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The Huddle

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Stocks Mixed on Friday to End Another Volatile Week, China cut its Benchmark Reference Rate for Mortgages by an Unexpectedly Wide Margin, Saudi Aramco Net Profit Soars 82% in Q1 on High Oil Prices, Wheat Prices Surge to 2-Month High due to India Export Ban, Retail Sales Rise Slightly in April, Walmart Reports Disappointing Q1 Earnings, Home Depot Narrowly Beats on Earnings, Deere Surpasses Earnings Estimate and Revenue Estimate in Q2 Earnings Report, 9. Former Fed Chair Ben Bernanke said the Central Bank was Wrong in Waiting to Address Inflation and 85% of S&P 500 Companies are citing “Inflation” on Q1 Earnings Reports.


1. Stocks Mixed on Friday to End Another Volatile Week

The S&P 500 was down for a seventh straight week, the longest streak since 2001, as investors increasingly are demonstrated worry that a recessionary outcome might be possible as the Fed continues to signal their willingness to do “whatever it takes” to fight inflation. Stock index performance was weak across the board as the S&P 500, Russell 2000, DJIA, and Nasdaq 100 were all down notably although stocks did stage a furious late day rally to end the Friday session. On the sector level there was little reprieve with Energy and Healthcare outperforming this week with many other sectors noticeably down including Consumer Staples and Consumer Discretionary. In other markets, Copper and Gold were up on the week while Bitcoin was down slightly, and oil was essentially flat.


2. China cut its Benchmark Reference Rate for Mortgages by an Unexpectedly Wide Margin


On Friday, China cut its benchmark reference rate for mortgages by an unexpectedly wide margin as its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. China, in a monthly fixing, lowered the five-year loan prime rate (LPR) by 15 basis points to 4.45%, which is the biggest reduction since China revamped the interest rate mechanism in 2019 and more than the five or 10 basis points tipped by most in a Reuters poll. The one-year LPR was unchanged at 3.70%. Multiple people that participant in the market, believe Friday’s move was also a response to Chinese Premier Li Keqiang’s call to pick up policy adjustments and let the economy return to normal. Several private-sector economists are expecting China’s economy to shrink this quarter from a year earlier, compared with Q1 4.8% growth due to credit lending, industrial output and retail sales showed COVID-related stringent measures and mobility restrictions have taken a heavy toll. Also on Friday, China’s benchmark stock index, Shanghai Composite Index, increased around 1% on the rate cut. Capital Economics Julian Evans-Pritchard stated that today’s reduction to the five-year Loan Prime Rate should help drive a revival in housing sales, which have gone from bad to worse recently, but the lack of any reduction to the one-year LPR suggests that the PBOC is trying to keep easing targeted and that we shouldn’t expect large-scale stimulus of the kind that we saw in 2020.


3. Saudi Aramco Net Profit Soars 82% in Q1 on High Oil Prices

On Sunday, oil producer Saudi Aramco reported a close to 82% rise in Q1 net profit, matching with analyst projections. According to a median estimate from 12 analysts provided by the company, Aramco was projected to report a net income of $38.5B. Aramco reported a net income of $39.5B for the quarter to March 31 from $21.7B in 2021. Aramco reported its earnings were the highest in any quarter since it went public, boosted by crude prices, volumes sold and improved downstream margins. Aramco declared a dividend of $18.8B to be paid in Q2, in line with market predictions and approved the distribution of one bonus share for every 10 shares held in the company. Aramco said it saw improved downstream margins in Q1 and is looking to develop opportunities in the downstream sector. Earnings by global energy companies such as BP and Shell have risen to their highest in at least a decade. Brent crude prices ended Q1 up almost 70% to $107.91 a barrel from the end of March 2021. OPEC+ agreed this month to another modest increase in its monthly oil output target citing it couldn’t be blamed for disruptions to Russian supply that have driven up prices. Aramco CEO Amin Nasser stated that during Q1, our strategic downstream expansion progressed further in both Asia and Europe, and we continue to develop opportunities that complement our growth objectives. Shares of Aramco rose 37% since the beginning of 2022, outperforming the Saudi index, which is up around 14%.


