US EARLY MORNING: SPX slips back into sideways range amid debt ceiling impasse; FOMC minutes ahead

OVERNIGHT: On Wall Street, stocks Tuesday dropped, while short-term Treasury yields rose, as investors became increasingly anxious over the lack of progress in US debt limit negotiations. Our US wrap is here. In APAC trade, stocks declined amid ongoing US debt ceiling discussions, while NZ markets were in focus after the RBNZ unexpectedly signalled the end of its tightening cycle. In Japan, the first positive Reuters Tankan reading for this year did little to spur risk appetite. China indices were lower after the White House spoke out against China's Micron (MU) ban, while a lawmaker called for the Commerce Department to add Changxin Memory Technologies to the entity list and called to ensure that no US export licenses are granted to firms operating in China which are used to backfill Micron. Our APAC wrap is here. It was a sour start to the midweek trading session in Europe, with indices underwater after the open following a continued impasse in US debt ceiling talks, tense US-Sino relations, some fears about a COVID resurgence in China, as well as hot UK inflation data which has seen traders increase hawkish bets on the Bank of England (see our wrap, below). Our European equity open note is here. 

US PRE-MARKETS: US equity futures are in the red, but not by as much as their European counterparts. Treasury yields are ticking up, perhaps in sympathy with hot UK inflation data, which has resulted in market pricing for the BoE to tilt hawkishly (see our recap, below). The DXY climbed off overnight lows as yields picked up, and is now trading around flat. Crude benchmarks are higher, bucking the negative risk tone after the API reported bullish energy inventory data for the week, where crude stocks posted a surprise draw, as did distillates, while gasoline inventories saw a much larger than expected decline; additionally, traders cite hawkish warnings from the Saudi Arabian oil minister on Tuesday. Today’s agenda will centre around debt ceiling talks, while the FOMC meeting minutes will be looked at to see the extent to which a June pause was discussed in May (preview below).

S&P 500 OUTLOOK: Last week, we saw the S&P 500 break above the horizontal ranges it had been patrolling since mid-April, but the latest impasse on the debt ceiling and tense US-Sino relations has soured risk sentiment, and the index has now fallen back within the consolidation range (roughly between 4,110-4,185). And strategists think that we may be fixed within these ranges into the end of the year. A poll by Reuters said strategists see the index ending this year at around 4,150 (revised down from their previous estimates for 4,200 in the comparable February poll) – that would still be up around 8% vs end-2022 levels, but implies little movement from current prices. One of the strategists polled said that the outlook for stocks was a “very uninspiring, low-growth backdrop, with tight monetary policy and earnings that will be down this year versus last.” The poll chimes with some of the scepticism that was met in wake of last week's rally, with analysts noting that the upside was not a function of earnings or rates, while most of the gains this year have been driven by a few highly concentrated names. Ahead, while many remain confident that the US economy can avoid a recession, margin compression is still likely to be seen among corporates, and many Fed officials last week were suggesting that the bias for rates could still be to the upside (FY profit growth for this year is seen at a paltry 1.2%, according to Reuters).

US DEBT CEILING LATEST: On Tuesday, the White House and Congressional Republicans faced challenges in reaching an agreement to increase the US borrowing limit, with the uncertainty posing risks to the economy and financial markets, with just nine full days till the estimated debt-limit deadline of June 1st. Republican House Speaker McCarthy and negotiator Graves signalled an impasse, but both remain in deal-seeking mode. Speaker McCarthy said that he hadn't spoken to President Biden, and wasn't scheduled to visit the White House on Tuesday, but emphasized commitment to working until everything is resolved. McCarthy accused Biden and the White House of attempting to involve Medicare and Social Security to disrupt negotiations. House Financial Services Chair McHenry said that the primary disagreement remains on spending, and it is uncertain when negotiations will resume. Republican negotiator Graves mentioned that no further meetings were scheduled, but said that they have made progress in some areas, while still facing significant differences on the debt limit duration. Elsewhere, the White House acknowledged that using the 14th Amendment to bypass the debt ceiling wouldn't solve the current problem but didn't rule out considering the strategy if an agreement can't be reached.

TODAY’S AGENDA:

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  US DATA/SPEAKERS: The data release slate is quiet; weekly MBA mortgage applications data is due. However, it is the Fed meeting minutes that will garner most attention. That said, the minutes are somewhat stale given the more recent Fedspeak, which has taken a mixed tone. Nonetheless, participants will be looking to see the extent to which the minutes reflect these divergent views and, indeed, how much a potential pause was discussed at the May meeting (see below). Fed Governor Waller will speak at a university event; influential leaders like Powell, Jefferson and Williams have more or less advocated for a hold in June, although Waller leans more hawkishly than these officials. On the supply front, the Treasury will sell USD 22bln of 2yr FRNs, as well as USD 43bln of 5yr notes.


