US EARLY MORNING: Index futures are rallying as yields fall; hopes of an easing in the pace of monetary tightening, and unverified reports that China is to look at ways to end Covid Zero are supporting sentiment

NOTE: Daylight saving time in the UK has now ended, and the time differential between London and New York will be four hours this week. Daylight saving will end in the US on Sunday 6th November, upon which the usual five-hour time differential will be restored.

SNAPSHOT: US equity futures are gaining by 0.6-1.0%, with the Nasdaq-100 leading gains as Treasury yields narrow by 6-9bps, with much of the rally in the 5yr space. Hopes that the Fed will signal a less aggressive pace of rate hikes ahead have gained further traction after Australia’s RBA, which has often led G10 central bank policymaking in the pandemic era, refrained from a jumbo-sized hike. Additionally, there are some unverified reports that China was forming a committee to assess how to exit Covid Zero policies, though officials have not been able to confirm the rumours. In Europe, Gilts are outperforming as the Bank of England prepares to start Gilt selling later today (also some reports that higher taxes would be needed ahead). The Dollar Index is lower by around 0.6%, falling beneath the 111.00 handle. Crude futures are rallying amid a weaker dollar, a constructive risk tone; analysts are expecting a small 300k build to crude stocks this week, though the products are seen drawing by almost 2mln.

EQUITIES INTO THE FED: Nomura’s quants say CTA short covering is a factor behind the rally over the last couple of weeks, and it expects CTAs to continue to cover shorts in US equities for some time. Regarding the Fed, Nomura says risks to share prices from the Wednesday meeting appear to be to the downside. “The one-week implied volatility skew for the S&P 500 is low, in the 20th percentile for the week prior to FOMC meetings since January 2012,” the bank writes, “a low skew often means that volatility itself is being suppressed.” But Nomura says that we are currently seeing high volatility, and while this would normally imply high demand for downside protection, the skew is low. “The US options market at least appears increasingly optimistic about the November FOMC meeting,” it says, “when optimism ramps up ahead of a meeting, this tends to leave the market somewhat defenceless, and this tends to lead to weakening share prices in the wake of the meeting,” it warns. Nomura adds that stock prices are prone to decline in response to a hawkish surprise, and are unlikely to react much to a dovish surprise, as this is already factored in to some extent. Meanwhile, JPMorgan reckons that stocks could rally 10% on Wednesday if the Fed raises by 50bps vs the 75bps expected, though they still expect 75bps.

DAY AHEAD: Final manufacturing PMI data from the UK, although Gilt traders may be more attuned to the Bank of England commencing Gilt sales today. Stateside, the manufacturing ISM data is the highlight (headline expected at 50.0 from 50.9), along with JOLTs data. After hours, the API will publish its gauge of weekly energy inventories. The central bank speakers slate is quiet, but we do get remarks from the ECB's Schnabel; we are now also entering a particularly busy window, with the Fed on Wednesday, and the BoE on Thursday (preview links below). Full Day Ahead here. In terms of US corporate earnings, it promises to be another busy day, with highlights including LLY, PFE, UBER, ABNB, AMD; full expectations can be accessed here. 

BROADER THEMES:

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  EU-US Trade - EU hopes to resolve dispute with the US over new subsidies for North American manufacturers in upcoming talks, Bloomberg reported citing a senior EU diplomat. An EU-US task force is scheduled to discuss the issue this week, ahead of a December meeting of the US-EU Trade and Technology Council, BBG added.


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  China Reopening - China stocks rally on unverified social media reports that a committee was being formed to assess scenarios on how to exit Covid Zero, Bloomberg reported. China’s Foreign Ministry said it was not aware of such a committee being formed.

CENTRAL BANKS:

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  RBA - Australia's central bank lifted its Cash Rate Target by 25bps to 2.85%, as expected (there were some outside calls for a return to a more aggressive jumbo sized rate hikes given the recent elevated inflation data from Australia). The timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. It said the Board remains resolute in determination to return inflation to the target, while it expects to increase interest rates further over the period ahead. The statement lacked any major hawkish surprises. Central forecasts for GDP growth were revised down a little, while inflation is seen peaking at around 8% later this year. Westpac said, "it now seems that the Board is prepared to await the impact of the series of hikes at that risk of embedding an inflation psychology in the system which would eventually require a much more damaging policy response." The bank retained its forecast for the terminal rate to peak at 3.85%, but now extends the length of the tightening cycle to May as inflation becomes more entrenched in the near term.


