US EARLY MORNING: US equity futures are flat; Fed Senior Loan Officer survey, Financial Stability Report and the NY Fed's inflation expectations data are due; CPI/PPI are the highlights for the week ahead

US PRE-MARKETS: US equity futures are a little above flat, and Treasury yields are mixed though have not deviated from neutral by more than a couple of basis points, while the curve continues to flatten moderately. The Dollar Index is a little lower. Weekend news flow has been limited, but has focussed on Berkshire Hathaway (operating earnings jumped in the quarter), the US fiscal drama (Yellen warns the saga could bring economic catastrophe, while Biden is set to meet Republicans on Tuesday), Apple shrugging-off the demand slump, and regional banking issues (PACW slashed its dividend but said its fundamentals were sound). The Fedspeak late Friday took a more balanced tone; Fed’s Bullard (non-voter) still sees rate hikes ahead, but is awaiting incoming data before finalising his view for June, a line echoed by Fed’s Goolsbee (voter). Today, traders will focus on the Fed’s Senior Loan Officer survey (which Chair Powell already said highlights tightening credit conditions), the Fed’s Financial Stability Report will make for an interesting read amid tensions in the banking sector, while the inflation expectations components within the NY Fed’s consumer survey will provide a useful preview ahead of this week’s CPI and PPI data. The Fedwatchers at SGH Macro believe that although the June meeting outcome is still technically dependent on incoming data, banking stress and a potential debt ceiling crisis support a pause, even if data remains strong. SGH says that even the hawks are likely to accept a more patient approach, given that policy rates are at or near a sufficiently restrictive level. However, rate cuts are not expected soon, and if activity or inflation does not moderate as expected, rate hikes could return after June.

EARNINGS SCORECARD: At the end of last week, S&P 500 companies that had published results for the March quarter have seen aggregated earnings slip by 0.7%, while revenue has risen by 3.5%, according to data from Refinitiv. Profit growth is being led by the Consumer Discretionary sector; Industrials, Energy and Financials have also reported earnings growth this quarter. Materials are the laggard, seeing earnings tumble 23%, followed by Utilities (-22%) and Healthcare (-15%). Morgan Stanley says that a H2 EPS rebound is contingent on a solid macro backdrop. The bank notes that the Q1 EPS beat rate is strong, and the guidance has been better than expected. However, "leading macro data" have been easing (MS cites the ISM, which tends to lead rolling earnings surprise for the S&P 500 by 6 months), pointing to downward trends in EPS surprise and margins over the coming months. The equity market continues to expect rate cuts and durable growth, but the likelihood of both outcomes playing out this year is low, the bank argues. It also says that consumers are planning to spend less on discretionary goods ahead, with the most negative net spending intentions for consumer electronics, leisure activities, home appliances, and food away from home. Low and middle-income consumers plan to spend more on groceries, while high-income consumers plan to spend more on travel. The high-income group indicated negative spending intentions for food away from home and leisure services. MS says the bottom line is that equities are priced for an optimistic and lower probability outcome, and consumers continue to expect a pullback in spending for most categories over the next six months.

GOLDMAN'S TECH WARNING: Goldman Sachs notes that big tech companies like Apple (AAPL), Amazon (AMZN), Google (GOOG), Meta (META), and Microsoft (MSFT) have collectively risen 29% this year, outperforming the S&P 500 by 23%, and has led to fewer types of companies driving the market. Goldman says these tech stocks are considered expensive when compared to the rest of the S&P 500, trading at a P/E ratio of 25x (a 49% premium vs its other index peers). Although some believe the high price is justified due to factors like improving earnings growth and quality, Goldman warns that if the economy improves and rates increase, these companies may not continue to perform as well. And if there is a recession, these stocks could be vulnerable since they are popular in hedge fund long portfolios.

DAY AHEAD:

• Our interactive Day Ahead calendar is here; a pdf version can be accessed here.


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  EUROPEAN DATA/SPEAKERS: The UK is out for Bank Holiday for the Coronation of His Majesty King Charles III. On the continent, the ECB Survey of Monetary Analysts and Sentix data are the only releases of note, whilst ECB watchers will also be listening out for any commentary from ECB Chief Economist Lane, who is going to be speaking on ‘resetting the economy’.


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  US DATA/SPEAKERS: The Fed will release its Senior Loan Officer survey (preview in our weekly here) and its 2023 Financial Stability Report; the former was mentioned by Chair Powell at his post meeting press conference last week, and apparently alludes to tightening credit conditions (recap on the Fed meeting in our weekly central bank note here), while the latter will be interesting in the context of recent bank woes. On the speaker side, Fed’s Kashkari (voter) will speak on minimum wages. The NY Fed Survey of Consumer Expectations will be released in the afternoon, and will give some insight into inflation expectations ahead of this week’s CPI and PPI data releases.


