Market re-prices expectations for near-term policy normalization:
Big focus in the market continues to revolve around the hawkish takeaways from the April FOMC minutes. Key line from the minutes noted that: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June”. Some re-pricing of near-term policy normalization expectations following the release. According to WSJ, probability of a June tightening pushed up to 34% from just 4% a few days ago. Added probability of a July move increased to 56% from 20% on Tuesday.
More Fedspeak:
More Fedspeak following hawkish takeaways from FOMC minutes. NY Fed President Dudley reiterated Fed remains data dependent. Added that he expects a pickup in Q2 growth and noted if confident his forecast is on track, June or July tightening seems reasonable. Happy to see pickup in expectations for near-term rate hike. Nothing specific on monetary policy from Fed Vice Chair Fischer, though he did say faster potential growth needed most now that we are near full employment and approaching target inflation rate. Most hawkish comments came from Richmond Fed President Lacker, though he is not a voter. Noted market overestimated how likely Fed was to pause. Added rates could have been raised in March and April. Also said he would be comfortable with four rate hikes this year.
Not all bad news for apparel retailers:
Retail under heavy scrutiny as of late with continued shift away from apparel, declining mall traffic and weather-related headwinds. However, not all bad news as a couple of specialty apparel names put up better-than-expected results after the close Wednesday. AEO-US beat on Q1 earnings with help from both comp and GM upside. Street talked up positive comp performance in all months of Q1, favorable product assortment, Aerie acceleration, market share gains and investment traction. Also upbeat on Q2 outlook URBN-US another bright spot. While EPS only in line, comps unexpectedly increased 1% and gross margins expanded by 100 bp on lower markdowns at UO brand. Also said comps fairly consistent throughout the quarter and while May softer, weather the primary culprit.
Big tech names Cisco and Salesforce beat and raise:
Beat and raises from two higher-profile tech names after close on Wednesday. CSCO-US fiscal Q3 revenue slightly better, while a nearly 200 bp GM beat (helped by STB exit) also helped drive EPS upside. Security, Collaboration and Services the bright spots, helping to offset the softer performance in Switching, Routing and Data Center. Street also noted initial guidance for 6-8% sequential revenue growth in Q4 at high end of seasonality and underpinned by book-tobill “comfortably” above 1.0. Model transition momentum a widely discussed bright spot. CRM-US beat on all key metrics for Q1. Billings growth of 31% y/y nearly double the consensus, driven by strong deferred revenue. Large deal momentum flagged as a positive. Company also raised F17 guidance.
Bayer makes move on Monsanto; FMC Technologies and Technip agree to merge:
Some notable M&A headlines today. Germany’s BAY-GNmade an unsolicited, non-binding proposal to acquireMON-US, subject to due diligence, regulatory approvals and other conditions. MON said it will review the proposal, which has been the subject of recent speculation in the press. Reuters article noted any deal would likely raise antitrust concerns given overlap in seeds business, particularly in soybeans, cotton and canola. Separately,FTI-US and TEC-FR announced a $13B all-stock merger of equals in the oil-services industry. Expected to deliver at least $400M in annual pretax cost synergies by 2019. Companies also highlighted revenue synergy opportunities from integrated subsea project execution model. Deal expected to be significantly accretive to both companies’ EPS.
Companies concerned about new overtime pay rules:
Several press reports have highlighted concerns about fallout from new federal overtime rules. Under the new rules, the threshold under which salaried workers will automatically qualify for overtime pay will double to $47,476 a yeae from the current level of $23,660. WSJnoted employers say the change, which goes into effect in December, will lead them to slow hiring, reduce workers’ hours and cut pay, bonuses and benefits. However, Goldman Sachs said while changes unlikely to meaningfully impact average hourly earnings, they could provide a modest lift to payrolls if employers cut overtime hours and hire new workers to make up the difference. It said employer behavior following last increase in 2004 suggests this effect could boost payrolls by ~100K this time around, or ~10K a month if spread over several months.
Not much likely to come out of G7 meeting of finance officials:
G7 meeting of finance officials takes place May 20-21 in Japan. No communique expected and related headlines unlikely to have much impact on the market. Bulk of the attention in the press has revolved around the host country, particularly in terms of the foreign exchange market. Japan once again expected to get little sympathy from its counterparts regarding yen strength. Japan reportedly hoping for some acknowledgement of a need to avoid excessive volatility in the currency market, which it believes could provide it cover to directly intervene. However, US officials, including Treasury Secretary Lew, have recently said that moves surrounding the yen have not been disorderly. While Japan also likely to push for more fiscal support, Germany expected to continue reject calls for any coordinated action.
China tells state firms to get more efficient, boost competitiveness:
More hints of China’s emphasis on structural reforms to help drive a longer-term restructuring of the economy (vs nearterm policy support measures to help stabilize growth) Reuters noted China’s cabinet said in a statement on Wednesday state firms directly controlled by central government should reduce layers of management from the existing 5-9 levels to 3-4 levels in next three years. Added a Xinhua report said firms would have to scrap ~20% of redundant measurement. Cabinet also said state companies should cut costs by RMB100B, or ~$15.3B, by end of 2017. Added firms should also consolidate around their core strengths, reduce debt levels and cut accounts receivables and inventory levels. Steel and coal companies specifically told to cut capacity by 10% over 2016 and 2017.
