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Subdued Tone Despite Strong Bank Earnings as Retail Sales Come Up Short

Published 07/18/2023, 09:29 AM
Updated 03/09/2019, 08:30 AM

(Tuesday market open) The morning kicks off with more big banks beating analysts’ earnings expectations, but major indexes were barely changed in premarket trading. Retail Sales—an important barometer of consumer health—rose less than expected in June.

Both Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) checked in with earnings that surpassed average Wall Street estimates, bolstered by higher interest rates in the case of Bank of America and growing assets for Morgan Stanley’s Wealth Management business. Lockheed Martin (NYSE:LMT) was a third major earnings story this morning, also exceeding analysts’ forecasts and raising guidance.

Wall Street’s widening rally showed no signs of going on a diet as the new week began. While the info tech sector topped the S&P 500® leader board yesterday thanks in part to gains for chip stocks, the sectors right behind—financials and industrial—helped tell a broader story.

Both financials and industrials are up more than 3% over the last month—a sign that the long rally now includes so-called cyclical sectors that thrive in an advancing economy. Small-caps enjoyed gains, too, both yesterday and longer term.

A broader rally tends to be a healthier one, making the market less vulnerable to a pullback in any one sector. It also reflects ideas that the Federal Reserve may be close to ending its 16-month rate-increase cycle. On a less positive note, yesterday’s gains came amid below-average volume, which can hint at less investor enthusiasm.

Morning rush

  • The 10-year Treasury note yield (TNX) fell 3 basis points to 3.76%.
  • The U.S. Dollar Index ($DXY) was barely changed at 99.75.
  • Cboe Volatility Index® (VIX) futures were stable at 13.58.
  • WTI Crude Oil (/CL) inched up to $74.37 per barrel.

Just in

June Retail Sales rose 0.2%, below the 0.5% consensus estimate and down from a revised 0.5% the previous month. Excluding autos, sales also rose 0.2%. Though the report was weaker than expected, it was the third consecutive month of gains after slipping in four of the prior five months. In a development that may be notable for the housing sector, building materials dragged the headline number.

However, the so-called “control group” of the Retail Sales report, which represents total industry sales and feeds directly into the consumption portion of Gross Domestic Product (GDP), grew 0.6% in June. This could be an upward bias on estimates for GDP growth. The Atlanta Fed’s GDPNow gets updated later today and recently stood at 2.3% for Q2.

Something else to keep in mind: Retail Sales data aren’t adjusted for inflation, so the slowing headline and ex-autos data might suggest abating price pressures. Resilient consumer spending has been surprising and it’s part of the reason inflation has fallen so slowly. Perhaps that’s starting to crack. Goods spending has already leveled off, but maybe services have finally topped too.

Stocks in Spotlight

Bank resilience: Net-interest income, or the money banks make lending versus what they pay customers, is a gift that keeps on giving for Bank of America. The company enjoyed a 14% rise in that category, driven by higher interest rates and loan growth. Fixed income trading revenue also jumped, though equities revenue fell. On the less positive side, Bank of America added to its provisions for credit losses, a sign that it still has concerns about possible loan defaults. Another worry is a rise in net-charge-offs, or the portion of loans unlikely to be repaid, though that metric remains below prepandemic levels. And credit card write-offs nearly doubled from a year ago. Still, the company said in its press release that the economy looks healthy and the job market is “resilient.”

Morgan Stanley added $100 billion in net new assets to bring its total for the year to $200 billion and raised its dividend. Business improved over the course of the quarter, which began in early April soon after turmoil swept the banking industry. “The quarter started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone,” said James Gorman, CEO of Morgan Stanley, in the company’s press release. In one negative development, Morgan Stanley missed analysts’ estimates on net-interest income.

Despite beating expectations on earnings, neither bank’s stock enjoyed much of an impact in the early going, and neither banks’ shares have participated in the market’s overall rally this year.

This week’s earnings calendar also includes American Airlines (NASDAQ:AAL), Tesla (NASDAQ:TSLA), Philip Morris (NYSE:PM), Netflix (NASDAQ:NFLX), American Express (NYSE:AXP), Johnson & Johnson (JNJ), United Airlines (UAL), and CSX (NASDAQ:CSX). Fasten your seatbelts.

Eye on the Fed

Futures trading indicates a 97% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its meeting next week, according to the CME FedWatch Tool.

Fed speakers are on leave this week ahead of the FOMC meeting. They mostly sounded hawkish last week.

What to Watch

Home Run: With Retail Sales out of the way, the next key data report is tomorrow morning’s June Housing Starts and Building Permits. Housing stocks were among the market leaders last week as home demand continued to defy steep mortgage rates. D.R. Horton (DHI), the largest U.S. home builder by volume, reports Thursday morning.

