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Daily Market Report | February 11, 2022

US FINANCIAL MARKET

Stocks Waver After Inflation Data – Wall Street Journal, 2/11/2022

  • U.S. stocks wavered and bond yields moved down Friday, as investors continued to assess how the Federal Reserve might react to the latest strong inflation report.
  • The S&P 500 recently traded up less than 0.1%, a day after the broad index fell 1.8%. The Nasdaq Composite fell 0.3%.
  • The Dow Jones Industrial Average added about 111 points, or 0.3%. All three indexes are on track for weekly gains.
  • Data on Thursday showed that inflation hit 7.5% in January, a four-decade high. A Federal Reserve official said the central bank might have to move more drastically to curtail consumer prices, spooking investors.
  • Both events injected fresh volatility into a stock market that is still on fragile footing. They also sent the yield on the benchmark 10-year Treasury note climbing above 2% the first time since mid-2019. The yield, which settled Thursday at 2.028%, ticked down Friday to recently trade at 2.001%. Yields and bond prices move inversely.
  • In individual trading, Zillow rose 12% after it reported a jump in revenue for its core unit, despite losing $881 million on its closed home-flipping business last year.
  • Fintech company Affirm tumbled 9.3% after its sales forecast came in below Wall Street’s expectations.
  • Overseas, the pan-continental Stoxx Europe 600 slipped 0.3%.
  • In Asia, the Shanghai Composite Index fell 0.7%, while Hong Kong’s Hang Seng Index ticked down 0.1%.
  • Markets in Japan were closed for a public holiday.

Zillow’s Shuttered Home-Flipping Business Lost $881 Million in 2021 – Wall Street Journal, 2/11/2022

  • Zillow Group said on Thursday that it lost $881 million on its algorithmic-driven home-flipping business last year in its first earnings report since the real-estate company shut down that operation in the fall.
  • For the fourth quarter, Zillow reported a net loss of $261 million, or $1.03 a share.
  • Analysts expected Zillow to report a loss of 90 cents a share, according to FactSet.
  • The full company, which includes Zillow’s profitable home-listing and advertising business, posted a consolidated net loss of $528 million in 2021, mostly because of its home-flipping business, Zillow Offers.
  • Zillow said in a Thursday letter to shareholders that it is targeting revenue of $5 billion by 2025, with 45% EBITDA margins.
  • During the fourth quarter, Zillow lost an average of about $25,000 on every home it sold, before interest expense, though it sold those homes faster and at much smaller losses than it had expected, the company said.
  • The company said it generated about $8.1 billion in revenue last year, though Zillow Offers was responsible for about $6 billion of it.
  • Zillow also cut about 2,000 jobs, or one-quarter of its staff, and wrote down losses of more than a half-billion dollars on the value of the remaining homes connected with Zillow Offers.

Affirm Posts Wider Quarterly Loss Early After Twitter Posting – Bloomberg. 2/11/2022

  • Affirm Holdings tumbled after the buy-now, pay-later firm whipsawed investors with an errant, early release of partial financial results and then forecast quarterly revenue that missed analyst estimates.
  • The company’s shares plunged as much as 33% on Thursday afternoon after it reported results with a third-quarter revenue forecast that missed some analyst estimates, and a widened net loss.
  • Just hours earlier, investors were given a snapshot of what the company called “another great quarter” via an accidental Tweet, which was enough of a glimpse to send the shares surging.
  • The second-quarter results, which it went on to release ahead of schedule anyway, showed a 77% gain in revenue.
  • Its net loss of $159.7 million widened from $26.6 million a year earlier, missing the $100.3 million average estimate of six analysts in a Bloomberg survey.
  • In the accidental Tweet posted at about 1:15 p.m., the company had referenced the revenue surge, before deleting the post.
  • The stock had fallen 26% this year through Wednesday’s close.

Expedia optimistic about travel recovery, boosting stock despite mixed results – MarketWatch, 2/11/2022

  • Predicting a “brighter year ahead,” Expedia Group said Thursday that the impact of the omicron variant on travel was not as severe as previous COVID-19 disruptions.
  • The travel-booking company reported fourth-quarter net income of $276 million, or an adjusted $1.06 a share, adjusted for stock-based compensation and other costs.
  • That compared with a loss of $412 million, or $2.64 a share, in the year-ago period.
  • Revenue rose to $2.28 billion from $920 million in the year-ago quarter.
  • Analysts surveyed by FactSet had forecast earnings of 80 cents a share on revenue of $2.29 billion.
  • Expedia’s total gross bookings were $17.5 billion in the fourth quarter, an increase of 131% year over year and down 25% compared with the fourth quarter of 2019.
  • The company said that was the lowest quarterly decline last year when compared with pre-pandemic numbers.
  • For the full year, Expedia reported $72.43 billion in gross bookings and $8.6 billion in revenue.
  • It posted a net loss of $269 million, or $1.80 a share.
  • Adjusted earnings were $1.65 a share. Analysts had expected earnings of $1.33 a share on $8.63 billion in revenue.

