German Inflation Data in Driver's Seat as Worrisome Reading Hits Bond Market, Raising Yields

(Friday Market Open) It’s the day after Apple AAPL and Amazon AMZN reported worrisome earnings, but German inflation data is in the driver’s seat this morning.

An eye-popping German October inflation reading of 11.6% raised concerns that global interest rate hikes aren’t slowing prices. The U.S. 10-year Treasury yield (TNX) added seven basis points to climb back over 4% this morning after a retreat the last few days, and stocks fell pretty much across the board ahead of the opening bell. 

Earlier, the tech sector was already under pressure from AMZN’s weak quarter as shares of that giant initially fell 20%. They recently recouped some of that, but it’s still not a pretty picture despite AAPL holding up nicely.

There’s also plenty of U.S. data today to take one’s mind off any disappointing earnings. Personal Consumption Expenditure (PCE) prices rose 0.3% in September, matching the market’s expectations for the Federal Reserve’s favorite inflation indicator. But core PCE, which strips out energy and food prices, rose 0.5%, higher than expected. That could be another factor pushing up Treasury yields. The one good thing you could say is that neither headline nor core accelerated from the previous month. But they didn’t slow, either.

University of Michigan sentiment data is due a bit later this morning.

Amazon and Apple Earnings Are In

AMZN and AAPL earnings key takeaways include:

Stocking Full of Rocks: AMZN shares cratered nearly 20% immediately after the company reported, wiping out about $200 billion in market value in just a few minutes. AMZN’s Q4 revenue projection was below Wall Street’s expectations, and Q4 is the heart of holiday shopping season. It was another shattering development for the tech sector after weak Meta (META) earnings Wednesday, which could possibly weigh on other holiday-shopping-connected stocks. However, Walmart (WMT), Macy’s (M), and Target (TGT) shares didn’t immediately lose ground.

Cloud Burst: The devastating blow to AMZN’s stock also reflected Q3 cloud sales missing Wall Street’s estimates by about $1 billion. This comes a day after Microsoft (MSFT) reported its cloud sales growth slowed. Struggles in the cloud business speak directly to weakness in the broader economy. Businesses are spending less, apparently, not only on the cloud but on goods in general (see yesterday’s Durable Orders data for more proof). All of this could play into the recession narrative.

AWS and the Rest: Amazon Web Services (AWS), its cloud division, drives a lot of the company’s growth. So when it sputters, it exposes softness in other parts of the company.

Oh, the Irony: AMZN’s stock market plummet came despite the company swinging to profitability in Q3 after two quarters of losses. The discrepancy of seeing shares react so badly after AMZN met earnings and revenue expectations shows how company projections sometimes outweigh quarterly performance. And of course, the Q3 cloud factor is also there because investors opened the hood and checked out the engine, proving they’re not content to just check headline quarterly figures.

Rubber Boots: If AMZN investors needed life jackets following the e-commerce giant’s earnings, AAPL investors hardly needed an umbrella. Shares fell a pedestrian 0.4% in the minutes after AAPL reported record fiscal Q4 revenue, even though iPhone sales fell just short of analysts’ average expectations. AAPL shares are down 15% this year, so not all is well in iPhone land. However, quarterly revenue rose 8% from a year ago despite foreign exchange headwinds.

Watch the Checkbook: One concerning element of AAPL’s earnings were rising costs. Its total operating expenses of $13.2 billion in Q3 compared with $11.4 billion a year earlier are running ahead of last year by about $7 billion year to date. Research and development costs rose 17% year over year versus a 15% rise in sales, general, and administrative. Cost of sales rose from 2021. It’s possible a lot of this reflects inflation, and many companies face the same challenges.  

Open Your Wallet: AAPL’s revenue probably got a boost from the company raising prices in businesses like streaming, as well as for the iPhone and iPad. It could be interesting to see if customers keep buying from AAPL when they have to spend more, especially if there’s a recession. Many “staples” companies like McDonald’s (MCD) and Procter & Gamble (PG) have pulled this off recently, but a hamburger or a bar of soap aren’t a $900 iPhone. 