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  CORPORATE EARNINGS: Numbers from ADI and NVDA; the latter will be particularly noteworthy given its prominence in the AI space. Our Daily US Earnings Estimates note can be accessed here.


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  ENERGY:  API weekly energy inventory data reportedly showed crude stocks -6.8mln bbls (exp. +0.8mln), Cushing +1.7mln, Gasoline -6.4mln (exp. -1.1mln), Distillate -1.7mln (exp. +0.4mln). Citi said the data is bullish across the board, if confirmed by the more definitive DOE report due later on Wednesday.


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  PREVIEW - FOMC MEETING MINUTES (19:00BST/14:00EDT): At the May meeting, the FOMC raised rates by 25bps to 5.00-5.25%, in line with expectations, while also hinting at a 'pause' (more on that in a moment) by dropping the language about anticipating more policy firming. The Fed will determine further policy firming based on tightening to date, policy lags, and other developments, Fed Chair Powell said, adding that the central bank remains committed to bringing inflation back down to target and will take a data-dependent approach to determine further rate hikes, adding that there would be an ongoing assessment of whether the Fed has reached a 'sufficiently restrictive' level. The Senior Loan Officer Opinion Survey (SLOOS) was consistent with banks tightening lending standards and slowing the pace of lending. At the same time, the Committee believed that inflation would take a while to come down. Powell also said they are much closer to the end than the beginning; feels as if the Fed is close, or maybe even there. Since the May meeting, officials have emphasised that their latest policy actions should not be read as a 'pause', and the Committee is prepared to act further to tame inflation pressures. Post-FOMC, Fedspeak has become more nuanced regarding the differences in views over the policy outlook, and some divergences are emerging. In the outright hawkish camp, Logan (current voter) argued that the data does not yet show that skipping a rate hike in June is appropriate, and Governor Bowman (permanent voter) said additional rate hikes were likely appropriate. In the neutral-but-with-hawkish elements camp, Bullard (non-voter) said he would keep an open mind going into the June meeting but was inclined to support another rate hike whilst discussing the need for another 50bps of tightening looking through the year. Bostic (2024) said there was still a way to go to beat inflation. The influential NY Fed President Williams and Vice Chair Nominee Jefferson (both voters) adopted a more circumspect view, speaking about how inflation remains too high, but offsetting that by leaning into the monetary lags view, saying a year is not enough time to assess the full impact of hikes thus far. Chair Powell took this line, which for some, all but confirms that rates would be on hold at the June 15th meeting announcement. Fed's Kashkari (current voter), who has until recently been one of the outspoken haws, doved it down after comments from Chair Powell, suggesting that he may be able to support an unchanged outing in June, or in his words, a 'skip'. Chicago Fed's Goolsbee (current voter) has been one of the vocal doves in recent weeks, repeatedly warning about the risks of overtightening in the fallout of the banking episode. (Newsquawk)


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  RECAP – UK INFLATION: UK inflation metrics were hotter than expected in April, with the annual headline rate easing to 8.7% Y/Y from 10.1%, but above the expected 8.2%; the core measure rose to 6.8% Y/Y from 6.2% against expectations that it would be unchanged in the month. Money markets moved hawkishly, and now a +25bps rate rise at the June meeting to 4.75%, is now fully priced. The significant decrease in inflation was driven by a sharp decline in utility prices, which can be attributed to the smaller decrease this year compared to the previous year when prices were frozen under the government's Energy Price Guarantee. Utility inflation is expected to further decrease in July when energy price caps drop below the government's price guarantee. The specific cap for July-September will be announced on Thursday. Meanwhile, the increase in core inflation has pushed the annual measure beyond the previous perceived peak of 6.5% in April of the previous year, reaching the highest levels since 1992. This rise was attributed to an increase in prices for core goods, while the growth in services inflation from 6.6% to 6.9% exceeded the BoE's forecast of 6.7%. "In other words, the recent resilience of economic activity appears to be stoking domestic inflationary pressure," Capital Economics said, adding that "with inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates in June, and perhaps a bit further in the months after." Following the release, money market pricing now sees the UK terminal rate at just over 5.25%  in December (from around 5.00% before the release).


