SNAPSHOT: US equity futures are mixed. NQ +0.2%, ES -0.1%, RTY -0.3%, YM -0.3%. Treasuries are bid, with yields lower by around 5bps across the curve, which has resumed its flattening bias. The Dollar Index is up, largely as the EUR slides after grim flash PMI data for June flags risks to growth. Crude benchmarks are also lower. The theme remains concerns on growth amid high prices, and policymakers who are behind the curve in their policy responses.
GROWTH CONCERNS: Economic growth concerns have dragged on equities of late, and this week, Fed officials have been more explicit in acknowledging risks that the US economy could fall into a recession. In his testimony to lawmakers, Chair Powell said that a recession was certainly a possibility, while non-voter Harker touched on this theme ahead of Powell’s remarks. These remarks follow a NY Fed publication last week, which noted that the economic outlook had worsened considerably since March, and its model projected that inflation would remain elevated this year, accompanied by a not-so-soft landing. The model sees modestly negative GDP growth in this year and next, with only a 10% probability of a soft landing (defined as four-quarter GDP growth staying positive over the next ten quarters), while the chances of a hard landing (defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1%) stood at around 80%. These concerns can be seen in energy markets: despite the thin spare capacity of OPEC members and the Russian-related disruptions, crude prices have been sliding, with the demand-side of the equation coming under pressure. ING says that this may help relieve some of the tightness in crude markets in the short to medium term, but it does little to solve the longer-term supply shortfalls. The knock-on to equities is also becoming clearer. The slowdown in growth and elevated level of consumer prices is a threat to corporate margins, and could hit earnings in the quarters ahead – retailers like Target and Walmart have already warned about this. Meanwhile, an analysis by Reuters says that there are few signs that the Street is factoring in the drag from higher oil prices in earnings expectations; the piece cites research suggesting that a USD 10 rise in oil prices cuts 0.3ppts from GDP, and the approximately USD 30 rise in crude prices since February has already shaved 1% from global growth. Reuters noted that around 61% of Q2 pre-announcements for Q2 had been negative so far, which lags the 68.7% negative pre-announcements in the previous quarter. Currently, analysts expect S&P 500 companies to report 5.4% earnings growth in Q2, but once energy companies are taken out, that falls to a 2.2% decline, according to the newswire’s data.
DAY AHEAD: Weekly initial jobless claims data coincides with the BLS’ survey period for the June jobs report, though the street sees little change in the week. Perhaps more interestingly, the S&P Global Flash PMI data for June may give us clues as to how the more-widely viewed ISM data will look when it is released in the early part of July; the Street looks for the S&P PMI data to ease slightly on the month, although there are probably greater fears of a more meaningful slide after the soft showing in the European PMI data today. Fed Powell delivers Part 2 of his semi-annual testimony to lawmakers, which is usually a copy-and-paste-job of his first testimony, and will likely face a similar line of questioning by lawmakers on inflation and growth. The Treasury announces sizes for next week’s 2s, 5s and 7s auctions. Note that the EIA has delayed the release of its weekly crude inventory data due to a system issue, but the NatGas stocks data will still be released. Full Day Ahead here.
- Inventories - API data showed crude stocks +5.7mln in the week (exp. -0.6mln), inventories at Cushing -0.4mln, gasoline stocks +1.2mln (exp. -0.5mln), and distillates -1.7mln (exp. +0.3mln). The US EIA said its own product releases report this week would be delayed because of system issues, although the Nat Gas storage report will be released as scheduled today. EIA did not provide any indication of when the delayed data would be released, stating that it would resume its normal production schedule and release delayed data as soon as possible.
- Energy - As expected, President Biden called on Congress to suspend the federal gas tax for three months. Note: reports on Wednesday, citing multiple Democratic sources, said that efforts to suspend the tax stood almost no chance of passing, and a more likely scenario was for states to enact their own gas tax holidays. Elsewhere, Energy Secretary Granholm said the Defense Production Act could be used to bring more refining capacity online, and when asked about a ban on fuel exports, she said that the administration would not take any tools off the table.
- Occidental Petroleum Corporation (OXY), Berkshire Hathaway Inc. (BRK.B) - Berkshire Hathaway purchased 9.6mln shares (USD 529mln worth) of Occidental this week, raising its stake to 16.3%, according to a filing. as the oil company’s shares come off the year’s high.