Under Armour flags hit to margins, supplies due to COVID-19 disruptions – Reuters, 2/11/2022

  • Under Armour on Friday warned that higher transportation costs would squeeze its earnings in the current quarter, as the sportswear maker wrestles with COVID-19-led disruptions to its supply chain.
  • Shares fell 8.1% to $18.40 as the company flagged reductions to its spring and summer order book due to supply constraints.
  • Net revenue rose 9% to $1.53 billion, beating estimates of $1.47 billion, according to Refinitiv IBES data.
  • Adjusted earnings per share stood at 14 cents, five cents above expectations.
  • Under Armour said gross margin would be down 200 basis points in the current quarter, compared with last year’s adjusted gross margin, hurt by a 240 basis points hit from higher freight expenses.
  • It forecast earnings of 2 cents to 3 cents per share for the quarter ending March 31, which at least four analysts said was below estimates.

Why Your Car Might Be Worth More Today Than When You Bought It – Wall Street Journal, 2/11/2022

  • The prolonged inventory crunch of dealership lots is turning the U.S. used-car market upside down: Once-depreciating vehicles are rising in value, and some recently purchased ones are worth more now than their original price.
  • Used-car prices rose 40.5% in January from a year ago, according to data released Thursday by the Labor Department, a jump that helped accelerate U.S. inflation to an annual rate of 7.5% last month, a new four-decade high.
  • “You see nutty things. Cars that were $25,000 new three years ago are $25,000 today,” said Adam Lee, chairman of Lee Auto Malls in Maine. “It doesn’t make any sense.”
  • For instance, the average price paid for a new 2021 model-year vehicle in April was $38,585, according to J.D. Power. In January 2022—nine months later—that same model-year vehicle was selling for an average of $48,765 as a slightly used vehicle.
  • The trend also holds when a broader cross-section of model years is taken into account, including those bought before last spring. Before the pandemic, the first-year drop in value was about 33.3%, and then the car would continue to depreciate, at an average rate of 14% in each year after that, according to research firm J.D. Power.

Ford reconsiders India after halting production, this time for EVs – Reuters, 2/11/2022

  • Ford Motor said on Friday it is considering producing electric vehicles (EVs) in India for export, and possibly for sale in the domestic market, just months after the U.S. automaker decided to stop selling and manufacturing cars in the country.
  • Ford’s comments mark a shift in strategy after it said in September it was taking a hit of about $2 billion because it does not see a path to profitability and was leaving the major auto market. The decision came as a setback for Prime Minister Narendra Modi’s “Make in India” campaign.
  • Ford has two car plants in the country. In a statement on Friday, the company said it was “exploring the possibility of using a plant in India as an export base for EV manufacturing.”
  • When asked if the company may consider selling electric cars in India as well, a Ford India spokesman said, “there have been no specific discussions on this right now, but it is not out of the realm of future consideration”.

Comcast’s NBCUniversal Near Deal to Shift Content to Peacock From Hulu – Wall Street Journal, 2/11/2022

  • Comcast’s NBCUniversal is finalizing a plan that would drastically change its partnership with Hulu, shifting high-profile programming to its own Peacock streaming platform, according to people familiar with the matter.
  • Starting this fall, new episodes of shows like “The Voice,” “Saturday Night Live” and “American Auto” would no longer be available on Hulu soon after they air as a result of that plan, they said.
  • NBCUniversal has taken many steps recently to strengthen Peacock, which has struggled to establish itself in a crowded environment. The move would also be the latest indication of the changing relationship between Hulu’s co-owners— Walt Disney and NBCUniversal—which went from streaming partners to direct competitors in recent years.

Defense Companies Feel Squeeze From Inflation – Wall Street Journal, 2/11/2022

  • Rising wages and fuel expenses are exacerbating defense companies’ challenge of controlling costs for weapons and systems to fit the Pentagon’s budget.
  • The U.S. fiscal 2022 defense budget request of $715 billion assumed inflation of 2.2% when it was made last year.
  • Actual prices have run well ahead of that projection, however.
  • Fuel was forecast to rise 10% during the fiscal year, but crude oil prices are up about 55% over the past 12 months.
  • Escalating costs for materials, transportation and labor are bringing the pressures of inflation to defense companies.
  • They have historically been protected from some price increases via so-called cost-plus deals that pass much of the burden to the Pentagon, the U.S. defense sector’s biggest customer.
  • Protection this time has been diluted by delays in approving a budget for fiscal 2022 and in announcing one for the following year, according to budget experts. That has left contracts and spending based on an inflation rate of 2.2% while defense companies are dealing with a 7.5% annualized rise in the consumer-price index in January.