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  Fed Preview (Wednesday 18:00GMT/14:00EDT) - The FOMC is expected to hike its target Fed Funds range by another 75bps to 3.75-4%, with a firm focus on the guidance and Powell's presser as the Committee looks to step down the pace of tightening as it approaches the terminal rate, roughly in the 4.5-5% area. That comes despite a lack of progress in bringing inflation down, with concerns rising around the risk of overshooting on hikes. As a hawkish offset to expectations around an approaching Fed pause, Powell could use the meeting to signal a higher terminal rate - there are no new SEPs at this meeting - than the September 'Dot Plot' implied [4.6%], whilst continuing to lean on the "higher for longer" messaging. Although dovish risks include Powell signalling 50bps in December whilst failing to guide to a higher terminal rate; too much focus on financial stability also risks shifting expectations to a Fed pause. Full Newsquawk preview here.


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  BoE Preview (Thursday 12:00GMT/08:00EDT) - With Y/Y CPI running at an uncomfortably high 10.1% in September and the core metric advancing to 6.5%, policymakers are expected to deliver a “significant” rate hike after the 50bps adjustment in September underwhelmed some in the market. Expectations are for the MPC to hike the Bank Rate by 75bps to 3%, according to 18 /30 analysts surveyed by Reuters. In terms of market pricing, a 75bps hike is 95% priced in as bets for 100bps continue to recede. The decision to hike rates is expected to be unanimous, however, there is expected to be a split in views over the magnitude with Dhingra (voted for a 25bps hike in September) and Tenreyro potential dissenters. Note, the Bank has continued to push back on the aggressive level of market pricing with Deputy Governor Broadbent (20th Oct) noting that it remains to be seen if rates need to rise as much as currently priced in by markets. It’s also worth noting that by the time of the meeting, the Bank’s Gilt sale operation (short and medium-term) will have commenced after pushing back the start date in October. Elsewhere, the accompanying MPR projections will be subject to great uncertainty and potentially of limited use given that they can only factor in stated government policy. Given the fiscal event due on October 31st has now been pushed back to November 17th, the MPC will need to base its forecast on the Energy Price Guarantee being maintained for two years, instead of the shorter timeframe that Chancellor Hunt is expected to officially unveil. Full Newsquawk Preview here.

ENERGY:

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  Energy Names - US President Biden said the oil industry had not met its commitment to support the American people, and were not helping consumers with their record profits. Biden cited Shell (SHEL) and Exxon (XOM) profits as remarkably high, and said oil companies should pay a higher tax on excess profits if they do not lower prices at the pump.


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  BP (BP) - Q3 2022 revenue USD 57.8bln (exp. 45.2bln), adj. net USD 8.15bln (exp. 6.02bln), adj. EPS 0.4315 (exp. 0.3159), profit/loss attributable to shareholders USD -2.6bln (vs -2.5bln Y/Y). Dividend 0.06006/shr (vs 0.0546/shr Y/Y). Announces a further USD 2.5bln share buyback; expects to be able to deliver buybacks of circa USD 4.0bln/annum. Sees FY reported upstream production to be slightly higher Y/Y; Q4 seen slightly lower Q/Q, primarily in gas regions.


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  Williams Companies, Inc. (WMB) - Q3 EPS 0.48 (exp. 0.44), Q3 revenue USD 3.021bln (exp. 2.87bln). Exec said Williams was thriving as demand for critical services continues to expand, well positioned to excel despite the macro-economic concerns for the broader markets.

INDUSTRIALS:

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  Avis Budget Group, Inc. (CAR) - Q3 adj. EPS 21.70 (exp. 14.64), Q3 revenue USD 3.55bln (exp. 3.49bln). Exec said that despite growing concerns around an economic slowdown, Avis' strong summer performance, driven by increased demand in both the commercial and leisure segments, carried through to September, and it remains optimistic this will continue throughout the Fall and into the holiday season.


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  Flowserve Corporation (FLS) - Q3 EPS 0.29 (exp. 0.23), Q3 revenue USD 872.9mln (exp. 868mln). Q3 was impacted by a number of previously disclosed discrete, period-specific issues impacting our EPS and margin performance. Exec said Q3 bookings were exceptionally strong, however, with large project awards in our traditional markets, solid aftermarket and MRO activity. Q4 EPS seen at least 0.40 (exp. 0.64), and Q4 revenue seen higher by 8-10% (exp. +12%).