4. Wheat Prices Surge to 2-Month High due to India Export Ban


On Monday, wheat prices rose to their highest amount in over two months due to India’s decision over the past weekend to impose an export ban. Indian exports had become a key stopgap source of supply to world markets in the aftermath of Russia’s invasion of Ukraine, which disrupted shipments from two of the world’s biggest exporters. India, which was the world’s 8th largest exporter in 2021, had said recently that it expected to export a record 10M tons in 2022 after a bumper harvest. Kazakhstan and Serbia have already imposed quotas on their grain exports, while Indonesia has restricted exports of palm oil, a widely-used cooking oil in South Asia and a vital input for a broad range of consumer goods. The front-month contract for U.S. Wheat was at $1,231.90, up 4.7%, having stalled earlier just under the $1,250 level. The government projections production of 111.32M tons this year as recently as February, but Reuters reported local market sources as saying that the heatwave could reduce that to 100M tons or less. The U.S. Department of Agriculture has stated that U.S. wheat exports are likely to fall to their lowest since 2015 in the current marketing year, which runs through May due to the tightening of the global wheat market, which has been made worse by the worsening conditions in some of the world’s most important growing regions. The USDA forecast last week that Ukraine’s wheat harvest in 2022 would likely fall by around 1/3 due to war disruptions.


5. Retail Spending Grows Once Again in April


On Tuesday, the Commerce Department reported that monthly sales rose 0.9% overall, just below the Dow Jones estimate for a 1% increase. Excluding autos sales, sales increased 0.6%, which was better than the 0.4% estimate. March’s spending was also revised higher, from the original estimate of a 0.5% increase to a 1.4% gain. Ex-autos sales were revised higher as well, to a gain of 2.1% in March against an original 1.1%. On a year-over-year type basis, sales were up 8.2%. The April report was strengthened from a 4% gain from miscellaneous retail and a 2.1% jump in online sales. Bars and restaurants also showed a solid 2% increase. All three categories posted larger gains than in March. Prices overall increased 0.3% in April and 0.6% excluding food and energy. On an annualized basis, the consumer price index rose 8.3% on headline and 6.2% on core in April. Gross domestic product fell 1.4% on an annualized basis in Q1, but analysis are expecting that to perform better throughout the rest of 2022. Excluding gas stations, sales increased 1.3%. The increases came despite a 2.7% decrease at gasoline stations as energy prices declined during the month. Bar and restaurant sales rose 19.8% from a year ago. Chief economist at LPL Financial, Jeffrey Roach stated that retail sales in April show that the consumer is weathering the inflationary headwinds, rising for the fourth consecutive month. Roach continued on saying that core categories show signs that consumers are likely dipping into savings to offset the decline in real wages. If pricing pressures can moderate enough to relieve some of the pressure on consumers, we expect a rebound in economic growth in Q2.


6. Walmart Reports Disappointing Q1 Earnings


On Tuesday, Walmart reported Q1 earnings of $1.30 EPS and revenue of $141.6B, missing on the consensus earnings estimate of $1.46 EPS, but surpassing the revenue estimate of $138.1B. The company also saw revenue grow over 2% on a year-over-year basis. Walmart also reported that sales rose 2.4% to $141.57B, better than the $138.8B that analysts had projected. Walmart now expects Q2 sales to rise 5% and raised its full-year sales forecast to 4%. EPS for the year will decrease by about 1% compared with the mid-single-digit increase it previously expected. Same-store sales for Walmart U.S. grew 3% compared with the year-ago period. E-commerce sales rose 1%. After the report was released, the company’s stock tanked, dropping over 11% as Walmart touched a 52-week low on Tuesday. The 11% drop in stock was also the worst single-day decline for the company since 1987. After the low of Tuesday, the stock dropped another 7% on Wednesday. According to financial market data provider Refinitiv, Walmart’s net income for the quarter fell to $2.05B and the company’s adjusted earnings came in at $1.30 EPS. According to un-adjusted data from the BLS, Grocery, which is Walmart’s top sales category, was one of the company’s hard-hit sections. Food costs surged 9.4% in April on a 12-month basis. Walmart CEO Doug McMillon stated that the discounter’s bottom line results for the quarter were unexpected and reflect the unusual environment. McMillon continued on saying that our Q1 performance is a disappointment to us, and we’re going to put it behind us and have a strong year.


