Daily Markets: Could the Fed Skip a Rate Hike?

Today’s Big Picture

Asia-Pacific equity markets finished the day mixed but mostly muted as China’s slower than expected manufacturing recovery overshadowed the passing of the debt ceiling bill in the U.S. House of Representatives. Taiwan’s TAIEX closed 0.40% lower as a large drawdown in Utilities coupled with declines in Industrial Services and Financials overcame positive results in all other sectors in that market. Both India’s SENSEX and South Korea’s KOSPI fell 0.31%, Hong Kong’s Hang Seng declined 0.10% and China’s Shanghai Composite was unchanged. Australia’s ASX All Ordinaries gained 0.24%, and Japan’s Nikkei closed 0.84% higher as the time-honored tradition of “buying the dip” buoyed that market. European markets are up in midday trading except for Italy, and U.S. equity futures point to a higher open.

The successful passage of the debt ceiling agreement in the House is giving some lift to equity futures. However, investors will receive several pieces of fresh economic data, and the market will digest Macy’s (M) cut to its full-year outlook after discretionary sales weakened significantly in March. The company now sees sales of $22.8-$23.2 billion for the year, down from the previous range of $23.7-$24.2 billion.

Ahead of today’s data, Philly Fed President Patrick Harker said the central bank should skip a hike at the June meeting as monetary policy was close to being restrictive. Fed Governor Philip Jefferson also signaled that skipping a hike would allow the central bank to assess data, adding that higher rates could exacerbate financial stress. That dialed back expectations for the Fed boosting rates following its June 14th policy meeting; however, the data coming today and in the next few weeks will tell us far more about inflation’s downward trajectory. Harker is scheduled to speak again today as part of a virtual NABE Monetary Policy and Outlook Webinar.

Data Download

International Economy

The au Jibun Bank Japan Manufacturing PMI was at 50.6 in May compared with flash data of 50.8 and after a final 49.5 in April. This marked the first growth in factory activity since last October.

The Caixin China General Manufacturing PMI unexpectedly rose to 50.9 in May from 49.5 in April. Output rose the most in 11 months, new order growth was at 2 year-high, and foreign sales continued to increase.

The HCOB Eurozone Manufacturing PMI came in at 44.8 in May, slightly up from a preliminary estimate of 44.6. Still, the latest PMI reading signaled a further decline in the health of the bloc's manufacturing sector. Output declined the most since last November and new order inflows dropped at the quickest pace in six months, with exports contracting at one of the sharpest rates on record. The flash reading on the May consumer price inflation rate for the Euro Area fell to 6.1% in May, down from 7.0% the previous month and below market expectations of 6.3%. The May flash was the lowest level since February 2022, though it remained significantly higher than the European Central Bank's target of 2.0%.

Domestic Economy

At 8:15 AM ET, ADP will release its May National Employment Report, which is expected to show 170K jobs added during the month vs, 296,000 in April.

At 8:30 AM ET the final reading for 1Q 2023 Unit Labor Cost and Nonfarm Productivity will be published. For the quarter, Unit Labor Cost is expected to clock in at 6% up from 3.3% in the prior quarter while Nonfarm Productivity is thought to fall 2.5% from 1.6%.

At 9:45 AM ET and soon thereafter at 10 AM ET, we will get twin looks at the May Manufacturing economy from S&P Global and then the Institute for Supply Management (ISM). The consensus sees ISM’s data falling to 49.8 in May from 50.2 in April, but we will also be examining new orders as well as pricing data for the month. A reminder that PMI figures above 50 indicate expansion while those below 50 indicate contraction.

Also at 10 AM ET, April Construction Spending data will be published, and investors will be wanting confirmation that infrastructure spending out of Washington is ramping up as expected.

The latest Fed Beige Book report on regional economic activity out late yesterday showed little change in April and early May, however, the report found future growth expectations deteriorated slightly.

The American Petroleum Institute reportedly shows a build of 5.2 million barrels of oil in US commercial stockpiles for the week ending May 26.

