U.S. equities are trading lower in afternoon action with the markets unable to extend yesterday's solid gains. The markets continue to face a host of headwinds, notably stubbornly high inflation pressures that have forced the Fed to begin an aggressive monetary policy tightening campaign. The economic calendar appears to be adding to the negative sentiment, as preliminary data on the domestic manufacturing and services sectors came in below estimates, new home sales plunged, and a read on regional manufacturing activity surprisingly fell into contraction territory. Meanwhile, inflation, labor costs, and supply chain issues remain evident in corporate earnings reports, with Snap falling sharply after lowering its guidance, while Best Buy posted mixed results, Abercrombie & Fitch reported an unexpected loss, and Autozone topped quarterly estimates. Treasuries are trading higher to apply downside pressure on yields, and the U.S. dollar is adding to yesterday's drop. Crude oil prices have turned lower, and gold is gaining ground. Europe finished mixed, while markets in Asia were lower with China leading the way.
As of 12:50 p.m. ET, the Dow Jones Industrial Average is down 1.0%, the S&P 500 is declining 1.9%, and the Nasdaq Composite is decreasing 3.1%. WTI crude oil is losing $0.53 at $109.76 per barrel, and Brent crude oil is decreasing $0.25 at $113.20 per barrel. The gold spot price is trading $17.40 higher to $1,865.20 per ounce, and the Dollar Index is falling 0.4% at 101.71.
Best Buy Co. Inc. (BBY $73) reported adjusted Q1 earnings-per-share (EPS) of $1.57, below the $1.59 FactSet estimate, as revenues declined 8.5% year-over-year (y/y) to $10.7 billion, north of the Street's forecast of $10.4 billion. Q1 same-store sales declined 8.0% y/y, compared to the expected 8.6% drop. The electronics and appliance retailer said results were softer than last year as it lapped stimulus and other government support that boosted unusually strong demand, while it saw increased promotional activity and higher supply chain expenses. BBY lowered its full-year EPS and sales guidance. The company noted that macro conditions worsened since early March and those trends have continued into Q2. BBY is trading modestly lower.
Snap Inc. (SNAP $13) is falling sharply after the social media company lowered its profit and revenue guidance for Q2 as it noted that the macroeconomic environment has deteriorated further and faster than anticipated. The company also said it will slow the pace of hiring.
Abercrombie & Fitch Co. (ANF $19) posted an adjusted Q1 loss of $0.27 per share, compared to the Street's forecast for a $0.02 per share profit, with revenues rising 4.0% y/y to $813 million, above the projected $799 million. ANF said inventories were up about 45.0% y/y due to increased in-transit inventory, higher units on hand, and increased average unit costs driven by freight. The company lowered its full-year revenue outlook but suspended its profit forecast to more closely align with industry practices, and the company's plans to flex operating expenses in response to volatility in freight and other costs. ANF is down over 30%.
AutoZone Inc. (AZO $1,875) reported fiscal Q3 EPS of $29.03, above the expected $26.18, as revenues grew 5.9% y/y to $3.9 billion, topping the estimated $3.7 billion. Q3 same-store sales rose 2.6% y/y, versus the expected 0.1% decline. The auto parts retailer said both its retail and commercial sales performance exceeded its expectations, with the former remaining healthy considering tough comparisons to a year ago. The company said inventory increased due to inflation and its growth initiatives, while its gross profit decreased driven primarily by accelerated growth in its lower margin commercial business. Shares are higher.
The S&P 500 has not been able to capitalize on yesterday's rebound after registering a seventh weekly drop last week, and the markets remain choppy as investors continue to grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Signs Point to Rising Recession Risk, how rising inflation, rate hikes, supply-chain problems, and the Russia-Ukraine war have contributed to growing recession fears. Liz Ann mentions that despite a drop in consumer confidence, spending has held up so far this year, and many indicators remain at solid levels. However, she says that rather than looking at the level of data, sometimes the trend is more important. In other words, "better" or "worse" may matter more than "good" or "bad". You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.
Reads on business activity and housing disappoint
The preliminary S&P Global U.S. Manufacturing PMI Index for May declined to 57.5 from April's unrevised 59.2 figure, and versus the Bloomberg consensus estimate of a decrease to 57.7. The preliminary S&P Global U.S. Services PMI Index showed growth for the key U.S. sector in May slowed to 53.5, compared to expectations to decline to 55.2 from April's 55.6 figure. However, growth remained as readings above 50 for both indexes denote expansion.
S&P Global said the measure of input prices moved to the highest level since 2009, but output prices slowed from the record pace set in April, adding that companies reported that "demand is coming under pressure from concerns over the cost of living, higher interest rates and a broader economic slowdown."
