Apple And Goldman Sachs Have Very Different News Days

(Tuesday Market Open) Equity index futures were pointing to a higher open before the Consumer Price Index (CPI) was released. And then what a change. Investors who convinced themselves that the CPI numbers were going to be softer and that the Federal Reserve was only going to hike the overnight rate just 50 basis points this month got a rude awakening.

Potential Market Movers

The CPI rose at a much hotter-than-expected 0.1% in August against the decline of 0.1% analysts forecasted. Year over year (YOY), CPI grew at a pace of 8.3%, similarly hotter than the forecasted 8.1%.

Core CPI was projected to be 0.3% month over month and 6.1% YOY but came in at 0.6% and 6.3% respectively.   

Equity index futures flipped on the news as the Dow futures went from more than 250 points higher to 500 points lower.

In Europe, inflation numbers were mixed with the Spanish CPI also coming in hotter than expected at a staggering 10.5% YOY and the German CPI coming in on target with 7.9%. Additionally, the German ZEW Economic Sentiment survey found that the German institutional investors were more negative than expected on the German economy. Similarly, the Eurozone economic sentiment was also gloomier than expected.

Despite the mixed inflation reports and negative outlooks, the Europe STOXX 600 was trading 0.47% higher and the German DAX rose 0.75%. However, these numbers also turned on the U.S. CPI report.

The STOXX 600 plummeted to -0.36% and the DAX fell to -0.10%.

The euro was gaining against the dollar in the spot market ahead of the U.S. CPI report. After the CPI report, the U.S. Dollar Index ($DXY) shot higher—going from negative territory to a gain of 0.64%.

The Treasury markets reacted with the 10-year Treasury yield (TNX) jumping six basis points to 3.42%.

September rate hike expectations returned to 75 basis points and the markets are now pricing in a small likelihood of 100 basis points.

Looking at the commodities market, Saudi Arabia said it would increase its oil production output, but the increase didn’t appear to be as much as investors had hoped because the oil prices were still rising ahead of the market open with WTI crude oil futures rising 1.56%. However, oil prices retreated after the CPI report and were down 0.98% before the opening bell.

After Monday’s close, Oracle (ORCL) reported a miss on earnings despite better-than-expected revenues. The company pointed to currency exchange for the miss. ORCL was relatively unmoved in extended hours trading but rose 1.98% ahead of this morning’s opening bell. The company appears to be sustained by a 45% increase in its cloud business.

Also, Peloton PTON gained $7.18 Monday after the company’s co-founders resigned.

Reviewing the Market Minutes

The S&P 500® index (SPX) extended its winning streak to four days yesterday after closing 1.06% higher. Investors appeared to be unconcerned about the arrival of today’s CPI report as the Nasdaq ($COMP) rallied 1.27%, and the Dow Jones Industrial Average ($DJI) increased 0.71%.

The rally in stocks appears to be prompted by a selloff in the U.S. dollar. The U.S. Dollar Index ($DXY) fell 0.63% extending its recent downswing to 1.79% since Tuesday’s close. However, the dollar index did find a bid and closed well of its lows for the day. The 108 level was an area of support for the $DXY at the end of August and could be a pivotal level once again.

The rally was led by energy, technology, and consumer discretionary sectors but every sector finished the day in positive territory. Energy was helped by WTI crude oil futures settling 1.7% higher to $87.84 per barrel and natural gas futures rose 3.5%.

The rally continues to exhibit some breadth as NYSE advancers outpaced decliners almost 4-to-1.

Apple AAPL had a good day rallying 3.9% after JPMorgan JPM suggested that demand for Apple’s new iPhone introduced last week was strong.

The New York Times and Bloomberg reported that Goldman Sachs GS is making plans to lay off as many as 5% of its workers as early as next week. Most layoffs in 2022 have been in the technology sector with more than 100,000 companies announcing cuts including the likes of Microsoft MSFT, Snap SNAP, Netflix NFLX, and Shopify SHOP. However, investment banks like Goldman have seen a large slowdown in mergers and acquisitions and initial public offerings. GS rose 0.73% on the day.

Investors appeared to be wary of Treasuries as the U.S. Treasury saw weak demand for its $32 billion auction of 10-year notes. Investors may have been hesitant to buy bonds ahead of today’s CPI report. However, it could also be that investors are opting for corporate bonds as they were last week—drawing away some interest in Treasuries. The 10-year Treasury yield (TNX) closed the day at 3.36% for a gain of nine basis points. 

Three Things to Watch

GOLDMAN GAFFE: Now that some borrowers are starting to miss payments and default on their loans, Goldman Sachs (GS) appears to be at risk taking a big hit from their Apple Card business. According to CNBC, the company’s losses on that particular piece of plastic was 2.93% in the second quarter making it the worst among big U.S. credit card companies.

Additionally, JPMorgan (JPM) said that Goldman’s loss rate is “well above subprime lenders.” Its loss rate is larger than Capital One (COF), which is the largest subprime lender among the big banks. One problem is that more than 25% of Goldman’s cardholders have a FICO score below 660. If delinquencies and defaults continue to rise, it could spell trouble for Goldman.

FINTECH FIGHT: Apple (AAPL) is expanding further into the fintech space as Apple Pay is offering “buy now, pay later” services that other fintech firms like Klarna, Affirm (AFRM), PayPal (PYPL), and Afterpay pioneered. Consumers can spread out payment for purchases over time. While the move may result in marginal increases to revenue for Apple, it’s likely to have a negative effect on the smaller competing firms.

The fintech space could have more issues ahead because the industry is under investigation by the Consumer Financial Protection Bureau over concerns that their activities could lead to large consumer debt balances and data risks.

CORPORATE CONCERNS: According to FactSet, 240 of the S&P 500 companies cited concerns over a potential recession during their second quarter earnings calls. This was the third most-frequent topic behind inflation—at 412 mentions—and supply chain at 325. The financials and industrials sectors had the highest number of “recession” mentions with 53 and 37 respectively.

Notable Calendar Items

Sep 14: August Producer Price Index (PPI)

Sep 15: August U.S. Retail Sales, Philadelphia Fed Manufacturing Index and earnings from Adobe (ADBE)

Sep 16: Michigan Consumer Sentiment

Sep 19: Earnings from AutoZone (AZO) and Lennar (LEN)

Sep 20: Building permits and Housing starts 

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