North American Morning Briefing: Stocks Futures Dip with More Tech Earnings Eyed – Morningstar


Watch For:

Weekly Jobless Claims; 2nd Estimate 1Q GDP; earnings from Alibaba, Baidu, Macy’s, Dollar General, Dollar Tree, Medtronic, VMware, Costco, Ulta Beauty, Dell, Gap, Royal Bank of Canada, Toronto-Dominion Bank

Opening Call:

Stock futures wobbled ahead of earnings from large technology companies and economic data including jobless claims and an updated reading of first-quarter gross domestic product.

Stocks have swung this week, fluctuating between daily gains and losses as investors considered the Federal Reserve’s next monetary tightening moves to combat inflation and how much they could weigh on growth and markets.

“To some extent, markets have been reassured that the Fed isn’t going to tighten more aggressively than what is expected. But sentiment in the market remains rather stressed,” said Luc Filip, head of investments at SYZ Private Banking. “There is still a lot of uncertainty about what will happen if inflation stays high.”

Investors are awaiting a second reading of gross domestic product in the first quarter and weekly jobless claims, which are both set to go out at 8:30 a.m. ET. The first GDP release showed a 1.4% contraction, shrinking for the first time since early in the pandemic.

“Economic data has come in weaker than expected lately, we do see this tightening in the economy. How severe the growth slowdown is what markets are thinking about now,” said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management.

“We are focusing on earnings and profitability. A lot of stable companies are reporting lower guidance,” Ramjee said. “Even the tech sector is not immune to margin pressure, especially from input costs like wages.”

In premarket trading, Nvidia declined 6% despite posting record revenues as its sales outlook for the current quarter came in below Wall Street’s estimates. Williams-Sonoma jumped 10% after posting profit that beat analysts’ expectations.

Overseas, the pan-continental Stoxx Europe 600 ticked up 0.2% and in Asia, major benchmarks were mixed.

Economic Insight:

The probability of a recession in the U.S. over the next year remains close to zero, according to Capital Economics’ own composite model.

The only indicator which signals recession levels is consumer confidence, while most leading indicators such as ISM new orders index and building permits are showing resilience, said Capital’s senior U.S. economist Michael Pearce. Recession risks have also declined as the bond yield curve has un-inverted, he added.

“The recent un-inversion of the 10y-2y curve still leaves it consistent with elevated recession risks, but below the 30% threshold which has been reached ahead of every recession since the 1960s.”


The dollar should recover after recent falls as expectations for Fed interest rates are re-priced higher, said ING analysts.

Wednesday’s minutes showed policy makers had nothing but confidence in the recovery and were “laser-focused on getting the policy rate to neutral as quickly as possible.” Markets have reduced their pricing of Fed rate-rise expectations by 25-35 basis points since early May, but higher levels could easily be put back, supporting the dollar, ING said.

“We prefer to see the recent 3% DXY % dip as a bull market correction and favor a near-term recovery to the 103.30 area.”

The yuan weakened against the dollar in onshore and offshore markets over fears of a slowdown in China’s economic growth.

Chinese leaders have continued to warn about significant growth risks and have called for implementation of more stimulus measures, said Ken Cheung, chief Asian FX strategist at Mizuho Bank, noting Premier Li Keqiang’s recent comments.

The leader’s message to support growth should reinforce the PBOC’s easing bias, and the widening monetary policy divergence between PBOC and other major central banks will probably leave yuan on the back foot, the strategist said.

The Hong Kong dollar’s peg to the dollar is likely to remain “highly credible” given that the city’s de facto central bank has ample resources to defend it, said Bank of Singapore’s currency strategist Sim Moh Siong. The HKD’s fundamentals are sound, given massive external surpluses, a stable banking system and low inflation, he added.

Although capital outflow pressures caused by a faster Fed tightening and China’s sluggish growth have driven recent HKD weakness, investors “should avoid being overly alarmist” even as USD/HKD tests the top side of the 7.75-7.85 band repeatedly.

Other News:

Russia’s central bank cut its key interest rate for a third time since early April as it sought to steady a strengthening ruble and support a faltering economy.

The Bank of Russia Thursday lowered its key interest rate to 11% from 14%. Following two rate cuts in April, that largely reverses a doubling of the key rate in the immediate aftermath of Russia’s invasion of Ukraine and the Western sanctions that it provoked.

Read more here.