- Century Aluminum Company (CENX) - The largest producer of primary aluminium in the US said it will temporarily idle its smelter in Hawesville, Kentucky, as a direct result of skyrocketing energy costs. The smelter is expected to begin idling on Monday, and CENX said it would remain idled for a period of nine to twelve months until energy prices return to more normalised levels. CENX said it continues to explore all available options to avoid the temporary curtailment.
- Alcoa Corporation (AA), Freeport-McMoRan Inc. (FCX), Rio Tinto plc (RIO), Southern Copper Corporation (SCCO), Vale S.A. (VALE) - Morgan Stanley has lowered PTs on a number of materials names: Southern Copper PT cut to USD 52 (prev. 66), Freeport McMoRan PT cut to USD 30 (prev. 39), Alcoa PT cut to USD 55 (prev. 96), Vale PT cut to USD 16 (prev. 22), and it downgraded Rio Tinto.
- H.B. Fuller Company (FUL) - Q2 EPS USD 1.11 (exp. 1.07), Q2 revenue USD 993.3mln (exp. 966.4mln), Q2 adjusted EBITDA +14% Y/Y at USD 139mln (exp. 136mln). Reiterates its FY22 EPS outlook between USD 4.10-4.35 (exp. 4.20), and backs its FY22 adj. EBITDA view between USD 530-550mln. Exec said it implemented annualised price adjustments of USD 330mln in H1 2022, and plans additional annualised increases of over USD 175mln in Q3. Said that when combined with annualised price increases of USD 450mln executed in FY 2021, total pricing actions are anticipated to more than offset raw material and delivery cost increases, adding that it is prepared to implement further increases, as necessary.
- Air Liquide (AIQUY), Siemens Energy (SMNEY) - The two form a JV for the European production of large-scale renewable hydrogen electrolysers. Siemens Energy will hold a 74.9% stake.
- Polymetal (AUCOY) - Kazakhstan’s sale of gold bullion and concentrates continues as normal, sales from Russian mines to Asian markets returned to the regular schedule. Sales logistics continue experiencing significant challenges from COVID restrictions in China and the impact of sanctions.
- Tesla, Inc. (TSLA) - CEO Musk said new car factories in Texas and Berlin were “losing billions of dollars” as they struggle to increase production because of a shortage of batteries and China port issues, according to Automotive News. “Both Berlin and Austin factories are gigantic money furnaces right now. Okay? It’s really like a giant roaring sound, which is the sound of money on fire,” Musk said in an interview with Tesla Owners Silicon Valley, an official Tesla recognised club, on May 31st.
- Tesla, Inc. (TSLA) - Reuters reported that although President Biden rarely talks about the automaker, privately the administration has leaned on the company to help craft a new policy to allow electric vehicles to benefit from the nation’s lucrative renewable fuel subsidies.
- Rolls Royce (RYCEY) - Will only be able to deliver its first “mini” nuclear power plants by the 2029 target date if the UK makes a commitment this year to deploying the technology, which would be years before it receives safety approval, The Times reported.
- BMW (BMWYY) - Production commences at the Lydia plant in China, as part of BMW’s EV push. BMW will increase annual output in the region to 830k units (vs 700k in 2021).
- Volkswagen (VWAGY) - Confirms FY22 deliveries will be +5/10% Y/Y, and revenue is seen growing +8-13% Y/Y.
- Stellantis (STLA) - The automaker is suspending production at its Rennes plant in France until July 3rd due to chip supply shortages.
- Steelcase Inc. (SCS) - Q1 adj. EPS -0.05 (exp. -0.18), Q1 revenue USD 740.7mln (exp. 691mln). Exec said revenue growth +33% was better than expected due to stronger incoming orders and improved order fulfilment from the adjustments it has made to mitigate the impact of supply chain disruptions. End Q1 backlog +52% Y/Y at USD 927mln, backlog included a higher than historical percentage of orders scheduled to ship beyond the end of the next quarter, and supply chain disruptions were expected to continue. As a result, it expects Q2 adj. EPS between 0.11-0.15 (exp. 0.23), and sees Q2 revenue between USD 875-900mln (exp. 873mln).