Big Mac: AAPL’s Mac sales bucked the trend by looking strong after Microsoft (MSFT) earlier this week said a soft PC market was one factor weighing on its numbers.

More Q3 Earnings Nuggets

Here’s our quick take on a few other major companies that reported since yesterday’s open:

Intel (INTC): Another case of a company that reported solid earnings and revenue but may get tripped up by its projections. Shares fell more than 3% in pre-market trading after the company provided Q4 guidance that was below Wall Street’s expectations, adding to worries about the struggling semiconductor industry.

Exxon Mobil (XOM) and Chevron (CVX): Unsurprisingly, earnings from these oil giants looked solid as energy has been a bit of a bright spot and likely will continue to be one.

Potential Market Movers

• The Cboe Volatility Index® (VIX) fell to around 27 Thursday after a run toward 34 earlier this month. Technically, it might’ve been significant that the VIX couldn’t eclipse its spring highs. A falling VIX implies less volatility ahead. Although 27 is still elevated historically, the long-term average is close to 20.
• In addition, VIX futures don’t indicate any major volatility plunge in the months ahead. Futures contracts as far out as next June have the VIX trading at 28-29, never dipping below 27 between now and then. It’s unusual to see this sort of pattern for the VIX and probably reflects how much uncertainty about Fed policy and possible recession overhangs the markets.    
• The CME FedWatch Tool now projects an 87% chance of the Fed hiking rates 75 basis points next week, down from 98% a week ago. Chances of consecutive 75-basis-point hikes in November and December are down to 37% from 75% a week ago.
• The strength in bonds both here and overseas helped push the U.S. Dollar Index ($DXY) down to 110 on Thursday, which is still historically high but under the 2022 peak near 114.
• In the coming weeks, keep an eye on the transport and retail industries. There’s still a chance of a major rail strike next month, Barron’s reminded readers yesterday. Two of 12 railroad unions have now rejected a September deal that seemingly averted the strike. A key date is November 19, when an agreement that forestalls strikes expires. A strike at that point could cripple transport and back up supply lines right as holiday shopping season begins. As if the bad AMZN news yesterday wasn’t enough.

Rechecking Guidance

For some companies, earnings guidance (or their projections for earnings and revenue next quarter or over the coming year) can be more informative than last quarter’s numbers. This is a snapshot of just one morning’s guidance (Thursday):

• 9 companies raised guidance.
• 21 kept guidance unchanged.
• 9 companies lowered guidance.
• 12 companies offered mixed guidance (good and bad).

The Upshot: The tally above (compiled from data collected by research firm Briefing.com) doesn’t look too ugly, but it’s not perfect, either. Thirty companies raised or reconfirmed previous guidance yesterday morning, and nine lowered. If executives mostly saw recessionary winds blowing, the bad updates would probably outnumber the good, but that wasn’t the case—at least not Thursday morning, so stay tuned. FactSettypically publishes the weekly round-up of guidance on Fridays, so look out for that at some point today.

Reviewing the Market Minutes

A divergence Wednesday continued Thursday. Once again, the Dow Jones Industrial Average ($DJI) and Russell 2000® (RUT) rose, while the S&P 500® index (SPX) and Nasdaq-100® (NDX) fell.

This could reflect:

• Weakness in tech due to disappointing earnings, which weighs on NDX.
• The U.S. government’s relatively strong first Q3 Gross Domestic Product (GDP) growth estimate of 2.6%. Better GDP growth would likely help the RUT, which is more domestic in nature than the SPX.
• Better GDP also might help some major industrial companies in the $DJI, particularly consumer discretionary ones that rely on a healthy U.S. consumer.

