Another day began with another major bank surpassing Wall Street’s earnings estimates.
Today’s results came from Morgan Stanley (NYSE:MS) (MS), the last of the “big banks” to report. Still, stocks declined in overnight futures trading after barely moving on Tuesday amid the lowest volatility in more than a year. Major indexes remain near recent two-month highs as investors await Tesla’s (TSLA) results this afternoon following fresh price cuts by the electric vehicle company.
Rising Treasury yields and a U.S. dollar showing signs of life appear to be two pressure points early Wednesday. Economic data from across the Atlantic and here at home also may be dragging stocks.
From overseas this morning came more signs of stubbornly high prices, as the U.K.’s annual inflation remained just above 10%. Food inflation hit 19.1%—the worst level since 1977.
Back home, mortgage applications last week fell almost 9%, according to the Mortgage Bankers Association, as the 30-year mortgage rate rose for the first time in six weeks.
- The United States 10-Year Treasury note yield (TNX) rose 4 basis points to 3.61%.
- The U.S. Dollar Index ($DXY) climbed to 102.12.
- The Cboe Volatility Index® (VIX) futures jumped to 17.49.
- WTI Crude Oil (/CL) fell to its lowest point since the recent OPEC production cuts to $79.34 per barrel.
A higher dollar and yields could reflect growing ideas of another Federal Reserve rate hike next month. This could hurt commodity prices, which might explain crude’s softness early Wednesday.
Morgan Stanley (MS) reported earnings per share of $1.70—about four cents above Wall Street’s consensus estimate—and revenue of $14.52 billion, beating consensus of $13.96 billion. Strength in the bank’s equity and fixed income trading businesses appeared to outweigh weakness on the investment banking side.
Netflix (NASDAQ:NFLX) (NFLX) shares boomeranged from losses of 9% to around unchanged in premarket trading after reporting earnings late yesterday. They fell 1% by early Wednesday. The company’s earnings topped estimates, but an arguably disappointing forecast made investors uneasy. NFLX posted revenue of $8.17 billion, just below its projection for $8.2 billion. Analysts had expected a rise in subscribers of 2.26 million, but the actual number was only 1.75 million. NFLX sees revenue of $8.24 billion in the second quarter, below the $8.5 billion analysts expect. NFLX faces mounting competition even as subscriber growth appears to be slowing. It added only half as many subscribers in 2022 as in 2021, perhaps reflecting falling demand since the end of pandemic restrictions.
Summer trips? Like Delta (DAL) last week, United Airlines (UAL) expressed optimism about Q2 travel demand, helping its shares climb in premarket trading after reporting earnings late Tuesday. “Demand remains strong, especially internationally, where we are growing at twice the domestic rate,” the company said in its earnings press release. Bookings have been strong, UAL’s CEO told CNBC this morning.
Eye on the Fed
The probability of a 25-basis-point increase next month stood near 89% as of this morning, according to the CME FedWatch Tool. That’s up from 70% a week ago.
Fed officials maintained their hawkish drumbeat earlier this week, helping solidify ideas that another rate hike is in the offing. Atlanta Fed President Raphael Bostic said on CNBC yesterday he thinks another rate increase is called for in May and that the Fed should hold rates there “for quite some time.” He also doesn’t think the market’s expectations for a rate cut later this year are accurate, or that inflation will drop quickly.
And St. Louis Fed President James Bullard told Reuters he thinks the Fed should keep raising rates based on recent data showing inflation remains persistent. Bullard didn’t mince words about the U.S. labor market, calling it “very, very strong,” Reuters reports.
Interestingly, neither Bostic nor Bullard indicated that they believe recession is likely this year, even though Fed minutes from the last Federal Open Market Committee (FOMC) meeting showed that members predicted a “mild recession.”
Stocks in Spotlight
Tesla (NASDAQ:TSLA) (TSLA) is expected to report after the close today. Back in January, the car maker electrified auto industry-watchers with a global price cut of as much as 20% on certain models, and more cuts have come since. The latest were announced this morning and affect several models. Prices are down double-digits for the Model 3 this year, bringing it below $40,000. Analysts wonder how these price cuts will affect margins in a still-nervous interest rate environment with heightened recession fears, and Wall Street expects Q1 margins to drop.
Q1 deliveries came in at a record 422,000 vehicles, but overall sales totals fell short of analysts’ expectations.
Here are analysts’ consensus estimates for TSLA’s Q1 earnings:
- Expected Q1 EPS (analysts’ consensus): $0.86
- Year-ago EPS: $1.07
- Expected Q1 revenue (analysts’ consensus): $23.31 billion
- Year-ago revenue: $18.76 billion
What to Watch
Travel update: Yesterday’s report of better-than-expected Q1 growth in China could have a broader impact on certain sectors. In terms of benefit for the rest of the world, travel and luxury spending is most likely to see the biggest impact from the recovery, says Schwab’s Michelle Gibley, director of international research. Chinese consumers represented one-third of global luxury spending before the pandemic vs. 17% last year.