Markets

There was positive news in the form of the debt ceiling bill passing the House of Representatives vote yesterday. However, it was overshadowed by the specter of both an increased probability of another rate hike in June and markets’ expectation of lower global economic activity on the heels of China’s latest PMI data release. The Dow fell 0.41%, both the S&P 500 and the Nasdaq Composite declined just over 0.60% and the Russell 2000 closed a full 1.00% lower. Energy (-1.76%) took the biggest hit yesterday as expected demand continued to soften on China’s lower PMI results which are taken by many to forecast lower overall global demand for oil. Relative safety was found in Utilities (0.92%) and Healthcare (0.86%). In individual names Advanced Auto Parts shares traded down 35.04% after the company reported a poor quarter, took down 2023 guidance, and reduced its dividend 83% to $0.25 per share. The update prompted several analyst firms to reduce their ratings on the name and many saw target price estimates get cut in half or more.

Here’s how the major market indicators stack up year-to-date:

• Dow Jones Industrial Average: -0.72%
• S&P 500: 8.86%
• Nasdaq Composite: 23.59%
• Russell 2000: -0.66%
• Bitcoin (BTC-USD): 64.14%
• Ether (ETH-USD): 56.44%

Stocks to Watch

Before U.S. equity markets begin trading today, Catalent (CTLT), Conn’s (CONN), Dollar General (DG), Hormel Foods (MRL), and Manchester United (MANU) are expected to report their quarterly results.

Salesforce (CRM) reported top and bottom line results for its April quarter that topped consensus expectations and the company issued upside guidance for the current quarter. For the July quarter, it sees EPS of $1.89-$1.90 vs. the $1.71 consensus with revenue in the range of $8.51-$8.53 billion vs. the $8.49 billion consensus.

Revenue and EPS reported by CrowdStrike (CRWD) for its April quarter easily beat consensus expectations. Exiting the quarter, the company’s average recurring revenue (ARR) grew 42% YoY to $2.73 billion. For the current quarter, CrowdStrike sees EPS of $0.54-$0.57 vs. the $0.54 consensus with revenue of $717.2-$727.4 million vs. the $718.59 million consensus.

Despite reporting better than expected April quarter results and issuing upside guidance for the current quarter, shares of Okta (OKTA) moved lower in aftermarket trading last night. For the April quarter, the company posted EPS of $0.22 vs. the $0.12 consensus as revenue for the period rose 24.8% YoY to $518 million. Subscription backlog exiting the quarter was $2.94 billion, up 9% YoY.

Shares of C3.ai (AI) were also under pressure last night even though the company’s April quarter results bested consensus expectations and it delivered in-line guidance for the current quarter. Revenue for the April quarter was little changed year over year at $72.4 million, of which 79% or $56.9 million was subscription related. During the quarter C3.ai shared it closed 43 agreements, including 19 pilots. For its 2024 fiscal year, management guided revenue to $295.0 - $320.0 million vs. the $265.79 million consensus.

Shares of Intel (INTC) finished higher yesterday after the company shared it is on track to hit the upper end of its second-quarter revenue forecast. "We're going to track at $12 billion to $12.5 billion as we close out the second quarter," Intel CFO David Zinsner said at the TD Cowen conference. The company's previous outlook in April was of revenue between $11.5-$12.5 billion.

Quarterly results at Victoria’s Secret (VSCO) didn’t have the lift folks were expecting as both its top and bottom line results fell short of consensus expectations. The company also issued downside guidance for the current quarter with EPS of $0.10-$0.40, well below the $0.98 consensus. Revenue for the July quarter is expected to decline in the mid-single digit range YoY vs. last year's net sales of $1.52 billion vs. the $1.54 billion consensus.

After Today’s Market Close

Broadcom (AVGO), ChargePoint (CHPT), Cooper (COO), Dell (DELL), Five Below (FIVE), lululemon athletic (LULU), Sentinel One (S), VMware (VMW), and Zscaler (ZS) are slated to report their quarterly results after equities stop trading. Those looking for more on which companies are reporting when should head on over to Nasdaq’s Earnings Calendar.

On the Horizon

Friday, June 2

• US: Employment Report – May

Thought for the Day

“Always look for the fool in the deal. If you don’t find one, it’s you.” – Mark Cuban

Disclosures

• CrowdStrike (CRWD), Okta (OKTA), Zscaler (ZS) are constituents of the Foxberry Tematica Research Cybersecurity & Data Privacy Index
• VMware (VMW), Broadcom (AVGO), Intel (INTC) are constituents of the Tematica BITA Digital Infrastructure & Connectivity Index
• Dollar General (DG) is a constituent of the Tematica BITA Big Spenders & Savers Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks Economy Earnings Central Banks