Fed Hawks Slap Stocks, Federal Reserve Hikes Rates by 75 Basis Points, Homebuilders Sentiment Declines for the 9th Consecutive Month, Two-Year Treasury Yield Passes 4% for the First Time Since 2007, Ford Motors Warns Investors of an Extra $1B in Supply Chain Costs during Q3 – Shares Plummet, Vladimir Putin Mobilizes 300,000 Troops for War in Ukraine, Apple Raises App Store Prices in Countries in Europe and Asia, Costco Reports Q4 Earnings – Shares Decline, KB Homes Reports Q3 Earnings, Beating on EPS and Revenue, Qualcomm 2022 Automotive Day Delivers Solid Numbers.
1. Fed Hawks Slap Stocks
The Fed surprised the market with an even more hawkish tone than expected at its meeting this week. Risk assets across the board crashed and the U.S. dollar soared. The S&P 500 and Nasdaq both sank 5% and Russell 2000 slipped nearly 7%. Add in last week’s 5% drop and we’ve now seen a 10% haircut in stocks in two weeks. No sector was spared with energy, consumer discretionary, and real estate all getting hit the hardest. Moving into the commodity markets, recession fears took a toll on Crude Oil dropping it 7% to $79.14/barrel, its lowest level in 9 months. Gold prices fell to $1,652/Ounce, officially breaking their rising 200-week moving average. Bitcoin inched lower to $18,785/Coin, its lowest level since 2020.
2. Homebuilders Sentiment Declines for the 9th Consecutive Month
In September, Homebuilder sentiment dropped 3-points to 46 in the National Association of Home Builders/Wells Fargo Housing Market Index. It’s not a good sign as anything below 50-points is considered negative. September is the 9th straight month of declines and the 46-points is the lowest reading since 2014, other than at the start of the pandemic. Homebuilders are placing the blame on rising rates as the average rate on the 30-year fixed rate mortgage has now doubled this year from 3% to 6%. Nearly a quarter of homebuilders also reported lowering home prices, up from 19% in August. Builders continue to report elevated construction costs, in addition to higher interest rates weighing on their market. Higher costs for land, labor and materials have made it harder for builders to lower prices, but they are now being forced to. A homebuilder and developer from Savannah, Georgia, NAHB Chairman Jerry Konter stated: “Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households.”
3. Ford Motors Warns Investors of an Extra $1B in Supply Chain Costs during Q3, Shares Plummet
On Monday, Ford Motors warned investors that the company is expecting to incur an extra $1B in costs during Q3. Ford reported that supply problems have resulted in parts shortages affecting roughly 40,000 to 45,000 vehicles, primarily high-margin trucks and SUVs that haven’t been able to reach dealers. Ford also cited that recent negotiations resulting in inflation-related supplier costs that will run about $1B higher than originally expected. Ford is now expecting Q3 adjusted earnings before interest and taxes to be in the range of $1.4B to $1.7B. The company expects to complete and deliver the vehicles to dealers in Q4 and is still projecting 2022 adjusted earnings before interest and taxes of between $11.5B to $12.5B. Following the news, Ford suffered its worst day in 11-years, with shares falling 12.3% on Tuesday. The Detroit automaker lost roughly $7B off its market value. It was the company’s worst day on a percentage basis since January 28th, 2011.
4. Apple Raises App Store Prices in Countries in Europe and Asia
On Tuesday, Apple announced it will raise prices of apps and in-app purchases on its App Store in all of the euro zone and some countries in Asia and South America. The new prices, excluding auto-renewable subscriptions, will be effective as early as October 5th. Apple periodically adjusts its prices in different regions and did reduce prices for euro zone countries last year to adjust for currencies and taxes, dropping starting prices for many apps to $0.99 cents from $1.09. The latest price increase lists those starting prices to $1.19. Apart from euro zone countries, the price increases will hit Sweden and Poland in Europe, Japan, Malaysia, Pakistan, South Korea and Vietnam in Asia and Chile in South America. For some countries like Vietnam, the price increase was due to new regulations relating to collecting tax from consumers, Apple said. Revenue from Apple’s services business, which includes the App Store, has been growing at a rapid pace in the last few years and now hovers around $20B per quarter.
5. Two Year Treasury Yield Passed 4% for the First Time Since 2007
The yield on the 2-year Treasury note surged passed 4.1% after the Federal Reserve hiked rates this week bringing it to its highest level since 2007. The policy-sensitive 2-year Treasury rose 15 basis points to 4.113%. Meanwhile, the yield on the benchmark 10-year Treasury rose to a high of 3.64%, its highest level since February 2011. The Fed raised rates by 75 basis points at its September meeting and showed that it will keep hiking rates until the funds level hits a terminal rate, of 4.6% in 2023. The 2-year rate started 2022 trading at around 0.73%. Wednesday’s move puts it 328 basis points (3.28% points) above that level. CFRA’s Sam Stovall stated: “As a result, bond yield inversions continue to widen, causing equity markets to fall further as recession risks increase.”