7. Home Depot Reports Q1 Earnings, Topping Earnings and Revenue Estimates


On Tuesday, the Home Depot reported Q1 earnings of $4.09 EPS and revenue of $38.9B, beating the consensus earnings estimate of $3.67 EPS and surpassing the revenue estimate of $36.4B. The company also saw revenue grow over 3% on a year-over-year basis. For the rest of 2022, the Home Depot is now expecting sales to increase about 3% and earnings per share growth in the mid single digits. The company previously forecast slightly positive sales growth and an earnings per share increase in the low single digits. Wall Street was expecting revenue growth of 1.8% and EPS growth of 3.6% for 2022. The Home Depot also reported that net sales rose 3.8% to $38.9B, surpassing expectations of $36.72B. Same-store sales increased 2.2% in the quarter. U.S. same-store sales rose 1.7%. A year ago, the company reported U.S. same-store sales growth of 29.9%. Customer transactions fell 8.2%, but the Home Depot’s average ticket climbed 11.4% and customers were still willing to trade up for premium products. Transactions of at least $1,000 increased 12.4% in the quarter. Home Depot CEO Ted Decker stated that the strong performance in the quarter is even more impressive given the robust performance we were comparing against last year. Decker continued on saying that while we don’t know how inflation might impact consumer behavior going forward, we are closely monitoring elasticities and customer trends across our respective categories and geographies and remain encouraged by the underlying strength we see in the business. This is Decker’s first quarter at the helm of the company. We believe that the medium-to-longer term underpinnings of demand for home improvement have never been stronger, Decker said. 


8. Deere Surpasses Earnings Estimate and Revenue Estimate in Q2 Earnings Report

On Friday, Deere reported Q2 earnings of $6.81 EPS and revenue of $13.4B, beating the consensus earnings estimate of $6.65 EPS and also surpassing the revenue estimate of $13.1B. The company also saw revenue grow over 10% on a year-over-year basis. This quarterly report represents an earnings surprise of 2.41%. Over the last four quarters, the company has surpassed consensus EPS estimates four times. After the report was released, Deere shares fell 4.8% in pre-market trading to around $347. Looking ahead to the end of 2022, Deere is expecting to see net income of between $7B and $7.4B, up from its prior projections of $6.7B and $7.1B. Deere also reported that worldwide sales increased 11% from 2021 to $13.37B. Deere CEO John May stated that Deere’s Q2 performance reflected a continuation of strong demand even as we face supply-chain pressures affecting production levels and delivery schedules. May continued on saying that Deere employees, suppliers, and dealers are working hard to address these challenges. We are proud of their extraordinary efforts to get products to our customers as soon as possible under the challenging circumstances.


9. Former Fed Chair Ben Bernanke said the Central Bank was Wrong in Waiting to Address Inflation


On Monday, former Federal Reserve Chair Ben Bernanke stated that the central bank erred in waiting to address an inflation problem that has turned into the worst episode in U.S. financial history since the early 1980s. Bernanke, who helped the Fed through the 2008 financial crisis, told CNBC that the issue of when action should have been taken to slow inflation is complicated. Bernanke also said that the question is why did they delay that. Why did they delay their response? I think in retrospect, yes, it was a mistake and I think they agree it was a mistake. Bernanke said he understands why the Powell-led Fed waited. One of the reasons was that they wanted not to shock the market, he said. Jay Powell was on my board during the Taper Tantrum in 2013, which was a very unpleasant experience. He wanted to avoid that kind of thing by giving people as much warning as possible and so that gradualism was one of several reasons why the Fed didn’t respond more quickly to the inflationary pressure in the middle of 2021. There’s a lot of support for the fact that the Fed is tightening now, even though obviously we see the effects in markets, Bernanke said. Recently, several Fed officials have defended their response, saying that when it became clearer that inflation was more persistent, they began using forward guidance to tell the market that tighter policy was coming.


10. 85% of S&P 500 Companies are citing “Inflation” on Q1 Earnings Reports


Consumer prices increased over 8% in April as the market continues to be concerned about higher inflation. The 8% rise in April was the second largest year-over-year type surge since 1982. Of the 445 companies that reported Q1 earnings so far, 377 have cited the term “inflation” during their earnings calls, which is well above the five-year average of 155. This is the highest overall number of S&P 500 companies citing “inflation” on earnings calls going back to at least 2010. The previous record was 356, which occurred in Q4 2021. However, there are still about 40 S&P 500 companies that have not reported actual earnings for Q1 to date, so the final number will likely finish even higher than already reported. 85% of the S&P 500 companies that have released earnings calls for Q1 have cited “inflation” during the call. This is also the highest percentage of S&P 500 companies citing “inflation” on earnings calls also going back to at least 2010. The previous record was 74%, which also occurred in Q4 2021. The Industrials (62) and Financials (55) sectors have the highest number of companies citing “inflation” on earnings calls for Q1. Also, the Materials (100%) and Consumer Staples (96%) sectors have the highest percentages of companies citing “inflation” on their Q1 earnings calls during the same period.

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