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  RECAP – RBNZ: The RBNZ lifted rates by 25bps to 5.5%, and suggested that it will not be raising interest rates further after lifting the OCR to the highest level in over 14 years. The decision surprised the market, as some expected (and still expect) more rate hikes. Westpac notes that the Committee had a vote for the first time on whether to keep rates the same, or raise by 25bps; Two members voted for no change, while the others voted for the increase. Policymakers also talked about the possibility of higher house prices and economic risks from migration, but overall, the Committee believes that a 5.5% interest rate will help manage those risks. "The bottom line is that this is a central bank that sees itself on hold for a protracted period," Westpac wrote, "key risk factors are likely to be around the judgement of the RBNZ that the quite significant boost in population growth will quickly reverse and not add to housing market or inflation pressures," and the bank added that "data on house prices and migration will be important to watch in that regard, and similarly labour market indicators will be important to watch." Westpac now sees the RBNZ on hold in July, but warns that there remains some potential for a +25bps hike in August. "Should this not eventuate we anticipate the RBNZ to remain on hold until after the election in October," adding that "by this time we expect that the housing market and migration pressures will be showing up fairly strongly and require a further adjustment in the OCR to the 5.75-6.00% range."

EQUITY NEWS:

TECH/COMMUNICATIONS:

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  China Tech - The US should impose trade restrictions on Chinese chip maker Changxin Memory Technologies in response to China's ban on chips from U.S. company Micron, according to the chair of the US House committee on China, escalating the trade dispute between the two countries, Reuters reports.


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  Meta Platforms (META) - Meta's challenge against EU antitrust regulators request for information has been rejected by an EU court.


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  Nvidia (NVDA), Microsoft (MSFT) - Nvidia will integrate its AI Enterprise software into Microsoft's Azure Machine Learning; said it will create a secure, enterprise-ready platform that enables Azure customers worldwide to quickly build, deploy and manage customized applications using 100 Nvidia AI frameworks and tools.


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  Microsoft (MSFT) - Launches Microsoft Fabric, a new analytics platform that combines data and analytics tools like Azure Data Factory, Azure Synapse Analytics, and Power BI into one unified product. MSFT said it will help businesses utilise their data and prepare for AI advancements.


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  Intuit Inc (INTU) - Results top expectations, lifts FY outlook. Q3 2023 adj. EPS 8.92 (exp. 8.48), Q3 revenue USD 6.02bln (exp. 6.1bln). Sees Q4 EPS USD 1.43-1.48 (exp. 1.43). Sees Q4 revenue to grow 9%-10% Y/Y. Raises FY23 EPS guidance to USD 14.20-14.25 from 13.59-13.89 (exp. 13.72). Revises FY23 rev. guidance to USD 14.3bln from 14.0bln-14.3bln (exp. 14.1bln).


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  Palo Alto Networks Inc (PANW) - Earnings topped expectations on cloud growth. Q3 adj. EPS 1.10 (exp. 0.93), Q3 revenue USD 1.72bln (exp. 1.71bln), Q3 billings 2.26bln (exp. 2.23bln). Sees Q4 billings between USD 3.15-3.20bln (exp. 3.15bln), Q4 adj. EPS seen between 1.26-1.30 (exp. 1.20), and sees Q4 revenue between USD 1.94-1.97bln (exp. 1.95bln). FY adj. EPS view 4.25-4.29 (exp. 4.02), FY revenue view USD 6.88-6.91bln (exp. 6.89bln, prev. 6.85-6.91bln).


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  AI Names - The White House plans to survey workers on how AI is used to monitor them, Reuters reports, and it is considering federal investments in technology that will impact work.


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  New Relic (NEWR) - Reported Q4 adj. EPS of 0.42, beating the consensus estimate of 0.22. Q4 revenue USD 242.5mln (exp. 241.1mln). Sees Q1 revenue between USD 238-240mln (exp. 251.2mln). For FY24, projects revenue between USD 1.02-1.03bln (exp. 1.07bln).


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  Qorvo (QRVO) - CEO Robert Bruggeworth sells 11.2K shares for a total USD 1.05mln.

FINANCIALS:

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  PacWest Bancorp (PACW) - PacWest sold its real-estate lending division Civic Financial Services to Roc360, WSJ reports. The bank had acquired Civic to grow its lending but recently changed plans due to financial challenges. Follows PacWest selling real-estate construction loans on Monday as it refocuses on community banking.


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  GoHealth (GOCO) - GoHealth formed a committee to review an offer from its biggest shareholders to buy all remaining shares. No decision or timeline has been set yet.

CONSUMER:

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  Toll Brothers (TOL) - Sales and profits topped expectations, and it said homebuyer appetites were improving. Q2 EPS 2.85 (exp. 1.91), Q2 revenue USD 2.51bln (exp. 2.06bln). Q2 End community count 350, +6.7% y/y (exp. 358), Q2 Total home sales 2,492, +3.5% y/y (exp. 2,081), Q2 Backlog 7,574 (exp. 7,741), Q2 Backlog in USD was 8.38bln (exp. 8.52bln), Q2 adj. home sales gross margin 28.3% (exp. 26.4%). Raises FY deliveries view to 8,900-9,500 (exp. 8,565) from 8,000-9,000; adj. home sales GM view raised to 27.8% (exp. 26.4%) from 27%.