Consensus estimates for tomorrow’s Starts and Permits stand at seasonally adjusted annual rates of 1.475 million and 1.472 million, respectively, according to Briefing.com. That’s down from 1.631 million and 1.491 million in May. Starts could get close scrutiny because of the surge in May of 21.7% from April. The trend had been lower, but single-unit starts jumped 18% in the May report, possibly a good sign for a market that lacks supply.

In other data, inflation numbers from Europe are due out early Wednesday.

Change in the weather: How could El Niño-related climate events later this year lead to storms in the global economy and markets? Find out in the latest analysis from Schwab’s Chief Global Investment Strategist Jeffrey Kleintop.

DXY Daily Chart

CHART OF THE DAY: DOLLAR SUPPORT BREACHED. The U.S. dollar index broke support last week, providing a boost to U.S. multinational companies. The 2022 rally in the dollar has been a drag on large multinational companies because earnings overseas are worth less in U.S. dollars. The more exposure the company has to overseas earnings, the bigger the hit from the strong dollar. So, the weaker dollar is boon for the big guys. Data source: ICE (NYSE:ICE). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Tesla rides the wave: Q2 was a blockbuster for electric vehicle sales, Barron’s says, which means Tesla faces high expectations charging into tomorrow afternoon’s earnings report. Lower prices, incentives, and more models helped drive quarterly sales across the industry, but Tesla likely lost some market share to competitors, according to research firm Cox Automotive. It now pegs Tesla’s U.S. electric vehicle (EV) share at 59%, down from 62% in Q1. Still, what’s good for the goose applies. Tesla delivered 466,000 vehicles last quarter, well above market expectations of 448,000 and a new quarterly record. However, Tesla may face questions on its earnings call regarding their inventory and pricing. The company lowered prices earlier this year but also saw its gross margin fall in Q1 to 19.3%. And just yesterday, Ford (F) announced price cuts for its F-150 Lightning electric pickup truck, perhaps adding to industry pricing pressure. In addition to comments about competitive issues, it would be interesting to hear Tesla’s thoughts on why EV penetration in overall U.S. car sales didn’t climb in Q2.

Counterintuitive corner: It’s no secret that the Cboe Volatility Index® (VIX)—the market’s so-called “fear gauge”—recently slid to lows last seen right before COVID-19 in early 2020. Though the VIX is up slightly over the last week or two, it remains historically weak below 15 (the historic average is near 20). A low VIX typically signals market calm and less chance of major moves on any given day for the S&P 500. That’s just front-month VIX futures, however, so it’s worth checking what contracts further out might tell us about investors’ expectations for future volatility. Right now, they’re headed down, as well. Looking out all the way to next March, none of the VIX futures contacts trade at 20 or above, the highest being March at 19.88. This calmness projected into next spring doesn’t necessarily mean investors can relax, however. A weak VIX, like the current firm market sentiment, is sometimes a contrarian indicator signaling that things may be out of hand on the bullish side of the tape. Any upward swing in VIX from these low levels should be watched closely for possible downward impact on stocks.

Credit check: Bankruptcies ticked up lately on the private side of the economy (as opposed to among big publicly traded companies), analysts note. However, the credit market continues to look stable following last spring’s turmoil. In fact, high-yield corporate bonds, sometimes called “junk bonds,” saw their spread versus Treasuries narrow to a new low-water mark for the year last week, falling 18 basis points to a 390 basis-point premium. On the investment-grade side, things were roughly flat last week, and investment-grade bonds trade at a 128-basis-point premium to Treasuries. None of this suggests any immediate problems for most companies seeking credit. Still, falling yields might mean we’ve reached a point where corporate bonds could start to see some pressure, simply because they’ve been relatively strong so far this year and those banking worries haven’t disappeared. A host of regional banks report beginning this week, so watch and listen for more credit market clues that might have an impact on corporate borrowing.

Calendar

July 19: June Housing Starts and Building Permits, and expected earnings from Goldman Sachs (NYSE:GS), Netflix (NFLX), First Horizon (NYSE:FHN), Haliburton (HAL), and U.S. Bancorp (USB)

July 20: June Existing Home Sales, June Leading Indicators, and expected earnings from Abbott Labs (NYSE:ABT), American Airlines (AAL), Philip Morris (PM), Johnson & Johnson (JNJ), D.R. Horton (DHI), Freeport McMoran (FCX), Travelers (NYSE:TRV), and CSX (CSX)

July 21: Expected earnings from American Express (AXP), AutoNation (NYSE:AN), and Regions Financial (NYSE:RF)

July 24: Expected earnings from Domino’s Pizza (DPZ) and Whirlpool (NYSE:WHR)

July 25: July Consumer Confidence and expected earnings from Alaska Air (NYSE:ALK), Archer Daniels (ADM), Biogen (NASDAQ:BIIB), Dow (DOW), Alphabet (NASDAQ:GOOGL), General Electric (NYSE:GE), General Motors (NYSE:GM), Kimberly-Clark (NYSE:KMB), Verizon (NYSE:VZ), Microsoft (NASDAQ:MSFT), and Visa (NYSE:V)

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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