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  General Electric Company (GE) - Awarded a USD 1.1bln Navy contract for repair, replacement, and programme support of 784 F414 engine components in support of F/A-18 aircraft.

TECH:

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  Apple Inc. (AAPL) - Top execs for the online retail store and information-systems divisions are stepping down, according to Bloomberg. BBG said that the departures mean Apple is losing at least three vice presidents in recent weeks.


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  NXP Semiconductors NV (NXPI) - Q3 EPS 2.79 (exp. 3.63), Q3 revenue USD 3.45bln (exp. 3.42bln). Exec noted that it was impacted by the weakening macro-environment in its consumer exposed IoT business. Demand in both the automotive and industrial markets continued to be resilient, however, driven by secular and company-specific drivers, along with incrementally improved supply. Ahead, exec said it is cautious in the intermediate term due to the uncertainties in the macro environment. Sees Q4 revenue at USD 3.3bln (exp. 3.42bln).


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  Amkor Technology, Inc. (AMKR) - Q3 EPS 1.24 (exp. 0.93), Q3 revenue USD 2.1bln (exp. 1.9bln). Exec noted all end markets revenue hit new record levels. Q4 EPS seen between USD 0.60-0.80 (exp. 0.88), and Q4 revenue expected between USD 1.8-1.9bln (exp. 1.87bln). FY CapEx seen at USD 900mln (prev. guided USD 950mln).


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  Arista Networks, Inc. (ANET) - Q3 adj. EPS 1.25 (exp. 1.04), Q3 revenue USD 1.177bln (exp. 1.06bln). Q4 revenue seen between USD 1.175-1.2bln (exp. 1.1bln).


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  Lattice Semiconductor Corporation (LSCC) - Q3 EPS 0.48 (exp. 0.44), Q3 revenue USD 172.5mln (exp. 166.3mln). Q4 revenue seen between USD 170-180mln (exp. 169.5mln), and GM seen 69.5% +/- 1% on an adj. basis.

COMMUNICATIONS:

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  Microsoft Corporation (MSFT), Activision Blizzard, Inc. (ATVI) - Microsoft has not offered any remedies to EU antitrust regulators reviewing its proposed USD 69bln bid for Activision Blizzard ahead of an expected full-scale EU probe, Reuters reports.


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  Sony Group Corporation (SONY), Microsoft Corporation (MSFT), Activision Blizzard, Inc. (ATVI) - Sony said the new 'Call of Duty: Modern Warfare II' game was the biggest PlayStation Store launch ever for a Call of Duty game (including preorders and day one sales).


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  Sony Group Corporation (SONY) - H1 net profit +13.5% Y/Y to JPY 482.2bln, H1 operating profit JPY 344bln (exp. 280.7bln), H1 revenue JPY 5.06tln (prev. 4.63tln Y/Y). Lifts operating profit outlook to JPY 1.16tln (exp. 1.16tln, prev. saw 1.11tln). Weaker JPY boosted sales of image sensors, used in smartphones and which the company makes in Japan but mostly sells overseas.


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  Sirius XM Holdings Inc. (SIRI), Lucid Group, Inc. (LCID) - SiriusXM's audio entertainment experience will be a standard in-dash feature across the full line-up of Lucid vehicles.

CONSUMER CYCLICAL:

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  Tesla (TSLA) - The automaker plans mass production start of Cybertruck at end of 2023, according to Reuters’ sources; previously it was expected to begin in mid-2023.


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  Toyota Motor Corporation (TM) - Raises sales outlook, though it lowered its output target. H1 net -23.2% Y/Y at JPY 1.17tln, H1 operating profit -34.7% Y/Y at JPY 1.14tln. Toyota will buy back up to 0.8% of shares for JPY 150bln. Lowers FY22/23 global production plan to 9.2mln units (prev. guided 9.7mln). FY operating profit seen at JPY 2.4tln (exp. 2.98tln). Exec said although the situation is better for chips that are also used for consumer products, there will still be some constraints in semiconductors for autos, though added that it appeared that the worst is over.


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  Goodyear Tire & Rubber Company (GT) - Q3 adj. EPS 0.40 (exp. 0.54), Q3 revenue USD 5.31bln (exp. 5.3bln). Sees raw material costs up USD 500mln in Q4, and expects Y/Y cost increases of USD 300-400mln in H1 2023, with most occurring in Q1. Assumptions include the impact of the stronger dollar and higher transportation and supplier costs.