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  Urban Outfitters (URBN) - Q1 EPS 0.56 (exp. 0.36), Q1 revenue USD 1.11bln (exp. 1.09bln); SSS +5.0% (exp. +2.4%), Anthropologie SSS +14% (exp. +8.7%), Free People SSS +17% (exp. +10%), Urban SSS -13% (exp. -9.9%).


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  VF Corporation (VFC) - Results were better than expected, driven by North Face unit and ongoing China recovery. Q4 EPS 0.17 (exp. 0.14), Q4 revenue USD 2.74bln (exp. 2.74bln). Q4 North Face sales +16%, international +8%, Greater China +10%, Americas -7%. Q1 sales seen down between 8-9% Y/Y. Sees FY24 EPS around 2.15 (exp. 2.19), and revenue 'flat-to-up slightly'

INDUSTRIALS:

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  Landstar (LSTR) - The truck broker lowered Q2 guidance due to a decline in loads hauled by trucks and reduced revenue per load, Freight Waves reports. Said volumes were currently down 16-18%, revenue down 14-16%. Sees Q2 EPS of 1.75-1.85 (previously guided 1.95), and revenue between USD 1.325-1.375bln (exp. 1.4bln) from 1.425bln.


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  General Dynamics (GD) - Awarded a not-to-exceed USD 1.08bln undefinitised contract action modification to previously awarded contract for long lead time material associated with the Virginia class submarines SSN 812 and SSN 813. Its NASSCO subsidiary was also awarded a USD 736mln modification to the existing T-AO contract for construction of a ninth ship in the John Lewis-class fleet oiler programme.


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  Lockheed Martin (LMT) - Awarded a USD 194.7mln firm-fixed-price and cost-plus-fixed-fee contract for MK 41 Vertical Launching System, modules and ancillary hardware in support of fiscal 2022-2027 MK 41 VLS production requirements.


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  Delta Air Lines (DAL) - Delta appoints Michael Spanos as COO, effective June 12th. Spanos previously served as CEO of Six Flags Entertainment Corporation.


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  Virgin Orbit Holdings (VORBQ), Rocket Lab USA (RKLB) - The bankrupt satellite-launch company Virgin Orbit is shutting down operations. Rocket Lab USA was selected as a successful bidder to purchase certain aerospace assets from Virgin Orbit in bankruptcy auction, including the lease to their headquarters and manufacturing complex, but excluding launch vehicles and other assets.

ENERGY:

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  Weekly Inventories - API weekly energy inventory data reportedly showed crude stocks -6.8mln bbls (exp. +0.8mln), Cushing +1.7mln, Gasoline -6.4mln (exp. -1.1mln), Distillate -1.7mln (exp. +0.4mln). Citi said the data is bullish across the board, if confirmed by the more definitive DOE report due later on Wednesday.

MATERIALS:

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  Lithium Names - Fast-growing lithium producer Argentina is working to gain access to the US EV market via negotiations with US diplomats, hopes to secure an exemption to the Inflation Reduction Act's battery metal sourcing requirements, Bloomberg said. The move comes amid global competition between the US and China for essential EV minerals.

HEALTHCARE:

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  China Covid - A China respiratory disease specialist Zhong Nanshan told a biotech conference in Guangzhou that China's COVID-19 cases to peak at 65mln infections per week by late June due to the XBB variant, Bloomberg reports. Infections are expected to reach 40mln per week by the end of May.


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  Agilent (A) - Earnings and sales top expectations, but cuts outlook. Q2 adj. EPS 1.27 (exp. 1.26), Q2 revenue USD 1.72bln (exp. 1.67bln). Exec noted that environment was "increasingly challenging". Said continued macroeconomic uncertainty, and stresses in the banking system, have accelerated a more conservative approach from its customers; early-stage biotech customers dramatically scaled back purchases as funding challenges drove cash conservation; China however exceeded its expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. Sees Q3 EPS between 1.36-1.38 (exp. 1.43), and sees Q3 sales between USD 1.64-1.675bln (exp. 1.8bln). For the FY23, sees EPS between 5.60-5.56 (exp. 5.69), and sees FY23 revenue between USD 6.93-7.03bln (exp. 7.1bln).


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  PTC Therapeutics (PTCT) - The MOVE-FA trial testing vatiquinone did not achieve its main goal, leading to PTC's decision to end the gene therapy programme and reduce its workforce by approximately 8%. Additionally, the company terminated the employment of CFO Emily Hill.

24 May 2023 - 09:01- Research Sheet- Source: Newsquawk