Tag: Breaking News: Markets

The top 10 things to watch in the stock market Wednesday

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The 10 things to watch Wednesday, Dec. 6

1. U.S. stocks are higher in premarket trading Wednesday, with S&P 500 futures up 0.45% after back-to-back days of losses. The move comes amid increasing signs the labor market is loosening, suggesting the Federal Reserve’s interest-rate hikes are succeeding in cooling the economy. U.S. private payrolls rose by 103,000 last month, according to the ADP National Employment Report, well below forecasts for a 130,000 increase.

2. Home builder Toll Brothers (TOL) delivers better-than-expected quarterly results, with revenue of $3.02 billion and earnings-per-share of $4.11 on stronger margins. The company also provides upbeat commentary around 2024, with mortgage rates expected to come down.

3. Bank of America downgrades PayPal (PYPL) to neutral from buy, while lowering its price target to $66 a share, down from $77. The firm doesn’t think PayPal is “broken” but needs time to fix things, calling 2024 a transition year.

4. JPMorgan shuffles around its oil ratings, upgrading Devon Energy (DVN) to overweight from neutral, while downgrading EOG Resources (EOG) to neutral from overweight. The firm also lowers its price target slightly on Club name Coterra Energy (CTRA) to $29 a share, from $30, while reiterating an overweight rating and keeping the stock as a “top pick.”

5. Morgan Stanley downgrades Plug Power (PLUG) to underweight from equal weight, while lowering its price target to $3 a share, down from $3.50. If you want a hydrogen play with less of the risk, stick with Club holding Linde (LIN). It’s the largest supplier of liquid hydrogen in the U.S. and doing a lot for clean hydrogen, too.

6. Morgan Stanley resumes coverage on JM Smucker (SJM) with an equal-weight rating and $122-per-share price target. The firm liked Smucker’s quarterly results but cites “several concerns,” including the company’s acquisition of Hostess Brands and the risk posed by GLP-1 drugs.

7. Bank of America calls semiconductor company Qualcomm (QCOM) a “top pick” amid the end of the global smartphone downturn. The firm expects global smartphone shipments to rise by 5% in 2024.

8. Citi upgrades Signet Jewelers to buy from neutral, while raising its price target to $119 a share, up from $93. You can hear the full story from CEO Gina Drosos on Tuesday’s “Mad Money“. 

 9. Can Club holding Starbucks (SBUX) break a 12-day losing streak now that the bad news is out? CEO Laxman Narasimhan said Tuesday at a Morgan Stanley conference that the recovery in China is “perhaps half the rate of what you would expect it to be given what you saw in the fourth quarter last year.” Shares of the coffeemaker were up 0.5% in early trading, at $96 apiece.

10. Exxon Mobil (XOM) says it plans to repurchase $20 billion worth of stock annually through 2025 after its acquisition of Pioneer Natural Resources (PXD) closes. The oil major is buying back $17.5 billion of stock this year.

(See here for a full list of the stocks at Jim Cramer’s Charitable Trust.)

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Off-price retailer TJX delivers another earnings beat, making its stock a buy

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A T.J. Maxx store in Pasadena, California.

Mario Anzuoni | Reuters

TJX Companies (TJX) reported better-than-expected fiscal year 2024 third-quarter results on Wednesday, while again raising its outlook for the full fiscal year — prompting us to upgrade the stock to a buy-equivalent rating.

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Activist investor ValueAct has been building a stake in Disney

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Disney CEO Bob Iger speaking with CNBC’s David Faber at the Allen&Co. Annual Conference in Sun Valley, Idaho.

David A. Grogan | CNBC

ValueAct Capital has taken a significant stake in Disney (DIS) and has been in dialogue with Disney’s management, the Activist Spotlight has learned. This is a new stake not previously disclosed in filings or media reports.

Here’s a breakdown of the situation:

Company: Walt Disney Co.

Business: Disney is one of the most iconic entertainment companies globally. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences and Products. Disney engages in film and TV content production and distribution activities, as well as operates television broadcast networks and studios.