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  Leggett & Platt, Incorporated (LEG) - Q3 EPS 0.52 (exp. 0.49), Q3 revenue USD 1.29bln (exp. 1.2bln). Reiterates FY22 EPS outlook between 2.30-2.45 (exp. 2.37), and reiterates its FY22 revenue outlook between USD 5.1-5.2bln (exp 5.15bln). Q4 EPS seen between 0.42-0.57 (exp. 0.52), and see Q4 revenue between USD 1.15-1.25bln (exp. 1.3bln).


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  Marriott Vacations Worldwide Corporation (VAC) - Q3 adj. EPS 3.02 (exp. 2.60), Q3 revenue USD 1.25bln (exp. 1.14bln). Lifts FY22 adj. EPS outlook to 10.20-10.64 (exp. 9.94, prev. guidance was for 9.47-10.35).


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  Sonoco Products Company (SON) - Q3 EPS 1.60 (exp. 1.39), Q3 revenue USD 1.89bln (exp. 1.9bln). Exec noted stable consumer demand and improving supply conditions. Q4 EPS outlook seen between 1.20-1.30 (exp. 1.25), and FY22 EPS seen between USD 6.40-6.50 (exp. 6.25).

CONSUMER STAPLES:

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  Herbalife Nutrition Ltd. (HLF) - Q3 EPS 0.91 (exp. 0.74), Q3 revenue USD 1.3bln (exp. 1.3bln). Exec said macroeconomic inflationary pressures challenged members' operations and customer demand during the quarter. Net sales negatively impacted by unfavourable geographic mix of revenue, strengthening of the US dollar, which drove a significant currency headwind. Given the rapidly shifting macroeconomic sentiment, increased volatility in the marketplace, HLF is withdrawing FY 2022 guidance. Names Michael Johnson as interim CEO.

FINANCIALS:

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  Aflac Incorporated (AFL) - Q3 adj. EPS 1.15 (exp. 1.21), Q3 revenue USD 4.8bln (exp. 4.6bln). Board declares Q4 dividend of 0.40/shr. USDJPY exchange rate impacted EPs by 8c; exec said pandemic conditions in Japan and in the US are continuing to normalise, contributing to positive sales growth in both segments in Q3 and into Q4.

HEALTH CARE:

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  Stryker Corporation (SYK) - Q3 adj. EPS 2.12 (exp. 2.23), Q3 revenue USD 4.48bln (exp. 4.46bln). Exec said that worsening foreign currency and ongoing inflation, including premiums on spot buys for key components, pressured adjusted earnings and will impact FY results; is taking additional actions to address these persistent issues. Exec notes strong order book for capital equipment, sales momentum in implant and capital businesses, now expects FY22 organic net sales growth between 8.5-9.0%, but if FX rates hold near current levels, FY net sales could be adversely impacted by approximately 4%, and adj. net earnings per diluted share to be adversely impacted by approximately USD 0.35-0.40.


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  Hologic, Inc. (HOLX) - Q4 EPS 0.82 (exp. 0.62), Q4 revenue USD 953.3mln (Exp. 863.9mln). Sees Q1 EPS between 0.80-0.90 (exp. 0.82), and sees Q1 revenue between USD 940-990mln (exp. 966mln); FY23 EPS seen between 3.30-3.60 (exp. 3.43), and FY23 revenue is expected between USD 3.7-3.9bln (exp. 3.8bln).

REAL ESTATE:

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  SBA Communications Corporation (SBAC) - Q3 AFFO/shr USD 3.10 (exp. 3.04), Q3 revenue USD 675.6mln (exp. 651.2mln). Wireless carrier activity remains robust across most of markets, exec said, and it believes activity will remain strong into 2023 and perhaps beyond, given the size and scope of its customers' 5G deployment plans. Raises its outlook for FY22 AFFO/shr to 12.12-12.34 (exp. 12.14, prev. guidance was for 11.87-12.24), and lifts its FY22 revenue outlook to USD 2.616-2.636bln (exp. 2.6bln, prev. guidance 2.557-2.597bln).


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  Vornado Realty Trust (VNO) - Q3 FFO/shr 0.81 (exp. 0.74). NY leasing activity 167k sqft (vs 301k in Q2); retail leasing 62k (vs 8k in Q2), theMART leasing 67k (vs 69k in Q2).

01 Nov 2022 - 08:22- Research Sheet- Source: Newsquawk