In housing news, new home sales (chart) tumbled 16.6% month-over-month (m/m) in April to an annual rate of 591,000 units, well short of the Bloomberg consensus forecast calling for a rate of 749,000 units, and below March's downwardly-revised 709,000-unit level. The median home price rose 19.6% y/y to $450,600. New home inventory rose to 9.0 months from March's level of a 6.4-months supply at the current sales pace. Sales fell m/m in all regions except for the West. Sales in the Northeast were higher y/y, while sales in the Midwest, South and West were lower. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.
The Richmond Fed Manufacturing Activity Index surprisingly fell into contraction territory (a reading below zero) for May, plunging to -9 from April's 14 reading, and well below forecasts for a reading of 10. Capacity utilization, new order volume and shipments dropped into contraction territory, and employment cooled significantly, while prices paid accelerated and remain severely elevated.
Treasuries are gaining ground, and yields have been choppy as of late as markets anticipate tighter Fed monetary policy amid the backdrop of persistent inflation and signs of slowing economic growth.
As the Fed launches a series of rate hikes to try to cool off inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market Reset: What's Next? in which she discusses how major central banks are hiking interest rates rapidly and shrinking their balance sheets in an effort to "normalize" policy. Kathy addresses the question hanging over the market: What is a normal policy rate? Be sure to follow Kathy on Twitter: @KathyJones. Amid this backdrop also check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes.
The yields on the 2-year Treasury note, as well as the 10-year note and the 30-year bond are decreasing 13 basis points (bps) to 2.50%, 2.73% and 2.95%, respectively.
Europe mixed as May manufacturing and services data was in focus
European equities were mixed following yesterday's solid gains and a string of several volatile weeks, with conviction remaining hard to come by. Persistent inflation has been a driver of the recent volatility, exacerbated by some poor earnings from key retailers out of the U.S. as of late, and has prompted some major global monetary policies to tighten. The Fed in the U.S. has led the way, along with the Bank of England, while the European Central Bank (ECB) has lagged, but ECB President Christine Lagarde said yesterday that the central bank will likely be in a position to exit negative rates by the end of the third quarter. Jeffrey Kleintop offers his latest commentary, The Three Bears?, discussing how stocks, bonds, and cash are all in a bear market or teetering on the edge of one—a very rare event. He points out how over the past 72 years, there have only been two prior periods with a triple bear. Jeff adds that a bull market is likely to return, as it typically has, but the timing is in question. He notes how every period is different and there can be no guarantees, but it is worth noting that the prior periods featuring any of these three bears were often very brief. You can follow Jeff on Twitter: @JeffreyKleintop.
Moreover, the war in Ukraine is still ongoing, adding to the list of bearish sentiment drivers, and Ukraine recently said it has ruled out any ceasefire that involves giving up territory to Russia. Some key preliminary May Manufacturing and Services PMIs from S&P Global were digested. Eurozone manufacturing and services output slowed more than expected but both continued to depict expansion. U.K. business activity also slowed more than expected but continued to grow, though the region's services sector output decelerated sharply. In other economic news, French business confidence for May held steady compared to expectations to dip, while U.K. public sector net borrowing for April rose but came in slightly below estimates. The euro moved higher versus the U.S. dollar but the British pound fell. Bond yields in the Eurozone were mixed, and rates in the U.K. saw solid pressure.
The U.K. FTSE 100 Index was down 0.4%, France's CAC-40 Index fell 1.7%, Germany's DAX Index decreased 1.8%, and Italy's FTSE MIB Index declined 1.1%, while Switzerland's Swiss Market Index traded 0.2% higher, and Spain's IBEX 35 Index gained 0.1%.
Asia lower following data and China focus
Stocks in Asia finished broadly lower as conviction remained empty amid the host of headwinds facing the global economy, while geopolitical tensions between the U.S. and China have nudged higher. Inflation continues to be the biggest discussion as central banks globally have turned hawkish in an effort to combat the persistent pricing pressures. However, China has bucked the trend and cut rates on 5-year loans last week in an effort to boost the economy due to recent lockdowns from a rise in COVID cases. To add to the mix, President Biden said he is considering lifting some Chinese tariffs to help combat inflation. China announced further stimulus efforts today but Chinese markets led to the downside as the measures appeared to underwhelm. Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. With the ongoing war in Ukraine, festering supply chain issues, and lockdowns in China persisting, the markets digested some preliminary May reports on manufacturing and services. Japan's services sector growth accelerated and its manufacturing output slowed slightly but remained in expansion territory. Australia's manufacturing and services sector growth both slowed solidly but continued to expand.
Japan's Nikkei 225 Index declined 0.9%, with the yen gaining ground late in the day to continue to recover from its tumble versus the U.S. dollar seen in March and April. China's Shanghai Composite Index fell 2.4%, with Tech stocks leading the way, and the Hong Kong Hang Seng Index dropped 1.8%. Australia's S&P/ASX 200 Index dipped 0.3%, India's S&P BSE Sensex 30 Index was down 0.4%, and South Korea's Kospi Index traded 1.6% to the downside.
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