue 52.70bln (exp. 52.99bln). Q2 Productivity and Business Processes revenue USD 17.00bln (exp. 16.81bln); Q2 Azure and other cloud revenue growth +31% driven by strong demand for consumption based services; Q2 Intelligent Cloud revenue USD 21.51bln (exp. 21.43bln); Q2 More Personal Computing revenue USD 14.24bln (exp. 14.74bln); Q2 Capital Expenditure USD 6.27bln (exp. 6.63bln); Q2 quarterly devices revenue -39%, driven by continued PC market weakness, execution challenges on new product launches; Q2 Xbox hardware revenue -13%. Microsoft (MSFT) sees Q3 productivity and business processes rev. USD 16.9bln-17.2bln (exp. 16.9bln), sees more personal computing rev. USD 11.9bln-12.3bln (exp. 13.5bln), sees intelligent cloud rev. 21.7bln-22.0bln (exp. 22.1bln). Sees Q3 cost of revenue COGS USD 17.4bln-17.6bln (exp. 16.8bln), Q3 oper. expenses between USD 14.7bln-14.8bln. Sees a decrease in Q3 total revenue growth by about 3 points due to FX impact. FY operating margins expected to decrease around 2% Y/Y excluding Q2 charge and favourable impact from change in accounting method. Growth is to slow in commercial business for the rest of the FY. Continues to aim for fiscal year 2023 closure of Activision (ATVI) deal subject to regulatory approval.


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  ASML Holding N.V. (ASML) - The Dutch semiconductor company reported better-than-expected earnings in Q4, and expects revenue growth of 25% in 2023. Q4 revenue EUR 6.43bln (exp. 6.38bln), Q4 net EUR 4.29bln (exp. 4.25bln). Said Q4 gross margin of 51.5% was above guidance due to additional upgrades and insurance settlement for last year's ASML Berlin fire. CEO noted lower demand in some areas, as inventory for chips increases. The semiconductor continues to see uncertainty in the market caused by inflation, rising interest rates, risk of recession and geopolitical developments related to export controls, but added that its customers have indicated that they expect the market to rebound in H2. Sees Q1 net sales between EUR 6.1-6.5bln (exp. 6.07bln). Intends to declare a total dividend for the year 2022 of EUR 5.80/shr (+5.5% vs 2021).


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  Texas Instruments Inc (TXN) - Results for Q4 were above expectations, although its guidance disappointed investors. Q4 EPS 2.13 (exp. 1.98), Q4 revenue 4.67bln (exp. 4.62bln). Exec said Q4 results reflect weaker demand in all end markets with the exception of automotive. Sees Q1 revenue view between 4.17-4.53bln (exp. 4.41bln), and sees Q1 EPS between 1.64-1.90 (exp. 1.86).


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  Alphabet Inc. (GOOG) - DoJ and states filed a lawsuit against Google alleging the search and advertising behemoth illegally monopolised the market for online ads through a years-long practice of self-dealing, anticompetitive acquisitions, and forcing businesses to use multiple products and services that it offers, Politico reported, confirming earlier reports in the week. The report added that the lawsuit could lead to a breakup of Google’s massive advertising business, even though any resolution is likely years away. In a note, Credit Suisse's analysts said that in a "maximum value destruction scenario", where the contribution from Google's display business is completely eliminated, Alphabet's PT of USD 128 could be slashed by 8%, although in the event that Google had to divest the display advertising business, shareholders would be compensated for the loss in FCF, and accordingly, the actual potential value destruction would be much less than 8%.


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  F5 Networks, Inc. (FFIV) - Q1 EPS 2.47 (exp. 2.33), Q1 revenue USD 700.4mln (exp. 700.7mln). CEO said customers were minimising their spend and optimising their existing investments. Sees Q2 EPS between 2.36-2.48 (exp. 2.50), and sees Q2 revenue between USD 690-710mln (exp. 705.1mln). Reiterates sees FY23 revenue growth between 9-11% (exp. USD 2.95bln), though it said the mix may look different than what it expected three months ago.


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  Vacasa, Inc. (VCSA) - Announced a workforce reduction of around 1,300 jobs (17% of its workforce), according to a filing. VCSA reiterated its previously issued Q4 revenue and adj. EBITDA guidance, and reiterated that it was seeking to strike a balance between growth and profitability, closely managing its discretionary investments.


