Stocks Resume Run as Oil Plunges on Riyadh’s Discontent: Nov. 22, 2023

Stocks are resuming their run as market bulls shrug off yesterday’s selling pressure with this morning’s economic data supporting optimism. Durable goods orders are pointing to weakening inflation while labor market data depict a business community with little appetite for laying off workers. The durable goods and labor data imply that the economy is slowing to a potentially sustainable level rather than falling into recession. Furthermore, discontent among OPEC + members has led to a sharp decline in oil prices today, further dampening inflationary pressures.

Durable Goods Register Another Decline

Durable Goods orders declined last month and registered the third drop in the last four months as the corporate investment, passenger aircraft and automobile categories weighed on results. October Durable Goods orders fell 5.4% month-over-month (m/m), a sharp fall from September’s 4% recovery and well below the 3.1% decline predicted by a consensus of analysts. Capital goods orders, excluding defense and aircraft, an indicator of business investment, declined 0.1%, worse than the projected 0.1% growth rate. Indeed, the category is down for the second consecutive month, as fiscal stimulus related to manufacturing fades while the long and variable lags of monetary policy tightening work their way through the economy. Durable Goods orders excluding transportation were unchanged m/m, while Durable Goods orders excluding defense declined 6.7% during the period.

Across categories, orders for aircraft led the decline, dropping 49.6% while orders for the automobiles and parts category fell 3.8% m/m in October. The headline number was also hurt by the following categories that experienced the stated declines:

• Communications equipment, 2.6%
• Primary metals, 0.5%
• Electrical equipment and appliances, 0.1%

Offsetting some of the weakness were order increases in the defense aircraft and fabricated metal products categories, which gained 1.8% and 0.4% during the month. Orders for machinery and computers were unchanged m/m.

Employers Cling to Workers

Manufacturers may have less need for workers as orders continue to contract, but they are outliers with the overall labor market showing that most businesses are hesitant to trim headcounts. Of most significance, the recent increase in initial unemployment claims reversed last week. Also in this morning’s report, continuing unemployment claims broke an eight-week streak of gains, together pointing to a healthy labor market. Initial unemployment claims fell to 209,000 for the week ended November 18, better than the consensus’s projection of 225,000 and the previous week’s 233,000. Continuing unemployment claims fell to 1.84 million during the week ended November 11, lower than estimates expecting 1.88 million and from the previous week’s 1.862 million.

Corporate Earnings Reflect Buoyant AI Demand

Artificial intelligence has been a strong growth driver for certain companies while other businesses that plan to implement the technology in their products believe it will provide a strong wave of sales. Consider the following examples:

Semiconductor designer and manufacturer Nvidia posted a blockbuster quarter with the growth of artificial intelligence creating strong demand for the company’s computing products, but it issued disappointing guidance due to its concerns about recently revised export restrictions to China. The company has been shifting its focus from providing personal computer components and emphasizing sales of products for cloud computing facilities and data farms. Nvidia’s quarterly revenue grew more than 200% year-over-year (y/y), leaping from $5.93 billion to $18.2 billion and beating the consensus expectation of $16.18 billion. Data center sales jumped approximately 270% to $14.51 billion and soared past the analyst consensus expectation of $12.97 billion. Revenue from products for the gaming sector climbed 81% to $2.86 billion and exceeded the analyst forecast of $2.68 billion. Nvidia’s earnings per share (EPS) of $4.02 was also strong, exceeding the consensus expectation of $3.37 and climbing y/y from $0.58.  Nvidia anticipates another strong quarter with $20 billion in revenue, which would be a 230% y/y increase. It said sales to China and certain other countries will decline due to new export restrictions, but it expects sales in the U.S. and other locations to pick up.