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  US CORPORATE EARNINGS: The highlights on today earnings slate includes MCK and PYPL; our Daily US Earnings Estimates note can be accessed here. Meanwhile, for the week ahead, APD, DUK, ABNB, OXY on Tuesday; DIS on Wednesday; JD on Thursday; our Weekly US Earnings Estimates sheet can be accessed here.


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  WEEK AHEAD: Highlights include US CPI and PPI, UK GDP, China Inflation and Trade data, BoJ SOO. Our weekly preview is here.

EQUITY NEWS:

WASHINGTON:

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  Debt Ceiling - President Biden is set to meet Republican leaders on Tuesday to discuss raising the current USD 31.4tn limit, with Congress typically tying approval of a higher debt ceiling to budget and spending measures, BBC reports. Treasury Secretary Janet Yellen warned that if the debt ceiling was not raised, the government could run out of money by early June, leading to economic and financial catastrophe, ABC reports. Yellen believes debt ceiling negotiations should not be made with a gun to the head of the American people.

ASSET ALLOCATION:

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  Equity Allocations - The USD 307bln California State Teachers' Retirement System voted to lower its stockholdings to reduce risk without sacrificing returns, and increase investment in private credit, infrastructure and private equity, due to the possibility of a prolonged economic slowdown, WSJ reports.

TECH:

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  Big Tech - Goldman Sachs notes that big tech companies like Apple (AAPL), Amazon (AMZN), Google (GOOG), Meta (META), and Microsoft (MSFT) have collectively risen 29% this year, outperforming the S&P 500 by 23%, and has led to fewer types of companies driving the market. Goldman says these tech stocks are considered expensive when compared to the rest of the S&P 500, trading at a P/E ratio of 25x (a 49% premium vs its other index peers). Although some believe the high price is justified due to factors like improving earnings growth and quality, Goldman warns that if the economy improves and rates increase, these companies may not continue to perform as well. And if there is a recession, these stocks could be vulnerable since they are popular in hedge fund long portfolios.


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  Microsoft (MSFT), Activision (ATVI) - Microsoft has hired lawyer Daniel Beard to appeal against the decision by the UK's competition regulator to block its USD 69bln takeover of Activision, The Telegraph reports. Beard is seen as a leading competition barrister, and has overturned multi-billion dollar penalties levied on Apple (AAPL) and Intel (INTC) by the EU in recent years.


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  Alphabet (GOOG) - Google is changing the way it displays search results to include more AI conversations, short videos, and social media posts to adapt to how people now access information online, which is different from its traditional "10 blue links" format, WSJ reports.


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  Apple (AAPL), Berkshire Hathaway (BRK.B) - Berkshire chief Warren Buffet said Apple was the best business in Berkshire's portfolio, and that its stake had grown to USD 151bln, accounting for 46% of its equity portfolio, Reuters reported. Apple also received a positive mention in Barron's, which says that iPhone maker is defying the trend, but there is still time to buy the stock. Barron's notes that the iPhone sales growth shows that customers value the high-quality experience that Apple products provide, despite their premium prices. The loyalty and satisfaction of Apple's customers, along with the sticky nature of the company's ecosystem, are also contributing factors, while Apple's install base has surpassed two billion active devices, and paid subscriptions have doubled in the past three years.

COMMUNICATIONS:

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  Amazon (AMZN) - Of note for advertising and tech names, the consumer cyclical company Amazon is forming a team to develop AI tools that generate photos and videos for merchant advertising campaigns on its platform, The Information reports. The move could help diversify its ad business, which has grown by double-digit percentages every quarter since 2021; currently, its ad business centres on search results, but it is trying to expand its reach.


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  Disney (DIS) - Florida Governor DeSantis signed a new bill into law that gives him the power to cancel any development agreements the previous board signed with Disney, using a new board he controls, Reuters reports. The Central Tourism Oversight District Board, whose members are appointed by DeSantis, can void any deals made up to three months before the board's creation.


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  Paramount Global (PARA) - 50 Cent, Shaquille O'Neal and Kenya Barris are reportedly interested in buying Paramount's BET network, and have been seen discussing a potential deal with investment company CVC, according to TMZ.


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  Vodafone (VOD) - The telecom company's biggest shareholder, Emirates Telecommunications Group Co PJSC (E&), mulls increasing its stake in the company to 20-25% so that it can have more influence over its future, Bloomberg reports. E& currently owns 14.6% and has already discussed changes with the company's board.

FINANCIALS:

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  US Banks - After shares of regional banks came under pressure last week following regulators brokering a deal for JPMorgan (JPM) to purchase First Republic (FRC), the White House is playing down the need to limit short-selling of banks, but is closely monitoring the situation, Bloomberg reports.


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  Bank Deposits - Weekly Fed data showed that deposits at US commercial banks fell to the lowest level in nearly two years at the end of April, while overall credit provided by banks increased, led by a record level of outstanding loans and leases, Reuters reports. Deposits fell to around USD 17.1tln, a drop of about USD 120bln from the week before, which was the lowest level since June 2021.