Stock Market Value: $167 Billion ($91.07 a share)

Activist: ValueAct Capital

Percentage Ownership: n/a

Average Cost: low $80s per share

Activist Commentary: ValueAct has been a premier corporate governance investor for over 20 years. ValueAct principals are generally on the boards of half of ValueAct’s core portfolio positions and have had 56 public company board seats over 23 years. ValueAct has filed 89 13D’s in their history and has had an average return of 57.57% versus 17.52% for the S&P 500 over the same period.

Behind the scenes:

ValueAct knows technology very well as seen by their active investments at Salesforce, Microsoft, and Adobe where they had board seats. They also know media well as active investors at the New York Times, Spotify and 21st Century Fox.

ValueAct began buying Disney this summer during the WGA and SAG strikes and it is one of the firm’s largest positions. The activist investor has been in dialogue with Disney’s management and are still growing their position today.

ValueAct believes that Disney’s theme parks and consumer products businesses and their $10 billion in EBIT (earnings before interest and taxes) are alone worth low $80s per share, ValueAct’s approximate cost basis in the stock.

The theme parks unit has a high return on capital, allowing Disney to further monetize its intellectual property. Amongst its peers like Warner Bros, Paramount and Netflix, Disney is the only one who has this advantage. Moreover, this is a business that is not threatened by technology, but enhanced by it.

For example, Disney’s Genie app, which allows park visitors to be guided through the parks in a way that minimizes their wait time, greatly enhances the visitor experience. Moreover, Disney has recently announced that it will be investing $60 billion into theme parks, which will be money well spent.

Stock Chart IconStock chart icon

Disney YTD

This theme park valuation implies an almost zero valuation for the rest of Disney’s business that includes ESPN, theatrical movie releases, Disney+, Hulu and its television networks. Like digital news and music, video streaming was greatly disrupted by the internet and the low cost of capital from 2016 to 2021 afforded streaming companies, almost unlimited capital to acquire customers at any cost. Then with rising interest rates and inflation, that bubble burst in 2022 and there was a massive re-rating of assets globally.

Many of the high-growth companies that had easy access to capital now find themselves the most capital constrained they had been in a long time. This gives a huge advantage to companies like Disney, which has a market leading brand and an incumbent business model with strong customer relations.

Now, these streaming wars are in the process of resolving and companies are focused more on profitability than acquiring customers at any cost. This means cutting costs and creating growing and sustainable revenue.

ValueAct has experience in both of these areas. At Salesforce, where ValueAct CIO Mason Morfit is on the board, margins have gone from 18% to 32% while the stock has gone from $130 to $220 in 10 months. Disney has already announced an aggressive cost cutting plan, but it is the revenue opportunity that is more interesting here.

At portfolio companies like Adobe, Microsoft, Salesforce, Spotify and the New York Times, ValueAct has advocated for and assisted in creating bundles, pricing tiers and advertising stacks that have led to less churn, more pricing power, higher average revenue per user and even better advertising technology.

Both the New York Times and Spotify increased their bundles (NYT with Wordle, the Athletic, etc.; Spotify with podcasting and audiobooks) and both increased subscription pricing. The New York Times’ stock went from $30 per share to $45 per share and Spotify went from approximately $80 per share to $175 per share. Disney has numerous opportunities for bundling, price tiers, etc. and there are many ways this can work out through its present assets, M&A, alliances and licensing, but intelligently bundling its products will lead to more stable and valuable revenue. Based on similar situations that ValueAct has been involved in, this could lead to up to $15 billion of EBIT for the media assets and a Disney stock price as high as $190 per share.

ValueAct has a history of creating value through board seats, including at Salesforce and Microsoft, but has also added value as active shareholders in situations like Spotify and the New York Times.