On the move: March Existing Home Sales are due out soon after the open Thursday, and one question is whether median prices will fall again as they did in February for the first time in 11 years. February’s price drop probably reflected rising mortgage rates and slowing demand for pricier homes, Briefing.com said at the time. Still, sales surged 14.5% in February on a seasonally adjusted basis. Supplies remained tight. Analysts expect a slight decline in the headline figure to a seasonally adjusted 4.5 million in March, according to consensus from Briefing.com.
Engine check: Leading Indicators from research group The Conference Board also come out tomorrow morning, and Wall Street expects another decline, this time of 0.4%. This report can provide a look under the hood at consumer sentiment and manufacturing, among other economic metrics.
Debt clock ticks: As you might have noticed, yesterday was Tax Day. (Did you file on time?) Unlike many tax deadlines, this one could have major market ramifications by giving the federal government a better sense, within a week or two, how much revenue is coming in. Knowing that can help Washington figure out when the debt ceiling debate must be resolved before risking possible default. Yesterday, Goldman Sachs (NYSE:GS) (GS) warned the government might have only until early June to take action, Reuters reports.
SPX Daily Chart
CHART OF THE DAY: TECH REVIVES: So far this year, the S&P Technology Select Sector Index (IXT-purple line) is outpacing the S&P 500 index (SPX-candlesticks). Next week is when tech earnings begin in earnest, so that could be a test of the sector’s rally. Data source: S&P Dow Jones indices. Chart source: The thinkorswim® platform.
Not seeing eye-to-eye: If the Fed does hike rates in May and June, that would make it 11 meetings in a row with a rate increase and take the fed funds target range to between 5.25% and 5.5%. Curiously, that’s 25 basis points above the range the Federal Open Market Committee (FOMC) had indicated last month as its endpoint for 2023. That said, the FOMC’s March dot plot hadn’t shown two rate hikes as completely out of the picture. Seven Fed officials had penciled in chances for at least two more rate hikes this year. The futures markets, however, still factor in much higher chances of rate cuts. There’s only a 13% probability that rates will be higher than the current 4.75% to 5% by the end of the year, according to the CME FedWatch Tool. The tug-of-war between the hawkish Fed and the dovish market hasn’t vanished yet.
Riding the rails: Railroads made Q1 headlines for the wrong reasons thanks to the derailment of a Norfolk Southern (NYSE:NSC) train carrying a load of chemicals through Ohio. That issue put railroad regulations on the front burner as some in Congress called for tighter oversight. Even without the accident, railroad company Q1 earnings would likely be in the spotlight because they can help investors get a pulse of the so-called “goods” side of the economy. Companies like CSX (NASDAQ:CSX) and Union Pacific (NYSE:UNP), both of which report Thursday, ship many of the automobiles, agricultural products, machinery, and, yes, chemicals, that fuel the U.S. manufacturing economy. Some major railroads were burdened by labor shortages and inclement weather in Q4, so one thing to watch is whether there’s been improvement on the hiring front. Fuel costs might also be a discussion topic, with energy prices on the rise. Most of all, it’s important to monitor these companies for what they have to say about the slumping U.S. manufacturing economy.
Take a bite: When recessions hit, people generally spend time in the kitchen instead of eating out. Despite that, restaurant stocks keep soaring. McDonald’s (MCD), Chipotle (NYSE:CMG), and Starbucks (NASDAQ:SBUX) are all at or near 52-week highs. Credit card spending also looks quite healthy, according to recent reports from some major banks. In the recent past—for instance during the pandemic—solid consumer spending helped quickly squelch recessions. With unemployment at a near-record low of 3.5% last month, could consumers keep carrying this economy on their shoulders despite rising interest rates and high inflation? One clue could be initial jobless claims, which have been ticking higher. Tomorrow brings the latest weekly figure, and analysts project 242,000, up from 239,000 a week earlier and well above levels below 200,000 earlier this year. If claims keep rising, more consumers may head to the grocery store.
April 20: March Existing Home Sales and Leading Indicators, and expected earnings from AlaskaAir (ALK), American Express (NYSE:AXP), AT&T (T), Philip Morris (NYSE:PM), Taiwan Semiconductor (TSM), and Union Pacific (UNP).
April 21: Expected earnings from Freeport McMoRan (FCX), and Procter & Gamble (PG).
April 24: Expected earnings from CocaCola (KO).
April 25: April Consumer Confidence, March New Home Sales, and expected earnings from 3M (MMM), Dow Chemical (DOW), General Motors (NYSE:GM), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Halliburton (NYSE:HAL), McDonald’s (MCD), PepsiCo (NASDAQ:PEP), Raytheon (NYSE:RTN) (RTX) United Parcel Service (NYSE:UPS), and Verizon (NYSE:VZ).
April 26: March Durable Orders, and expected earnings from Boeing (NYSE:BA), Boston Scientific (NYSE:BSX), Humana (NYSE:HUM), and Norfolk Southern (NSC).