CHART OF THE DAY: CHANNEL SWIM. Despite the recent rally, the S&P 500 (SPX—candlesticks) is still trading within its downward channel (red lines). The SPX bounced off the channel’s 75% line (pink) halfway through October and broke above the channel’s 50% line (yellow) on Monday. The next level of resistance is likely at 25% (blue). While examining the price at these levels can be interesting, many short-term traders may find them difficult to trade. However, some day-traders may find them useful when setting their plan for the day. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

I Bond Site Crash: If you’re still hoping to snap up inflation-protected government-issued I bonds at 9.62% before tomorrow night, prepare for possible disappointment. The Treasury Direct website crashed Thursday as investors tried to snap up the inflation-protected I bonds at a guaranteed 9.62%, six-month rate before today’s deadline. That guaranteed rate is above the year-over-year September Consumer Price Index (CPI) rise of 8.2%, implying that if inflation remains steady, investors would actually come out ahead (until the next reset on May 1, 2023). 

When the site crashed, the government told people that due to heavy volumes, it couldn’t guarantee late arrivals or purchases by the deadline. This rush to government bonds tells you something about the current climate, where investors appear to favor perceived “safety” over the risk of stocks. Of course, that 9.62% rate is pretty enticing, though the investment limit is $10,000. It’s hard to find stocks with a dividend that high, and even most so-called “junk” corporate bonds can’t match it. What will the rate be starting November 1? Due to some softening inflation data in recent weeks, most estimates put the new rate around 6.48%, which compared to current savings rates approaching 3% is still pretty good.

Ouch: Federal Reserve Chairman Jerome Powell said there would be pain in getting the economy under control, and he’s certainly been right on that so far. Current and prospective homeowners seem to be feeling more of it by the day. Mortgage rates just hit 20-year highs and housing prices—and very likely home values—are headed down. Freddie Mac reported Thursday that the average rate on a 30-year fixed mortgage hit 7.08% this week, just a day after New Home Sales data slid more than 10% in September. If you’re feeling the squeeze, realize it may be worse in certain places around the country. Fortune reported today that housing prices are falling in 51 of 60 cities being tracked by the American Enterprise Institute’s Housing Center, “and there’s much further to fall.” 

The Road to Sturgis: Motorcycle leaders slowed last quarter but didn’t take a major spill, judging from this week’s Harley-Davidson (HOG) earnings report. The company beat top- and bottom-line Wall Street estimates, and its shares revved ahead. HOG also confirmed previous guidance, perhaps a sign that it isn’t too worried about the economy getting worse. All that said, year-over-year retail motorcycle sales from HOG weren’t an incredibly pretty vista, falling 2% in Q3.

But that was a big improvement over Q2 when sales fell 23%. It’s possible HOG and perhaps other motorcycle makers could be getting a boost from rising gas prices and perhaps from rising car prices too. As any car shopper knows, it’s hard to find a new four-wheel vehicle for less than $20,000 these days, but HOG’s homepage lists motorcycles starting well below $15,000.

Notable Calendar Items

Oct. 31: Happy Halloween! October Chicago PMI and earnings from CNA Financial (CNA), Goodyear Tire (GT), and Stryker (SYK)

Nov. 1: Start of the FOMC meeting, September Construction Spending, October ISM Manufacturing Index, and earnings from Abiomed (ABMD), DuPont (DD), Eli Lilly (LLY), Pfizer (PFE), Uber (UBER), Advanced Micro Devices (AMD), and Under Armour (UAA)

Nov. 2: FOMC rate decision and earnings from Allstate (ALL), CVS Health (CVS), Yum Brands (YUM), and Zimmer Biomet (ZBH)

Nov. 3: September Trade Balance and Factory Orders and earnings from Exelon (EXC), Hyatt Hotels (H), Illumina (ILMN), Kellogg (K), Penn Entertainment (PENN), and Marriott (MAR)

Nov. 4: October Nonfarm Payrolls Report and earnings from Hershey (HSY), Cardinal Health (CAH), and Duke Energy (DUK)

Nov. 7: September Consumer Credit and earnings from Palantir (PLTR), Lyft (LYFT), and BioNTech (BNTX)

Nov. 8: Election Day, and earnings from DuPont (DD), AMC Entertainment (AMC), Occidental (OXY), Walt Disney (DIS), and Wynn Resorts (WYNN)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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