I would expect that they would want a board seat here and as someone who has a reputation of working amicably and constructively with boards, the Disney board should welcome them with open arms. Aside from their extensive experience at technology companies and media companies and their innovative and relevant history of growing sustainable revenue at similar companies, there is one other reason shareholders should welcome them to the board.

Bob Iger returned to Disney in 2022 with an initial two-year contract with the explicit goal of righting the ship. The board formed a succession planning committee at that time. Iger subsequently extended his employment agreement through 2026 but longer-term succession remains one of the board’s most important priorities. Having a shareholder representative on the board is very helpful in that area particularly one like ValueAct, whose CIO participated in one of the most audacious and successful CEO successions ever when Satya Nadella replaced Steve Ballmer as CEO of Microsoft. Someone with that experience and perspective would be invaluable in navigating CEO succession at Disney.

Finally, we cannot ignore the fact that Disney is presently the target of a proxy fight by Nelson Peltz and Trian Partners that is turning somewhat confrontational. This certainly gives the Disney board an alternative they were not expecting.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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UBS sees a raft of Fed rate cuts next year on the back of a U.S. recession

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U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.

Evelyn Hockstein | Reuters

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.

In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.

The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.

“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”

The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.

“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

U.S. Treasury yield curve will likely continue to steepen, analyst says

“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”

UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.

“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.

Worst credit impulse since the financial crisis

Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.

“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.

Signs of a recession may be on the horizon, says fmr. Fed economist Claudia Sahm

Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”

“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.

A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production, and incomes.

Goldman ‘pretty confident’ in the U.S. growth outlook

The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.

Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.

“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”

Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.

“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded.

Correction: Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%. An earlier version misstated the range.

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The IPO market has grown quiet again. Here’s what is behind the shift in sentiment

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Traders working at the New York Stock Exchange (NYSE), on Sept. 20th, 2023.

NYSE

It’s quiet out there in IPO land — very quiet.

This is it: the weeks before Thanksgiving usually bring a spate of large IPOs eager to go public before the holiday season starts.

“Whatever you are going to get between now and the end of the year should be happening right now,” Don Short, head of venture equity at InvestX, told me.

Except, nothing is happening.

“The bad companies can’t go public, and the good companies don’t want to go public in a bad market,” Matt Kennedy from Renaissance Capital said.

A terrible performance for stocks in October, higher-for-longer interest rates, poor after-market performances from the recent spate of initial public offerings this summer and the prospects of dramatically lower valuations appear to be causing many IPO candidates to rethink or delay their debuts.

The steady rise in the 10-year Treasury yield was a particular deal killer.

“That was a big wet blanket” for the IPO market, Greg Martin from Rainmaker Securities told me.

Companies delaying IPOs

Waystar, which was considering launching its roadshow last week, is reportedly delaying its IPO until December or into 2024.

Last week, the Wall Street Journal reported that Panera Bread was laying off 17% of its corporate staff in advance of a possible IPO next year.

Others still interested in an IPO may have to take very large haircuts.

Buy now, pay later firm Klarna, another oft-mentioned IPO candidate, told CNBC it has no immediate plans to go public. The company last raised cash at a valuation of $6.7 billion, which marked a massive 85% haircut to its previous valuation of nearly $46 billion.

Chinese fast-fashion giant Shein has not made a decision on the timing or valuation of an IPO, but sources familar with the company’s plans told Bloomberg the company was targeting a valuation of $80 billion to $90 billion. However, the most recent funding round in May valued the company at $66 billion.

This is in stark contrast to most years, when big IPOs went public in November and December.

Rivian, the biggest IPO of 2021, priced on Nov. 9, 2021, and began trading the next day. Hertz raised $1.3 billion in November 2021. Braze raised $500 million the same month, Sweetgreen raised $364 million. Allbirds raised $303 billion.

Airbnb went public in December 2020 and raised $3.5 billion. The day before that, Doordash raised $3.4 billion. A month earlier, in November 2020, Sotera Health raised $1.1 billion, and Miravai Life Sciences raised $1.6 billion.

But the year-end IPO gold rush fizzled in 2022, and it’s fizzling again this year.