US ECONOMY & POLITICS

U.S. Consumer Sentiment Falls to Fresh Decade Low on Inflation – Bloomberg, 2/11/2022

  • U.S. consumer sentiment declined further in early February to a fresh decade low as views about personal finances deteriorated due to intensifying inflation concerns.
  • The University of Michigan’s sentiment index dropped to 61.7, the lowest since October 2011, from 67.2 in January, data released Friday showed. The figure trailed the median estimate of 67 in a Bloomberg survey of economists.
  • The report’s gauge of current conditions declined to 68.5, the weakest since 2011.
  • A measure of future expectations decreased to 57.4, also the lowest in more than a decade.
  • Consumers expect an inflation rate of 5% over the next year, up from last month’s reading of 4.9% and the highest since 2008.
  • They expect prices will rise at an annual rate of 3.1% over the next five to 10 years, unchanged from a month earlier.
  • The government’s consumer price index rose 7.5% in January, the fastest annual pace since 1982, as costs for food, housing and electricity jumped, a report showed Thursday.
  • As a result, 26% of respondents expected their financial prospects to worsen. That’s the highest share since 1980 and an indication of the toll faster inflation is taking on household balance sheets.
  • Bad financial times over the next five years were anticipated by nearly two-thirds of all consumers, representing the weakest long-term outlook in the past decade, according to the university’s report.
  • The report suggests the recent volatility in the stock market is also weighing on sentiment. The entire decline in confidence so far this month was among Americans with incomes of at least $100,000

Surging Inflation Heightens Fed Debate Over How Fast to Raise Rates – Wall Street Journal, 2/11/2022

  • The question facing Federal Reserve officials ahead of their policy meeting next month is no longer whether they will raise interest rates but rather by how much.
  • Another strong inflation report released Thursday is intensifying debate within the central bank over how to accelerate a series of interest-rate increases this spring to ease surging prices and cool the economy, according to officials’ most recent public comments and interviews.
  • The debate still has weeks to play out but could lead officials to begin lifting interest rates from near zero next month, with a larger half-percentage-point increase rather than the standard quarter-percentage-point move.
  • The Fed hasn’t raised rates by a half percentage point since 2000.
  • Expectations of a larger March rate increase ratcheted higher twice on Thursday—first when the Labor Department reported that consumer prices rose in January by a somewhat larger margin than economists had anticipated, and later when a regional Fed president said the stronger inflation data would justify the greater rate increase.
  • While some analysts and one Fed official floated the prospect Thursday of raising interest rates before their scheduled meeting, the central bank is unlikely to take such a step.
  • It last did so in April 1994, a period when the Fed was only beginning to provide more guidance to markets about its policy intentions.

Inflation to Exceed Fed’s 2% Goal Well Into 2023, Survey Shows – Bloomberg, 2/11/2022

  • Inflation is projected to run well above the Federal Reserve’s target rate this year and it’ll take longer to recede toward the 2% goal, according to Bloomberg’s latest monthly survey of forecasters.
  • The consumer price index will average 5% this year, up from the previous month’s projection of 4.6%, according the median of 76 economists surveyed Feb. 4-10.
  • The survey preceded the government’s latest CPI report, which showed inflation jumped 7.5% in January from a year ago, a fresh four-decade high.
  • The personal consumption expenditures index, which is the Fed’s preferred inflation metric, will likely average 4.2% in 2022, firmer than the 3.8% projection from last month. Both measures will average more than 2% in 2023, they said.
  • The increase in consumer prices last month was broad-based and showed that price pressures are extending beyond pandemic-related goods categories like cars to services such as health insurance and rents.
  • U.S. growth probably took a big hit as well to start the year.
  • Expectations for gross domestic product (GDP) for the first quarter were cut in half to an annualized 1.5% after economists fully assessed the omicron variant’s impact as well as greater-than-expected inflation.
  • Growth estimates were boosted slightly for the second quarter and reduced for the third.
  • Much of the first-quarter weakness can be attributed to consumer spending, now just expected to rise at a 1.8% rate compared with 2.5% in the January survey.
  • Inflation is eating away at Americans’ paychecks, leaving less discretionary income after high food and gas prices.

