Wall Street Lunch: Fed Whispers Warning
Summary
- Federal Reserve issues warnings to regional banks to strengthen their liquidity planning.
- Dollar General and Hormel Foods miss estimate; Campbell Soup tops consensus.
- Charts favor three heavily-shorted REITs - BTIG.
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The Fed tells some lenders to strengthen liquidity positions. (0:15) The FOMC's favorite inflation gauge ticks up year-on-year. (1:46) U.S. expands AI chip shipment curbs. (4:14)
This is an abridged transcript of the podcast.
Our top story so far –
The Federal Reserve has issued numerous private warnings to banks with assets of $100 billion to $250 billion, including Fifth Third (FITB), M&T Bank (MTB), and Citizens Financial Group (CFG).
The Fed is telling the regional lenders to strengthen their liquidity planning as it starts to tighten supervision in the months that followed the failures of three banks this spring. Bloomberg first reported the story, citing people familiar with the matter.
The warnings have addressed a wide range of issues, including capital, liquidity, compliance, and technology.
Earlier this year, Fed Vice Chair for Supervision Michael Barr said, "Following Silicon Valley Bank's failure, we must strengthen the Federal Reserve's supervision and regulation based on what we have learned."
While the central bank said that SVB's management failed to manage risks, it also said the regulator itself failed to take sufficient steps to get SVB to act quickly enough on issues it had identified.
In today’s trading –
Stock market bulls are aiming for their best streak since June.
The S&P (SP500) is up 0.4% in choppy trading. If it closes in the green, it will notch five straight winning days. The Nasdaq (COMP.IND) is up 0.6%, and the Dow (DJI) is up 0.3%.
Futures got a boost when Challenger reported that layoffs in August more than tripled to above 75K. That’s back to June levels and jibed with softer ADP and JOLTS figures.
But weekly jobless claims fell to 228,000, below the consensus of 235,000, which is consistent with monthly job gains of around 200,000. The August jobs report is out tomorrow morning.
In addition, income and spending data for July came in right around forecasts, although spending was a little hotter. The core PCE price index, the inflation gauge favored by the Fed, rose 0.2%, the same rate as June and in line with expectations. The annual rate ticked up to 4.2%.
Patheon Macro’s Ian Shepherdson said the "core PCE extends the run of 0.2-to-0.3% prints since February, but the 0.5% increase in core PCE services ex-housing - the Fed’s current focus - is the biggest since January."
But "over half of this jump was due to the volatile financial services component, led by a 7.3% jump in portfolio management prices."
And the Chicago PMI rose more than expected in August but still remains just in contraction territory near 49.
On the bond market, rates remained fairly steady. The 10-year Treasury yield (US10Y) looks like it is consolidating around 4.1% after hitting 4.35% just last week.
Among active stocks –
Dollar General (DG) missed estimates and cut guidance, leading to pressure on discount store names. The retailer expects full-year net sales growth in the range of 1.3% to 3.3% vs. +3.5% to +5.0% prior outlook and same-store sales growth in the range of a decline of approximately 1.0% to growth of 1.0% vs. +1% to +2% prior outlook, and EPS in the range of about $7.10 to $8.30 vs. $10.03 consensus.
Campbell Soup (CPB) revenue rose 4% year-over-year in fiscal Q4 to $2.07 billion, edging past the consensus. Organic net sales increased 5%, led by a 9% increase for the snacks segment. The company sees full-year sales growth of 0.5% to +1.5% and EPS of $3.09 to $3.15 vs. the $3.09 consensus. The outlook reflects the expectation for volume declines in the first half of fiscal 2024 with sequential improvement throughout the fiscal year.
Hormel Foods (HRL) missed consensus estimates with its fiscal Q3 earnings report. Revenue fell 2.3% year-over-year to $2.96 billion. The retail segment saw volume up 1%, net sales down 2%, and segment profit down 7%.
Morgan Stanley downgraded Palantir (PLTR) to underweight but raised the price target on the stock to $9 from $8. Analysts said that near-term optimism in the AI product cycle and valuation premium creates unfavorable risk-reward.
In other news of note –
The U.S. has expanded restrictions on exports of high-performing Nvidia (NVDA) and AMD (AMD) AI chips to some countries in the Middle East.
Nvidia said in a regulatory filing that in fiscal Q3, the U.S. government announced license requirements, with certain exceptions, that impact exports to China and Russia of its A100 and H100 integrated circuits, DGX, or any other systems that have A100 or H100.
NVDA said it does not expect these additional export restrictions to have an immediate material impact on its financial results.
In the Wall Street Research Corner –
BTIG’s technical strategist, Jonathan Krinksy, notes a rise in heavily shorted names this past week. And he says he still favors some office REITS with large short interest.
Those stocks are:
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