So far, 96 IPOs have raised $18.8 billion in 2023, according to Renaissance Capital. That’s following on 2022, when a measly $7.7 billion was raised, the worst year for IPOs in decades. By contrast, a normal year should see at least $50 billion raised.

Recent IPOs aren’t helping

It didn’t help that the recent spate of IPOs have not gone well.

“What I was hearing was that everyone that was lining up after Instacart went public [in September] pulled their deal and everything went a bit quiet,” Short told me.

Three of the biggest IPOs of the year are trading below their offering prices, and, a fourth, Arm, is trading near its debut price, after dipping below it in early trading Thursday.

Largest IPOs, 2023
(from offering price)

Arm about flat
Kenvue down 13%
Birkenstock down 8%
Instacart down 10%

Source: Renaissance Capital

Marketing automation company Klaviyo, which went public in September, is also trading 8% below its offering price of $30 after reporting earnings on Tuesday.

Restaurant chain Cava Group went public in June and at $31 is trading above its initial offering price of $22, but the stock was as high as $57 in the month after it went public, so at Wednesday’s price of $31 most of the original buyers of the stock after the open are under water.

The Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the largest IPOs in the past two years, is down 17% from its July peak to October trough, S&P wasn’t as bad but similar trajectory.

Some companies may still go public

The market is not completely closed.

“I wouldn’t discount December. If the latest rally continues, we could get more activity,” Kennedy said. “Companies want to go public when there is an expectation the market is going to trade up.”

There are some small firms still in the pipeline.

U.S. natural gas producer BKV, which filed for a $100 million IPO in November of last year, recently updated its prospectus, which is a sign they are still looking to go public.

Homebuilder Smith Douglas, which filed for a $100 million IPO in September, also updated its prospectus in mid-October.

American Healthcare REIT, which filed in September 2022, filed updated financials and announced an additional underwriter (Morgan Stanley) this week.

Here’s another problem: AI

So what happens to some of the older IPO candidates like Reddit or Stripe? As time goes on, they get less interesting.

“The excitement right now is in the AI space, but none of them are ready yet to go public,” Short said. “There are a lot of names still burning cash, but there’s not a lot of capital available for anything that isn’t AI right now.”

That is the main reason Arm is one of the few IPOs that isn’t down sharply.

“Anything associated with AI is a whole other category, and Arm is definitely getting a halo effect,” Short said. Arm reported its first earnings as a public company Wednesday night. Its shares were down about 7% in trading Thursday after offering a weak outlook.

Tough choices for IPO candidates

That leaves IPO candidates with three choices: 1) go public, likely with a substantial haircut, 2) stay private, also likely with a haircut, and hope that your venture capital source will continue to fund you, or 3) merge or go out of business.

Greg Martin from Rainmaker Securities runs one of the leading private platforms for trading pre-IPO companies. He told me the companies in the best position are those who could fund their operations from their own cash flow, but that is not a large group.

“The private financing markets are even worse than the public financing markets, so you really don’t want to be running out of cash right now,” Martin said, adding that he is seeing much lower prices for private sales of stock compared with two years ago.

That leaves many of the roughly 800 tech unicorns (those with valuations above $1 billion) in a precarious position.

“We are starting to see unicorns die,” Martin said. “There’s a lot of lower quality unicorns with negative EBIDTA [cash flow], and there’s not much demand for them in the public markets, so the M&A route is increasingly likely for a lot of companies.”

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Why oil is down since the Hamas-Israel conflict started and whether that can last

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Central banks look to have hit peak rates. Here’s how markets think they’ll come down

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A trader works, as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, July 26, 2023.

Brendan McDermid | Reuters

The world’s major central banks paused their interest rate hiking cycles in recent weeks and with data suggesting economies are softening, markets are turning their attention to the first round of cuts.

The U.S. Federal Reserve, European Central Bank and the Bank of England dramatically hiked rates over the last 18 months in a bid to tame runaway inflation.