Goldman ups Fed hike forecast to 7 rate increases in 2022 after CPI data – Reuters, 2/11/2022

  • Goldman Sachs said it expects seven 25 basis point interest rate rises from the U.S. Federal Reserve this year, up from its previous forecast of five and updating its forecast after Thursday’s U.S. inflation data.
  • HSBC’s U.S. economist Ryan Wang said the bank now expects the Fed to front-load rate rises more than previously anticipated, with a 50 basis point hike in March and four additional quarter-point rate rises in 2022.
  • As per HSBC, that will lift the federal funds target range from 0-0.25% to 1.50-1.75%.
  • Deutsche Bank said in a daily markets note that its economists had also raised their Fed call to a 50 bps hike in March plus five more 25 bps hikes in 2022, with a hike at all but the November meeting and totaling 175 bps in 2022.
  • Deutsche economists “also highlight the increasing risk of a 2023 or 2024 recession”, the note said.

Fed Staff Reported Securities Trades Amid Bank’s 2020 Stimulus Moves – Wall Street Journal, 2/11/2022

  • Two senior Federal Reserve staffers reported a series of financial market trades in early 2020, as the central bank swung into action with a historic stimulus effort aimed at supporting the economy through the coronavirus pandemic.
  • Economists John Stevens and Diana Hancock, both currently senior associate directors in the Fed’s research and statistics division, reported in official financial disclosure forms a series of trades in February and March 2020, according to financial disclosure forms reviewed by The Wall Street Journal.
  • The transactions, by two senior Fed economists with access to the central bank’s policy deliberations, came as Fed Chairman Jerome Powell signaled in late February a monetary policy pivot in response to worsening risks to the economy due to the pandemic.
  • Mr. Stevens reported 46 financial trades on Feb. 27 and Feb. 28, 2020, buying and selling individual company stocks, mutual funds and other investments, his disclosure form showed.
  • He reported 566 trades that year, making his list of market trades the most active among the 88 senior Fed board staff whose forms were reviewed by the Journal.
  • On Feb. 27, Ms. Hancock reported a sale of over $1 million in the iShares Edge MSCI USA Quality Factor exchange-traded fund, which holds shares in selected companies. She reported the purchase of between $500,001 and $1 million of shares in the same fund on March 18, 2020. These were among 14 trades she reported on her 2020 disclosure form.
  • Ms. Hancock, also noted a purchase of between $250,001 and $500,000 in Advanced Micro Devices stock on Feb. 12 and a sale of between $100,001 and $250,000 of those shares on Feb. 28—a day when stocks marked their biggest weekly losses since 2008, and Mr. Powell released a statement signaling a possible monetary policy response.

Reporters: US military blocking access to troops in Europe – Washington Post, 2/11/2022

  • Reporters covering the Pentagon and U.S. military are protesting what they say is a refusal to allow access to the approximately 3,000 U.S. troops being deployed in Europe in response to rising tensions between Russia and Ukraine.
  • Pentagon reporters say they have been denied opportunities to interview or embed with the newly arriving troops, who are being sent to Poland, Romania and Germany as a gesture of reassurance to NATO allies in the face of a potential Russian invasion of Ukraine, which is not a NATO ally. The journalists say such blanket restrictions are rare during peacetime and unusual even in active warzones.
  • The Pentagon Press Association, representing nearly 100 journalists who cover the Department of Defense, says the Biden administration has essentially banned access to the newly deployed rank-and-file soldiers in Europe. The group appealed to the Biden administration in a letter Wednesday addressed to Defense Secretary Lloyd Austin and national security adviser Jake Sullivan.

EUROPE & WORLD

Mercedes-Benz beats profit forecast, sees supply chain headwinds in 2022 – Reuters, 2/11/2022

  • Mercedes-Benz Cars & Vans expects an adjusted earnings before interest and taxes (EBIT) of 14 billion euros ($15.9 billion) in 2021 and sees supply chain headwinds persisting into 2022, it said on Friday.
  • Data released by Mercedes-Benz in January showed the carmaker registered a 5% sales drop in 2021, losing its crown for the first time in five years to BMW as the premium carmaker with the most vehicles sold.
  • The fourth quarter saw an adjusted return on sales of 15%, the company said on Friday, with profitability boosted by “solid net pricing, good product mix and favorable used car performance.”
  • The luxury carmaker predicted an adjusted return on sales of 12.7% in the full year, beating its own guidance of 10%-12% as the jump in electric vehicle sales made up for supply chain troubles, it said as it released preliminary results.
  • But it expects high raw material prices and semiconductor shortages to prevent it meeting strong demand for its products this year, Chief Financial Officer Harald Wilhelm told a call with analysts.
  • The chip shortage would ease in the second half of 2022, he said, adding that a “good part” of raw material costs were locked in but unit sales would still need to increase to mitigate the hit from rising costs.