Big focus in the market continues to revolve around the hawkish takeaways from the April FOMC minutes. Key line from the minutes noted that: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June”. Some re-pricing of near-term policy normalization expectations following the release. According to WSJ, probability of a June tightening pushed up to 34% from just 4% a few days ago. Added probability of a July move increased to 56% from 20% on Tuesday.
More Fedspeak:
More Fedspeak following hawkish takeaways from FOMC minutes. NY Fed President Dudley reiterated Fed remains data dependent. Added that he expects a pickup in Q2 growth and noted if confident his forecast is on track, June or July tightening seems reasonable. Happy to see pickup in expectations for near-term rate hike. Nothing specific on monetary policy from Fed Vice Chair Fischer, though he did say faster potential growth needed most now that we are near full employment and approaching target inflation rate. Most hawkish comments came from Richmond Fed President Lacker, though he is not a voter. Noted market overestimated how likely Fed was to pause. Added rates could have been raised in March and April. Also said he would be comfortable with four rate hikes this year.
Not all bad news for apparel retailers:
Retail under heavy scrutiny as of late with continued shift away from apparel, declining mall traffic and weather-related headwinds. However, not all bad news as a couple of specialty apparel names put up better-than-expected results after the close Wednesday. AEO-US beat on Q1 earnings with help from both comp and GM upside. Street talked up positive comp performance in all months of Q1, favorable product assortment, Aerie acceleration, market share gains and investment traction. Also upbeat on Q2 outlook URBN-US another bright spot. While EPS only in line, comps unexpectedly increased 1% and gross margins expanded by 100 bp on lower markdowns at UO brand. Also said comps fairly consistent throughout the quarter and while May softer, weather the primary culprit.
Big tech names Cisco and Salesforce beat and raise:
Beat and raises from two higher-profile tech names after close on Wednesday. CSCO-US fiscal Q3 revenue slightly better, while a nearly 200 bp GM beat (helped by STB exit) also helped drive EPS upside. Security, Collaboration and Services the bright spots, helping to offset the softer performance in Switching, Routing and Data Center. Street also noted initial guidance for 6-8% sequential revenue growth in Q4 at high end of seasonality and underpinned by book-tobill “comfortably” above 1.0. Model transition momentum a widely discussed bright spot. CRM-US beat on all key metrics for Q1. Billings growth of 31% y/y nearly double the consensus, driven by strong deferred revenue. Large deal momentum flagged as a positive. Company also raised F17 guidance.
Bayer makes move on Monsanto; FMC Technologies and Technip agree to merge:
Some notable M&A headlines today. Germany’s BAY-GNmade an unsolicited, non-binding proposal to acquireMON-US, subject to due diligence, regulatory approvals and other conditions. MON said it will review the proposal, which has been the subject of recent speculation in the press. Reuters article noted any deal would likely raise antitrust concerns given overlap in seeds business, particularly in soybeans, cotton and canola. Separately,FTI-US and TEC-FR announced a $13B all-stock merger of equals in the oil-services industry. Expected to deliver at least $400M in annual pretax cost synergies by 2019. Companies also highlighted revenue synergy opportunities from integrated subsea project execution model. Deal expected to be significantly accretive to both companies’ EPS.
Companies concerned about new overtime pay rules:
Several press reports have highlighted concerns about fallout from new federal overtime rules. Under the new rules, the threshold under which salaried workers will automatically qualify for overtime pay will double to $47,476 a yeae from the current level of $23,660. WSJnoted employers say the change, which goes into effect in December, will lead them to slow hiring, reduce workers’ hours and cut pay, bonuses and benefits. However, Goldman Sachs said while changes unlikely to meaningfully impact average hourly earnings, they could provide a modest lift to payrolls if employers cut overtime hours and hire new workers to make up the difference. It said employer behavior following last increase in 2004 suggests this effect could boost payrolls by ~100K this time around, or ~10K a month if spread over several months.
Not much likely to come out of G7 meeting of finance officials:
G7 meeting of finance officials takes place May 20-21 in Japan. No communique expected and related headlines unlikely to have much impact on the market. Bulk of the attention in the press has revolved around the host country, particularly in terms of the foreign exchange market. Japan once again expected to get little sympathy from its counterparts regarding yen strength. Japan reportedly hoping for some acknowledgement of a need to avoid excessive volatility in the currency market, which it believes could provide it cover to directly intervene. However, US officials, including Treasury Secretary Lew, have recently said that moves surrounding the yen have not been disorderly. While Japan also likely to push for more fiscal support, Germany expected to continue reject calls for any coordinated action.
China tells state firms to get more efficient, boost competitiveness:
More hints of China’s emphasis on structural reforms to help drive a longer-term restructuring of the economy (vs nearterm policy support measures to help stabilize growth) Reuters noted China’s cabinet said in a statement on Wednesday state firms directly controlled by central government should reduce layers of management from the existing 5-9 levels to 3-4 levels in next three years. Added a Xinhua report said firms would have to scrap ~20% of redundant measurement. Cabinet also said state companies should cut costs by RMB100B, or ~$15.3B, by end of 2017. Added firms should also consolidate around their core strengths, reduce debt levels and cut accounts receivables and inventory levels. Steel and coal companies specifically told to cut capacity by 10% over 2016 and 2017.
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