The deeply discounted dollar bonds of some private Chinese developers that haven’t defaulted are now offering “exceptional value” as Beijing has rolled out easing measures to aid the beleaguered property sector, said Michael Kelly, global head of multi-asset at PineBridge Investments.

Kelly said he expects state-owned developers to gain market share as the industry consolidates, but their bonds are reasonably priced for the current stage of the downturn.

In contrast, he said bonds of some “high-quality” private developers are starting to look attractive. An ICE BofA index of high-yield Chinese corporate bonds yielded 23.4% as of Wednesday.


Crude futures held modest gains in Europe, with the outlook remaining uncertain over a potential EU ban on Russian oil.

“The EU agreement is a distraction, given individual member states and vital corporate buyers in Europe are already phasing out purchases of Russian oil,” said Stephen Innes, managing partner at SPI Asset Management.

He said the overall stock level is likely to fall because of the individual cuts.


Gold prices were flat following the Fed minutes.

“Members’ ‘strong commitment and determination’ to bring inflation back under control as well as their willingness to take monetary policy to a restrictive stance suggest the [FOMC] may fail to deliver a ‘soft landing’ for the U.S. economy,” said Kristina Clifton, analyst at Commonwealth Bank of Australia.

Prices for base metals were lower, with recession worries and China’s lockdowns continuing to hurt sentiment, according to analysts.

“Base metals prices remain in the doldrums,” said SPI’s Stephen Innes. He said the decline in prices since the start of March indicated “pessimism around the global economy and a retreat of inflation hedges.”




Apple Boosting Pay Budget for Workers Amid Tight Labor Market

Apple Inc. is boosting pay for workers amid rising inflation, a tight labor market and unionization pushes among hourly store employees.

The iPhone maker on Wednesday told employees in an email that the company is increasing its overall compensation budget. Starting pay for hourly workers in the U.S. will rise to $22 an hour, or higher based upon the market, a 45% increase from 2018. Starting salaries in the U.S. are also expected to increase.


Nvidia Posts Record Sales, Warns of Russia, China Hit

Graphics-chip maker Nvidia Corp. gave a muted sales outlook, citing supply-chain disruptions in China and reduced business in Russia, as it posted record sales for the most recent quarter.

Nvidia said sales in the current quarter are likely to come in at $8.1 billion, missing Wall Street forecasts. The company said it anticipated a roughly $500 million hit to sales relating to Russia and Covid-19 lockdowns in China.


Elon Musk Plans to Rely More Heavily on Equity for Twitter Deal

Elon Musk is committing more of his wealth to finance his $44 billion deal for Twitter Inc. and seeking additional financial backers amid a sharp decline in Tesla Inc. stock in recent weeks.

Mr. Musk’s funding plan now includes $33.5 billion in equity, up from $27.25 billion, according to a Wednesday regulatory filing. The billionaire Tesla chief executive no longer plans to rely on a margin loan backed by shares of his electric-vehicle company, which are down by about a third since Twitter accepted his bid in late April.


Corruption Probe in Anaheim, Calif., Grows, Drawing in Disney

The Walt Disney Co. has become entangled in a corruption scandal unfolding in Anaheim, the southern California city where its Disneyland Resort is based, that this week prompted its mayor to resign.

In an affidavit filed in a California federal court, federal investigators describe a “cabal” of business leaders and elected officials in Anaheim who allegedly meet privately to influence public policy decisions.


Aramco Approached Valvoline About Potential Takeover of One of Its Units

Saudi Aramco approached Valvoline Inc. about a potential takeover of its lubricants business, according to people familiar with the matter, as the state oil giant looks to diversify.

No deal is imminent, and there are no guarantees there will be one, the people said. Valvoline has a market value of around $6 billion after its shares closed up more than 12% Wednesday following The Wall Street Journal’s report on the talks.


Lenovo’s Fourth-Quarter Profit Jumped 48%

Lenovo Group Ltd. said its fourth-quarter profit rose 48%, driven by higher revenue and disposal gains.

The world’s largest personal-computer maker on Thursday posted net profit of US$421 million for the three months ended March.


Toshiba Nominates Representatives of Elliott, Farallon to Board

Toshiba Corp. said Thursday that it is nominating seven new director candidates, including representatives of major shareholders Elliott Management Corp. and Farallon Capital Management LLC.

(MORE TO FOLLOW) Dow Jones Newswires

May 26, 2022 05:42 ET (09:42 GMT)

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