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  PacWest Bancorp (PACW) - The regional bank cut its quarterly dividend from 0.25/shr to 0.01/shr citing volatile conditions in the banking sector, but added that its business remains "fundamentally sound." On Friday, PACW's credit rating was placed on negative watch by Fitch Ratings due to uncertainty about the bank's strategic direction following its announcement that it is reviewing options.


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  Berkshire Hathaway (BRK.B) - Q1 earnings were USD 8.065bln (+12.6% Y/Y). Insurance underwriting profit was USD 911mln (vs 167mln Y/Y), investment income from insurance +68% to USD 1.969bln. Berkshire increased its stock buybacks by USD 4.4bln. It is reducing its investments in stocks such as Chevron (CVX). Buffett said he expects earnings to decrease this year at most of Berkshire's businesses due to an economic downturn.


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  UBS Group (UBS), Credit Suisse (CS) - UBS CEO Ermotti has chosen three Credit Suisse executives to join his management team, FT reports; Dixit Joshi, Francesca McDonagh, and Andre Helfenstein are most likely to survive the takeover. Ermotti is set to announce his new top team in the next week with the takeover due to be completed by early June.


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  TPG (TPG) - TPG is reportedly discussing acquiring an investment firm Angelo Gordon, valued at over USD 2bln, which would mark its first major move into credit investing since separating from Sixth Street three years ago, Bloomberg reports.


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  Crypto - DoJ is investigating whether Binance was used to let Russians move money through the exchange to skirt US sanctions related to Russia's invasion of Ukraine, according to Bloomberg, adding to the scrutiny of the world's biggest cryptocurrency exchange.


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  Washington Federal (WAFD), Luther Burbank (LBC) - Washington Federal and Luther Burbank obtain shareholder approval for merger.

CONSUMER:

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  Walmart (WMT) - An analysis by Dataweave showed that Walmart consistently kept grocery prices lower than competitors and generally increased prices at rates lower than US inflation for other products, even while facing allegations of unfair advantages over rivals, Reuters reports.


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  Volkswagen AG (VWAGY) - The automaker plans to dismiss most of the executive board members at its software division Cariad in an attempt to address development problems, Reuters reports. The unit had gone beyond its budget and failed to meet targets, which contributed to the departure of former CEO Herbert Diess and his replacement by Oliver Blume last year.


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  AB InBev (BUD) - CEO blames social media misinformation for stoking the consumer boycott of Bud Light following the drink being promoted by a transgender influencer.


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  Assa Abloy (ASAZY), Spectrum Brands (SPB) - Assa Abloy and Spectrum Brands reached a settlement with the DoJ over a proposed deal where Assa would acquire Spectrum's hardware and home improvement division for USD 4.3bln, Reuters reports. the DoJ had sued to block the deal, claiming it could result in higher prices.

ENERGY:

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  Chevron (CVX) - Berkshire Hathaway pared back its holding in Q1, selling about USD 6bln of stock.


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  Occidental (OXY) - Berkshire chief Warren Buffett leaned back on reports that it could acquire Occidental Petroleum, though added that he is happy with its 23.6% stake in the oil company.


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  Shell (SHEL) - A fire broke out at Shell's Deer Park chemical plant in Texas on Friday, but was under control by 6pm CDT. The Harris County Sheriff said five people were taken for medical evaluation due to possible exposure to chemicals.

MATERIALS:

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  Barrick Gold (GOLD) - CEO said it expects gold and copper prices to increase, which will bolster mining stocks. Adds that Barrick has the luxury of picking and choosing M&A opportunities.

INDUSTRIALS:

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  Airlines - The prices of air tickets are increasing rapidly by more than twice the inflation rate as airlines capitalise on a rising demand for travel despite tough economic conditions, FT reports. In February, the average ticket prices on over 600 popular routes rose +27.4%, marking the 15th consecutive month of double-digit growth.


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  Carrier Global (CARR) - CARR gets a positive mention in Barron's; said the HVAC stock was a buy as it represents the future of the industry.

HEALTH CARE:

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  Eli Lilly (LLY), Novo Nordisk (NVO) - LLY gets a positive mention in Barron's; the newspaper said weight-loss drugs developed by Eli Lilly and Novo Nordisk are expected to become very profitable, and recommends buying shares in one of the companies; LLY's drug reportedly outperforms NVO's.


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  AstraZeneca (AZN) - Koselugo was approved in China for paediatric patients with neurofibromatosis Type 1 and plexiform neurofibromas.


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  UnitedHealth (UNH) - Positive mention in Barron's; the newspaper said UnitedHealth is a buy to play the end of the Fed’s rate hike cycle.

08 May 2023 - 09:30- Research Sheet- Source: Newsquawk