The Fed on Wednesday held benchmark interest rates steady at a target range of 5.25%-5.5% for the second consecutive meeting after ending a string of 11 hikes in September.

Though Chairman Jerome Powell has been keen to reiterate that the Fed’s work on inflation is not yet done, the annual rise in the consumer price index came in at 3.7% in September, down from a pandemic-era peak of 9.1% in June 2022.

Yet despite Powell’s refusal to close the door on further increases in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rallied on the back of the decision.

The market is now narrowly pricing a first 25 basis point cut from the Fed on May 1, 2024, according to CME Group’s FedWatch tool, with 100 basis points of cuts now expected by the end of next year.

Since last week’s decision, U.S. nonfarm payrolls came in softer than expected for October, with job creation below trend, unemployment rising slightly and a further deceleration in wages. Although headline inflation remained unchanged at 3.7% annually from August to September, the core figure came down to 4.1%, having roughly halved over the last 12 months.

“Core PCE, which is the Fed’s preferred inflation metric, is even lower at 2.5% (3-month, annualized),” noted analysts at DBRS Morningstar.

“The lagged effects of a cooler housing market should reinforce the disinflationary trend over the next few months.”

But despite the dovish data points, short-term U.S. Treasurys reversed course to sell off on Monday, which Deutsche Bank’s Jim Reid chalked up to investors beginning to “wonder if last week’s narrative about rate cuts was overdone.”

“The U.S. economy is also proving more resilient than the U.K. and euro zone,” he said.

“For instance, market pricing for the Fed now implies a 16% chance of another rate hike, up from 11% on Friday,” Reid said in an email Tuesday.

“Moreover, the rate priced in by the December 2024 meeting was up +12.4bps to 4.47%. So there was a clear, albeit partial unwinding of last week’s moves.”

Reid also highlighted that this is the seventh time this cycle that markets have notably reacted on dovish speculation.

“Clearly rates aren’t going to keep going up forever, but on the previous 6 occasions we saw hopes for near-term rate cuts dashed every time. Note that we’ve still got above-target inflation in every G7 country,” he added.

The ECB

The European Central Bank late last month ended its run of 10 consecutive hikes to keep its benchmark interest rate at a record high of 4%, with euro zone inflation falling to a two-year low of 2.9% in October and the core figure also continuing to decline.

The market is also pricing almost 100 basis point of cuts for the ECB by December 2024, but the first 25 basis point reduction is mostly priced in for April, with economic weakness across the 20-member common currency bloc fueling bets that the central bank will be the first to start unwinding its tight policy position.

Gilles Moëc, group chief economist at AXA, said October’s inflation print confirmed and amplified the message that “disinflation has come in earnest to Europe,” vindicating the ECB’s “new-found prudence.”

ECB done with hikes barring unforeseen shocks, Bank of Portugal's Centeno says

“Of course, the current disinflation does not preclude the possibility that a ‘line of resistance’ would be found well above the ECB’s target. Yet, the confirmation that the euro area was flirting with recession last summer reduces this probability,” Moëc said in a research note Monday.

After the October meeting, ECB President Christine Lagarde batted away the suggestion of rate cuts, but National Bank of Greece Governor Yannis Stournaras has since openly discussed the possibility of a reduction in the middle of 2024 provided inflation stabilizes below 3%.

“This implicitly advocates a forward-looking version of monetary policy which takes lags into consideration to calibrate its stance. In clear, waiting for inflation to reach 2% before cutting rates would be ‘overkill,'” Moëc said.

“There is no doubt in our mind that the current dataflow is clearly favouring the doves, but the hawks are far from having given up the fight.”

The Bank of England

The Bank of England on Thursday kept its main policy rate unchanged at 5.25% for a second consecutive meeting after ending a run of 14 straight hikes in September.

However, minutes from last week’s meeting reiterated the Monetary Policy Committee’s expectations that rates will need to stay higher for longer, with the U.K. CPI holding steady at 6.7% in September. