Closing summary - Market eases into Thanksgiving Day holiday with modest gain
The S&P 500 gained 0.2% on Wednesday, overcoming an early 0.7% decline, as the market adjusted to the thought of the Fed tightening policy more aggressively. The Nasdaq Composite (+0.4%) and Russell 2000 (+0.2%) also completed their own comebacks, while the Dow Jones Industrial Average (-0.03%) closed fractionally lower.
Six of the 11 S&P 500 sectors closed lower while five closed higher. The real estate (+1.3%) and energy (+1.0%) sectors outperformed in positive territory. The materials (-0.7%) and consumer staples (-0.3%) sectors underperformed with modest declines.
Expectations for a more aggressive Fed were corroborated by the latest economic data and Fed commentary: the FOMC Minutes from the November meeting noted that "some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases." Weekly initial claims (199,000) fell to their lowest level since Nov. 15, 1969. The Fed's preferred inflation gauge in the PCE Price Index was up 5.0% yr/yr in October.
The market had already been pricing in this thinking, but it's worth noting that the probability for a rate hike in May 2022 increased to 54.9%, versus 45.4% yesterday, according to the CME FedWatch Tool. The fed-funds-sensitive 2-yr yield rose three basis points to 0.64%, leaving it up 13 basis points since Friday.
Strikingly, the 10-yr yield declined two basis points to 1.65% after brushing up against 1.70% in the morning. The U.S. Dollar Index rose 0.3% to 96.82. WTI crude futures were little changed at $78.31/bbl.
This retracement happened not only in spite of the unemployment and inflation data, but a host of other data that increased on a sequential basis, like personal income and spending for October, new homes sales for October, the second estimate for Q3 GDP, and the final November reading for the University of Michigan Index of Consumer Sentiment.
Nevertheless, the turnaround in the 10-yr yield was cited as a supportive factor for the rebound in the growth stocks, and, in turn, the major indices.
Separately, Nordstrom (JWN 22.66, -9.27, -29.0%) and Gap (GPS 17.84, -5.67, -24.1%) were punished for reporting disappointing earnings results. Deere (DE 367.86, +18.58, +5.3%), HP Inc. (HPQ 35.44, +3.25, +10.1%), and Dell (DELL 57.30, +2.63, +4.8%), on the other hand, pulled through for shareholders.
Reviewing Wednesday's economic data:
Initial jobless claims for the week ending November 20 plunged by 71,000 to 199,000 (Briefing.com consensus 265,000), which is the lowest level of initial claims since November 15, 1969. Continuing jobless claims for the week ending November 13 decreased by 60,000 to 2.049 million.
The key takeaway from the report is that, with initial claims hitting their lowest mark since 1969, it will play into the burgeoning narrative that the Fed is going to need to be more aggressive with its tapering plans.
Personal income increased 0.5% month-over-month in October (Briefing.com consensus +0.2%) while personal spending increased 1.3% (Briefing.com consensus +1.0%). The PCE Price Index jumped 0.6%, as expected, and the core PCE Price Index, which excludes food and energy, rose 0.4%, also as expected.
The key takeaway from the report is that prices increased at a pace faster than income, stealing the purchasing power of those income gains and leading to more spending out of savings. Real disposable personal income declined 0.3% month-over-month while the personal savings rate, as a percentage of disposable personal income, fell to 7.3% from 8.2%.
New home sales increased 0.4% month-over-month in October to a seasonally adjusted annual rate of 745,000 (Briefing.com consensus 800,000) from a downwardly revised 742,000 (from 800,000) in September. On a year-over-year basis, new home sales were down 23.1%.
The key takeaway from the report is that the growth in new home sales is concentrated in higher-priced homes, as inflation pressures, exacerbated by supply constraints and labor shortages, are curtailing the building of lower-priced homes and pinching affordability for lower-income buyers.
The final November University of Michigan Index of Consumer Sentiment increased to 67.4 (Briefing.com consensus 66.8) from the preliminary reading of 66.8. The final reading for October was 71.7.
The key takeaway from the report is that the Index of Consumer Expectations has been pressured to its lowest level in a decade due to rapidly accelerating inflation and little belief that steps are being taken to mitigate rising prices. Roughly 25% of respondents said that inflation eroded their living standards in November.
The second estimate for Q3 GDP showed an upward revision to 2.1% (Briefing.com consensus 2.2%) from 2.0%. The GDP Price Deflator was revised to 5.9% (Briefing.com consensus 5.7%) from 5.7%.
The key takeaway from the report is the understanding that the change in private inventories fueled the Q3 GDP increase. Real final sales of domestic product, which excludes the change in private inventories, were flat, slightly better than 0.1% decline reported with the first estimate.
The Advance report for International Trade in Goods for October showed a deficit of $82.9 billion, versus a revised $97.0 billion (from $96.3 billion) in September. The Advance report for Retail Inventories for October decreased 0.1%, while the Advance report for Wholesale Inventories for October increased 2.2%.
The Weekly MBA Mortgage Applications Index increased 1.8% following a 2.8% decline in the prior week.
As a reminder, the market will be closed tomorrow for Thanksgiving Day and will reopen on Friday with a 1:00 p.m. ET closure.
S&P 500 +25.2% YTD
Nasdaq Composite +22.9% YTD
Russell 2000 +18.1% YTD
Dow Jones Industrial Average +17.0% YTD
Overseas:
Europe: DAX -0.4%, FTSE +0.3%, CAC flat
Asia: Nikkei -1.6%, Hang Seng +0.1%, Shanghai +0.1%
Commodities:
Crude Oil +0.06 @ 78.31
Nat Gas +0.05 @ 5.10
Gold -5.70 @ 1783.90
Silver -0.07 @ 23.48
Copper +0.04 @ 4.47
Spotlight Comment: Gap can't fill void created by supply chain disruptions
Global supply chain disruptions are impacting virtually every retailer to some degree, but Gap (GPS 17.84, -5.67, -24.1%) is taking an outsized hit, as revealed in its downside Q3 earnings report and lowered guidance. Ahead of GPS's results, other apparel and accessories retailers, such as Abercrombie & Fitch (ANF), American Eagle (AEO), and Ross Stores (ROST), noted that supply chain constraints and shipping delays were impairing inventory levels. Therefore, it doesn't come as a surprise that GPS is also feeling the pinch of lightly stocked shelves and racks. However, the magnitude of the problem for GPS is catching investors off guard as the realization sets in that supply chain issues will be the Grinch to its holiday shopping season.
What's especially discouraging is that GPS had gained strong momentum coming off back-to-back blowout quarters. In Q2, net sales and comparable sales jumped by 28% and 12%, respectively, buoyed by an upswing in spending on clothes and accessories as people returned to offices and attended more social events. Although that healthy demand continued into this quarter, GPS was unable to capitalize on it due to inventory shortages, causing total comp growth to slide to 5%. To put the supply chain setbacks into further perspective, CEO Sonia Syngal estimates that the company lost about $300 mln in sales from the disruptions. Without that reduction, GPS's sales would have reached about $4.3 bln, which is just shy of the $4.4 bln consensus estimate.
The main reason why GPS is being severely affected is because it relies heavily on Vietnam for its products. That country, which accounts for ~30% of GPS's production, has grappled with new waves of virus cases, prompting factories to temporarily shut down. In fact, according to CFO Katrina O'Connell, some factories in Vietnam were closed for over two-and-a-half months, much longer than the company had expected. Compounding the issue is that shipping ports on the west coast of the U.S. remain congested, with containerships waiting offshore for days at a time.
GPS's Old Navy brand is bearing the brunt of these snags; the brand's comparable sales declined by 9% in Q3. In comparison, Gap global comps were up 7% while Banana Republic generated impressive comp growth of 28%, driven by strong product pricing.
Another bright spot is the digital channel. Boosted by the very successful launch of the Yeezy Gap Hoodie -- the highest grossing product in a single day in Gap.com history -- online sales grew by 38% versus 3Q19. Despite increasing foot traffic at its brick-and-mortar stores, GPS's digital channel is becoming a bigger piece of the overall pie at 38% of total sales.
These positives, though, are overshadowed by the Q3 misses and a FY22 outlook that was significantly cut. Specifically, the company is now forecasting EPS of $1.25-1.40 and revenue growth of 20%, compared to its prior guidance for EPS of $2.10-2.25 and growth of ~30%. Included in this guidance is an estimated $550-650 mln in lost sales from supply chain issues, as well as about $450 mln in air freight costs to help curb shipping delays.
Overall, it's a frustrating situation because consumer trends are currently in GPS's favor, but issues that are mostly out of its control are preventing it from capitalizing on the favorable environment. With its critical holiday shopping season succumbing to inventory shortages, investors are left to wonder when the grip of supply chain disruptions will ever loosen.
Today's News Summary:
For a full rundown of today's market and after hours developments, see Live In Play
Earnings/Guidance (Full Earnings Calendar):
Anaplan (PLAN) beats by $0.06, beats on revs; guides Q4 revs above consensus
Autodesk (ADSK) beats by $0.07, reports revs in-line; guides JanQ EPS below consensus, revs in-line; guides FY22 EPS in-line, revs in-line
Dada (DADA) reports Q3 (Sep) results, beats on revs; guides Q4 revs in-line
Deere (DE) beats by $0.25, misses on revs
Dell (DELL) beats by $0.20, beats on revs
Gap (GPS) misses by $0.24, misses on revs, comps +5%; guides FY22 EPS below consensus, revs below consensus; significant supply chain constraints impacted comps and sales
Guess? (GES) beats by $0.17, beats on revs; announces dividend increase
HP (HPQ) beats by $0.06, beats on revs; guides JanQ EPS above consensus; guides FY22 EPS in-line
Kingsoft Cloud (KC) beats by RMB1.35, misses on revs; guides Q4 revs in-line
Mesoblast (MESO) reports Q1 results; beats on revs
Nordstrom (JWN) misses by $0.17, beats on revs, reaffirms certain FY21 guidance
Nutanix (NTNX) beats by $0.12, beats on revs; guides Q2 revs in-line; guides FY22 revs above consensus
Pure Storage (PTSG) beats by $0.10, beats on revs; guides Q4 revs above consensus; guides FY22 revs above consensus
VMware (VMW) beats by $0.18, beats on revs; sees JanQ adjusted EPS above consensus and revs below consensus; expects FY23 revs to grow high-single-digits
General News:
November FOMC Minutes indicate, "Some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases."
United Nations atomic watchdog left Iran without deal on inspections, according to the Wall Street Journal
President Biden will nominate Shalanda Young for director of the Office of Management and Budget, according to the New York Times
The Biden administration asks appeals court to remove block on vaccination mandate for companies with 100 employees or more, according to the New York Times
Olaf Scholz will become chancellor of Germany with center-left government, according to the New York Times
Angela Merkel requested a two week lockdown in Germany due to COVID-19 case surge, but the new coalition government turned her down - CNBC
Germany will decide on COVID-19 restrictions today, according to CNBC
San Francisco Fed President Mary Daly (2021 voting member) says she can see the case for a faster taper depending on what happens - CNBC
Japan to introduce digital currency supported by bank deposits, according to Nikkei
Alphabet (GOOG): Hundreds of Google employees are against vaccination mandate, according to CNBC
Apple (AAPL) to use TSMC (TSM) for custom 5G modem in 2023, according to Nikkei
AVROBIO (AVRO) hosts a panel of investigators managing the patient experience in the Phase 2 FAB-GT clinical trial of AVR-RD-01
BeiGene (BGNE) announces approval of BRUKINSA in the EU for treatment of adults with Waldenstrm's macroglobulinemia
Castle Biosciences (CSTL) presents data reinforcing the clinical utility of its DecisionDx dermatologic portfolio
Coinbase Global (COIN) to acquire crypto wallet firm BRD for an undisclosed price
Eli Lilly (LLY) awarded $530 mln Army contract
General Mills (GIS) has agreed to sell its European dough businesses to Crlia; financial terms not disclosed
Hewlett Packard Enterprise (HPE), DELL, IBM and others to compete for US Army contract
Ionis Pharma (IONS) announces that Pfizer (PFE) reports topline results from Phase 2b clinical study of vupanorsen
Johnson & Johnson (JNJ): Johnson & Johnson COVID-19 vaccine fully approved by Health Canada to prevent COVID-19 in individuals 18 years and older
Kura Oncology (KURA) reports Phase 1b Study of KO-539 put on partial clinical hold by FDA
Mastercard (MA) has acquired Arcus FI to help support the delivery of bill pay solutions and other real-time payment applications across Latin America; financial terms not disclosed
Procter & Gamble (PG) voluntarily recalls certain Old Spice and Secret spray antiperspirant products after detection of benzene
Puma Biotech (PBYI) announces US Patent Term Extension for NERLYNX patent
Raymond James (RJF) reports operating metrics for October
Rivian (RIVN): Third Point made $300 mln in Rivian, according to Financial Times
SeaSpine (SPNE) announces full commercial launch of Admiral ACP System
Standard Lithium (SLI) announces $100 million direct investment from koch strategic platforms
Takeda Pharma (TAK): FDA approves Livtencity for treatment of certain patients with post-transplant cytomegalovirus that does not respond to other drugs
(see Upgrades/Downgrades calendar for full list):
Upgrades:
AEGON N.V. (AEG) upgraded to Outperform from Neutral at Credit Suisse
Chevron (CVX) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt raised to $145
Dollar Tree (DLTR) upgraded to Outperform from Market Perform at Telsey Advisory Group; tgt raised to $175
Just Eat Takeaway.com N.V. (GRUB) upgraded to Overweight from Neutral at JP Morgan
Synlogic (SYBX) upgraded to Outperform from Perform at Oppenheimer; tgt $7
Downgrades:
Anaplan (PLAN) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $48
Gap (GPS) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $22
Healthcare Trust of America (HTA) downgraded to Hold from Buy at Berenberg; tgt $37
Jack In The Box (JACK) downgraded to Hold from Buy at Stifel; tgt lowered to $100
Nordstrom (JWN) downgraded to Hold from Buy at Jefferies; tgt lowered to $30
Others:
Avery Dennison (AVY) initiated with an Outperform at Raymond James; tgt $240
Berry Global (BERY) initiated with a Mkt Perform at Raymond James
Better Therapeutics (BTTX) initiated with a Buy at Chardan Capital Markets; tgt $17
Celularity (CELU) initiated with an Equal-Weight at Morgan Stanley; tgt $9
ChargePoint (CHPT) initiated with an Equal Weight at CapitalOne; tgt $24
Diversey Holdings (DSEY) resumed with a Buy at Citigroup; tgt $16
EVgo Inc. (EVGO) initiated with an Equal Weight at CapitalOne; tgt $18
Graphic Packaging (GPK) initiated with a Strong Buy at Raymond James; tgt $24.50
LianBio (LIAN) initiated with an Outperform at Raymond James; tgt $27
Marcus (MCS) initiated with a Neutral at JP Morgan; tgt $25
Pliant Therapeutics (PLRX) initiated with an Outperform at RBC Capital Mkts; tgt $38
Sealed Air (SEE) initiated with a Mkt Perform at Raymond James
Silgan Holdings (SLGN) initiated with an Outperform at Raymond James; tgt $47
Spartan Acquisition Corp. III (SPAQ) initiated with an Overweight at CapitalOne; tgt $17
Spotify (SPOT) initiated with a Buy at The Benchmark Company; tgt $300
The Metals Company (TMC) initiated with a Neutral at Wedbush; tgt $5
Upcoming Events:
Econ data (Thursday):
Markets closed for Thanksgiving Day
**No economic data of note on Friday
Earnings:
Monday (Nov. 22)
Pre-Market: AVYA CRNC SR TWST ZH
After-Hours: A ARWR JACK KEYS URBN ZM
Tuesday (Nov. 23)
Pre-Market: ANF AEO AMWD ADI BBY BURL ROAD CBRL DKS DLTR DY GENI SJM MDT TITN
After-Hours: PLAN ADSK DELL GPS GES HPQ JWN NTNX PSTG VMW
Wednesday (Nov. 24)
Pre-Market: DE KC
After-Hours: None
Thursday (Nov. 25)
Markets closed for Thanksgiving Day
Friday (Nov. 26)
Pre-Market: PDD
After-Hours: None
Full Earnings Calendar
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