6. Vladimir Putin Mobilizes 300,000 Troops for War in Ukraine
On Wednesday, Russian President Vladimir Putin announced a partial military mobilization, putting the country’s people and economy on a wartime footing as Moscow’s invasion of Ukraine continues. In a televised announcement, Putin stated: “the West wants to destroy our country,” and that “mobilization events” would begin Wednesday without providing further details, aside from saying he had ordered an increase in funding to boost Russia’s weapons production, having committed (and lost) a large amount of weaponry during the conflict, which began in late February. A partial mobilization is a hazy concept, but it could mean that Russian businesses and citizens have to contribute more to the war effort. Russia has not yet declared war on Ukraine, despite having invaded in February and it calls its invasion a special military operation. Putin also confirmed that the military reservists would be called up into active service, but insisted a wider conscription of Russian men of fighting age was not taking place. Putin said: “I reiterate, we are talking about partial mobilization, that is, only citizens who are currently in the reserve will be subject to conscription and above all, those who served in the armed forces have a certain military specialty and relevant experience. Conscripts will obligatorily go through additional military training based on the experience of the special military operation before departing to the units.”
7. Fed Hikes Rates by 75 Basis Points
On Wednesday, the Federal Reserve raised its benchmark interest rate by another three-quarters of a percentage point and indicated many more rate hikes to come. In its latest attempt to combat inflation, which is running near its highest levels since the early 1980s, the central bank took its federal funds rate up to a range of 3%-3.25%, which is the highest it has been since 2008. This is the third consecutive 75 basis point hike in a row. Projections from the meeting suggested the Fed will raise rates by at least 1.25 percentage points in its two remaining meetings this year. Along with the massive rate increases, Fed officials signaled the intention of continuing to hike until the funds level hit a terminal rate or end point, of 4.6% in 2023. That implies a quarter-point rate hike next year, but no decreases. Fed Chairman Jerome Powell stated: “My main message has not changed since Jackson Hole, the FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.” The “dot plot” of individual members’ expectations doesn’t point to rate cuts until 2024. Powell has been saying he expected rates to start dropping in 2023. Officials coalesced around expectations for the unemployment rate to rise to 4.4% by next year from its current 3.7%. They see GDP growth slowing to 0.2% for 2022, then rising slightly in the following years to a longer-term rate of just 1.8%. The revised forecast is a sharp cut from the 1.7% growth estimate for 2022 in June. The hikes also come with the hopes that headline inflation will drift down to 5.4% this year, as measured by the Fed’s preferred personal consumption expenditures price index, which showed inflation at 6.3% in July. The summary of economic projections then sees inflation falling back to the Fed’s 2% goal by 2025.
8. Costco Reports Q4 Earnings, Shares Decline
On Thursday, Costco reported Q4 earnings per share of $4.20 and revenue of $72.1B, beating the consensus EPS estimate of $4.12and also slightly surpassing revenue estimates of $72B. The company also saw revenue grow 15% on a year-over-year basis. Membership revenues rose 7.5% to $1.3B. Same store sales were up 13.7% globally and 15.8% in the United States, with e-commerce sales rising 7.1%. Gross margins narrowed by around 80 basis points to 10.18. Costco shares were down over 4% on Friday, which has extended the stock’s six month decline to around 14%. CFO Richard Galanti stated: “In terms of membership fees and a possible increase, there are no specific plans regarding a fee increase at this time. We’re pleased with our growth in both top line sales and membership households over the last several quarters and in member loyalty as reflected in increasing member renewal rates.” Costco is still holding off on raising its membership fees after reporting Q4 results that were underwhelming and barely surpassed expectations.
9. KB Homes Reports Q3 Earnings, Beating on EPS and Revenue
On Wednesday, KB Homes reported Q3 results of $2.86 EPS on revenue of $1.8B, surpassing the consensus estimates of $2.69 EPS. However, the company missed on the consensus revenue estimate of $1.9B. Still, KB Homes saw revenue grow over 25% versus the year ago period. Homes delivered increased 6% to 3,615, while the average selling price rose 19% to $508,700. Homebuilding operating income grew 91% to $325.1M. Jeffrey Mezger, Chairman, President and Chief Executive Officer of KB Homes stated: “Although we experienced a shortfall in deliveries relative to our expectation due to extended build times and ongoing supply chain constraints, which will also impact our 2022 fourth quarter, our results demonstrate our larger scale, excellent portfolio of communities and a healthy balance sheet.” For Q4, the company expects housing revenues in the range of $1.95B to $2.05B. The average selling price is expected to be $503,000.
10. Qualcomm 2022 Automotive Day Delivers Solid Numbers
During Qualcomm’s (QCOM) 2022 Automotive Day yesterday, the company outlined a few different milestones and automotive related projections. The big projection was Qualcomm’s $30B automotive design-win pipeline, an $11B expansion from its most recent earnings call in July. Other significant numbers included QCT (Qualcomm CDMA Technologies) Automotive revenues climbing roughly 33% year-over-year by the end of Fiscal Year 2022 (September), growing to over $4B in 2026 and $9B in 2031. Qualcomm does not expect its automotive business to be accretive to margins until Fiscal Year 2026. In May, the company noted that applying the same chips it sells into phones into cars is “highly” accretive from a margin perspective. Overall, the company’s Automotive Day contained plenty of positive headline figures. However, if the economy deteriorates further, Qualcomm’s automotive partners may be staring at reduced production, hindering QCOM’s forecasts.