HP Inc., however, offered disappointing guidance, explaining that uptake of its AI enabled personal computers will be gradual after the devices are launched during the second half of next year and that weakness in China is likely to persist. In the meantime, its fourth-quarter revenue of $13.8 billion narrowly missed the analyst consensus expectation of $13.85 billion and declined from $14.8 billion y/y. Its adjusted EPS of $0.90 climbed from $0.82 in the year-ago quarter and fell within the company’s guidance range of $0.85 to $0.97. It narrowly exceeded the consensus expectation of $0.89. Within segments, the company’s commercial printing products revenue declined 4% while consumer printing products dropped 21%. Revenue from sales of consumer personal systems (PS) declined 8% and commercial PS sales revenue dropped 11%.  The company expects to generate a current-quarter EPS within a range of $0.76 and $0.86 compared to the analyst expectation of $0.86. Results will be challenged, in large part, by continued weakness in China among both consumers and businesses.

AutoDesk, which provides cloud-based software for planning construction and manufacturing projects, generated strong results for its fiscal third quarter ended October 31, with revenue growing 10.5% y/y to $1.41 billion. Analysts expected the company to produce $1.39 billion in revenue. The results point to a potential increase in construction which has been in the doldrums because of high financing costs and tight credit conditions. Excluding irregular expenses, AutoDesk’s EPS of $2.07 grew y/y from $1.70 and beat the analyst consensus expectation of $1.99. The company said it experienced stronger-than- expected expansions with its existing enterprise business agreements as it increasingly migrates clients to subscription contracts. Among its various client sectors, its architecture, engineering and construction revenue grew the fastest with a 17% rate. From a regional perspective, the Americas grew the fastest with sales increasing 18% while emerging markets grew the second fastest with a rate of 8%. The company, however, said it expects current quarter adjusted earnings of $1.94 while analysts had been expecting EPS guidance of $2.01. Its revenue guidance of $1.43 billion met the consensus expectation. For its next fiscal year, it expects revenue to increase 9% as the company adds AI features to its software. Analysts expected guidance of 10%.

Equity Bulls Charge While Bond Investors Grow Cautious

Markets are bifurcated today with stocks higher while bond prices take a break. It appears stock investors are more focused on weaker demand data from durable goods and stronger-than-expected earnings from Nvidia while bond players are focusing on the risk of renewed inflationary pressures stemming from tight labor market conditions. All major US stock indices are higher, with the small-cap, cyclically tilted Russell 2000 and tech-heavy Nasdaq Composite indices leading, having climbed 0.8% and 0.4%. The Down Jones Industrial and S&P 500 indices are each up 0.3%. Sectoral breadth is positive with all sectors higher except for energy and materials, which are lower by 0.9% and 0.2%. Communication services and technology are leading with prices higher by 1% and 0.5%. Energy stocks are getting battered as crude oil prices plunge on the back of a delayed OPEC + meeting. The meeting, which was supposed to occur this weekend, will now occur next Thursday, November 30, as anecdotal evidence suggests that Riyadh is upset that other cartel members are producing too much oil. While some nations want to keep prices high, others need hard currency right here right now. WTI crude oil is down 4.1% or $3.17 to $74.61 per barrel on the news. Meanwhile, Treasuries are selling off, with the 2- and 10-year maturities trading at 4.92% and 4.43%, as yields for each instrument have climbed 4 bps this session. Higher yields are propping up the dollar, with the greenback’s index up 51 bps to 104.13. The US currency is gaining against the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars.

Happy Thanksgiving

As many of us look forward to our Thanksgiving feast, we have some economic data following on Friday. S&P Global’s Purchasing Managers’ Index will provide an early look into this month’s economic conditions with breakdowns across the services and goods producing sectors. Manufacturing is expected to contract slightly while services sectors are likely to reflect modest growth. Also important to note, stock and bond markets will close early on Friday, with the former closing at 1:00 pm ET while the latter ends at 2:00 pm ET.

Happy Thanksgiving and Happy Holidays to all of you.

Join Me in Boca

I look forward to joining a panel discussion during the Noble Capital Markets’ 19th Annual Emerging Growth Equity Conference. The conference is being held December 4-5 in Boca Raton, FL and features a discussion with George W. Bush, 43rd president of the United States. My panel will follow opening remarks at 8 a.m. on Monday, December 4, and will provide timely insights into monetary policy and the direction of the economy. If you would like to register for the event, please contact me at jtorres@ibkr.com.