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  Logitech International S.A. (LOGI) - After announcing disappointing quarterly results this week, CEO told CNBC that it was still optimistic about the hardware company's overall strategy. Noted LOGI saw a pullback in B2B business in Q3, and customers cut spending levels, but he expects a bounce back when hybrid work setups expand. Elsewhere, he said consumers were purchasing more during promotions than usual. Added that the G Cloud launch remains on track.

INDUSTRIALS:

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  Canadian National Railway Company (CNI) - Q4 EPS CAD 2.10 (exp. 2.08), Q4 revenue CAD 4.54bln (exp. 4.48bln). Raises quarterly dividend +8% to 0.79/shr, and announced a programme to buy back 32mln shares over 12 months (approx. CAD 3,968,640,000). Ahead, it expects EPS growth of 1-3% (exp. +8.2%) driven by a softer economic outlook.


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  Nikola Corporation (NKLA) - Nikola and Fortescue Future Industries executed an MOU to collaborate on and evaluate the co-development of large-scale US green hydrogen production facilities.


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  Norfolk Southern (NSC) - Raises quarterly dividend +9% to USD 1.35/shr (prev. 1.24).

CONSUMER:

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  Walmart Inc. (WMT) - America's largest private employer will raise average hourly wages for US store workers starting next month, as it seeks to attract and retain employees in a tight domestic labour market, Reuters reports. WMT will lift average hourly wages to USD 17.50/hr from the current USD 17/hr, and its minimum wage will rise by as much as USD 2/hr for staff at its US stores to a range of USD 14-19/hr, depending on location. 340,000 workers at about 3,000 stores will be eligible, the report added.


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  Tesla, Inc. (TSLA) - The automaker said that it is continuing investment in Nevada and will build two new factories, investing more than USD 3.6bln, adding 3,000 new team members.

COMMUNICATIONS:

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  News Corp (NWSA), Fox (FOXA) - News Corp received a letter from Rupert Murdoch withdrawing the proposal to explore a potential merger with Fox; Murdoch said the plan was "not optimal for shareholders of News Corp and FOX at this time," BBC reported. The Murdoch family owns about 40% of both companies.


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  News Corp (NWSA), CoStar Group, Inc. (CSGP) - Separately, FT reports that News Corp is also in advanced talks to sell its 80% stake of Move to rival CoStar, which is valued in the "low billions" of dollars; FT said that a sale of the Move stake would be significant enough in size to have changed the calculus for the committees evaluating the merger of Fox and News Corp.

ENERGY:

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  Woodside Energy Group Ltd (WDS) - Q4 production +0.7% Q/Q at 51.6mln BOE, Q4 sales volume -8.5% Q/Q at 52.2mln BOE, Q4 revenue -12% Q/Q at USD 5.16bln. FY23 production guidance unchanged at between 180-190mln BOE.

MATERIALS:

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  Fresnillo (FNLPF) - Lifted its 2023 gold outlook as grades and volumes improved.


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  Polymetal (AUCOY) - Reported FY22 gold production +2% Y/Y.


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  Givaudan (GVDNY) - FY22 sales topped forecasts, EBITDA in line.

HEALTH CARE:

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  Intuitive Surgical Inc (ISRG) - Q4 adj. EPS 1.23 (exp. 1.25), Q4 revenue 1.66bln (exp. 1.67bln). Q4 worldwide da Vinci procedures +18% in the quarter, and it sees procedure growth rising between 12-16% in FY 2023. Sees FY23 gross margins between 68-69%, adding that it expects operating margins to fluctuate in the coming quarters. In 2023, it is expecting a significant increase in expenses related to clinical trials, and it expects appreciation expense to increase in 2023 and, and more significantly in 2024.


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  GlaxoSmithKline (GSK) - Received US FDA orphan drug designation for belimumab.


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  Roche (RHHBY) - Received US FDA EUA for cobas modular analyser.

FINANCIALS:

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  Capital One Financial (COF) - Q4 adj. EPS 2.82 (exp. 3.84), Q4 NII USD 7.2bln (exp. 7.2bln). Provisions for credit losses rise USD 0.75bln to USD 2.4bln. NIM +4bps to 6.84%.


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  Navient Corporation (NAVI) - Q4 adj. EPS 0.85 (exp. 0.83). Sees FY23 core EPS between 3.15-3.30 (exp. 2.92), and sees FY23 core earnings ROE in the mid-teens.

25 Jan 2023 - 09:20- Fixed IncomeData- Source: Newsquawk