Volvo Cars warns supply chain woes could remain as profit lags forecasts – Reuters, 2/11/2022

  • Volvo Cars on Friday posted earnings below expectations pressured by global supply shortages despite strong demand for its vehicles.
  • Quarterly revenue fell 6% to 80.1 billion crowns but topped the 75.2 billion expected by analysts. Volvo said it expected continued sales growth in 2022.
  • Volvo’s fourth-quarter operating profit fell to 3.7 billion Swedish crowns ($396.4 million) from 4.9 billion a year earlier and missed the 4.8 billion expected by analysts in a Refinitiv poll.
  • The company’s full-year operating margin rose to 7.2% from 3.2% in 2020 and 5.2% in 2019 before the pandemic struck.
  • Volvo aims for 50% of its sales to be pure electric cars by the middle of this decade. In January, the proportion was 6.6%.

China’s biggest chipmaker SMIC posts record revenue despite U.S. sanctions – CNBC, 2/11/2022

  • China’s largest chipmaker Semiconductor Manufacturing International Corporation reported record revenue and a surge in profit last year amid a global chip shortage but strong demand.
  • SMIC recorded 2021 revenue of $5.44 billion up 39% year-on-year, the fastest growth rate since 2010. Profit came in at $1.7 billion marking a 138% year-on-year rise.
  • The company said that it will add more production capacity in 2022, than it did in 2021.
  • SMIC is also continuing to invest heavily and the company said that it plans to spend $5 billion in capital as it tries to get three new plants off the ground in Beijing, Shanghai and the southern Chinese city of Shenzhen.

Hong Kong Residents Bemoan Toughest Pandemic Curbs Yet: ‘It’s Like Living in 2020’ – Wall Street Journal, 2/11/2022

  • More than two years after the first coronavirus case arrived in the city, residents are chafing at life under the toughest restrictions since the pandemic began, while much of the world is starting to move on.
  • Hong Kong tightened social restrictions on Thursday following a run of record daily cases which punctured its goal of keeping infections at zero.
  • The 1,325 cases announced Friday in the city of 7.4 million are relatively low by global standards, but city officials say they are determined to contain the outbreak.
  • For the first time in the city, churches and other places of worship were ordered to close their doors, and private gatherings were limited to two households. People raced to get haircuts before hair salons closed. In some areas, police officers ramped up random spot checks, fining people for violating rules that require masks be worn in public or limit public gatherings to two people. In one instance, they ticketed 19 men gathered in a park with 5,000 Hong Kong dollar ($641) fines each.
  • How Hong Kong fares in its latest battle with the virus is a test of a strategy that mainland Chinese and local officials describe as “dynamic zero Covid.” While Beijing has locked down and tested entire cities to eradicate outbreaks on the mainland, Hong Kong officials have said that they don’t have the capacity to do so.

Canadian pipeline operator Enbridge reports higher profit as oil volumes rise – Reuters, 2/11/2022

  • Enbridge reported a nearly 4% jump in fourth-quarter profit on Friday, as a recovery in fuel demand boosted the Canadian pipeline operator’s oil transportation volumes, but it missed earnings expectations.
  • Enbridge said it transported 3.01 million barrels per day (bpd) on its Mainline system in the fourth quarter, compared with 2.65 million bpd a year earlier.
  • The Calgary-based company’s earnings rose to C$1.84 billion ($1.45 billion), or 91 Canadian cents per share, in the period, from C$1.775 billion, or 88 Canadian cents per share, a year earlier.
  • On an adjusted basis, Enbridge earned 68 Canadian cents, falling short of analysts’ average expectation of 76 Canadian cents, according to Refinitiv data.

Factmonster – TODAY in HISTORY

  • Lewis and Clark’s Shoshone guide Sacajawea gave birth to a son, Jean Baptiste. (1805)
  • Lateran Treaty was signed, with Italy recognizing the independence and sovereignty of Vatican City. (1929)
  • Yalta Agreement signed by President Franklin Roosevelt, British Prime Minister Winston Churchill, and Soviet leader Josef Stalin during World War II. (1945)
  • Ayatollah Khomeini’s followers seized control of the Iran government. (1979)
  • South African resistance leader, Nelson Mandela, was released from prison after more than 27 years. (1990)
  • As a result of the Arab Spring protests, Egyptian president Hosni Mubarak announces his resignation and hands power of the country over to the military. (2011)

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