- Worthington Industries, Inc. (WOR) - Q4 adj. EPS USD 1.58 (vs 2.33 Y/Y), Q4 revenue USD 1.52bln (vs 978mln Y/Y). Exec said Steel Processing unit was negatively impacted by inventory holding losses in Q4 but its Building Products and Consumer Products units both continued to perform exceptionally well. Exec added that while the business environment continues to be challenging and there is some level of economic uncertainty, it remains optimistic about demand in its key end markets.
- Matson, Inc. (MATX) - Lifts quarterly dividend by 1c to 0.31/shr.
- Northrop Grumman Corporation (NOC) - Awarded a USD 248.2mln Navy contract modification.
- Kohl’s Corporation (KSS), Franchise Group, Inc. (FRG) - Franchise Group was considering lowering its offer for Kohl’s to near USD 50/shr from about USD 60/shr, CNBC reported citing sources, as the group mulls whether buying Kohl’s is the best use of its capital. Kohl’s shares closed Wednesday at USD 38.61.
- KB Home (KBH) - Q2 EPS USD 2.32 (exp. 2.01), Q2 revenue USD 1.7bln (exp. 1.6bln). Q2 average selling prices +21% at USD 494,300, Q2 homes delivered “essentially even” at 3,469. Backlog value +43% at USD 6.12bln, the highest Q2 level in its history; ending backlog +23% to 12,331 homes. Company said that sales rates were moderating from the exceptional levels as buyers process the impact of higher mortgage interest rates, as well as inflationary pressures. Reaffirms FY 2022 guidance.
- Uber Technologies, Inc. (UBER) - Has looked at selling its Indian ride-hailing arm, according to Bloomberg. Uber denied the report, according to CNBC-TV18, stating that it was categorically false, and it has never explored exiting India.
- Advanced Micro Devices, Inc. (AMD) - Mathew Hein appointed Chief Strategy Officer and Senior Vice President of Corporate Development. He joins AMD from DBO Partners, where he served as lead advisor to AMD on a number of opportunities.
- Leidos Holdings, Inc. (LDOS) - The USD 11.5bln Defense Enclave Services contract awarded by the Defense Information Systems Agency in February 2022 was upheld by the Government Accountability Office after a thorough and disciplined review.
- Synopsys, Inc. (SNPS) - Completes acquisition of WhiteHat Security for USD 330mln in cash, expects the acquisition to be neutral to FY22 adj. EPS.
- Atos (AEXAY) - Three companies are interested in Atos’ IT units that it intends to split into two, according to BFMtv. The interest is coming from Airbus (EADSY), Orange (ORAN), Thales (THLLY); of these, the piece suggests that the French state would be in favour of an Atos-Thales tie up.
- Meta Platforms, Inc. (META) - CEO Zuckerberg told CNBC that the Metaverse will eventually be as big as its current social media business, and that it would be a massive economy. Zuckerberg sees more than a billion people using the Metaverse. CEO also said that AI was a “massive wave” for all of its services, and Meta was “positioning the company to drive the wave of AI innovation,” adding that more content on social media will come from AI recommendations. Elsewhere, CEO said that he did not expect to replace Cheryl Sandberg’s role immediately, and her responsibilities would be shared by several people.
- Merck & Co., Inc. (MRK) - CDC Advisory Committee on Immunization Practices unanimously voted to include Vaxneuvance as a recommended option for vaccination in infants and children, including routine use in children under 2 years of age, Bloomberg reported.
- Becton, Dickinson and Company (BDX) - Announced a voluntary recall of its intraosseous products.
- Xenon Pharmaceuticals Inc. (XENE) - Announced new efficacy data supporting the late-stage Phase 3 development of XEN1101. Separately, announced a common stock offering, USD 250mln spot secondary, price range USD 30.00-31.00/shr.
- Novartis (NVS) - Tafinlar & Mekinist receives FDA approval for first tumour-agnostic indication for Braf V600E solid tumours.
- Apollo Global Management, Inc. (APO) - Apollo announced the formation of an Asia Pacific Credit Strategy in strategic partnership with Hostplus, one of the five largest superannuation funds in Australia. The new strategy launches with USD 1.25bln in assets, following an inaugural raise that includes a USD 500mln anchor commitment from Hostplus.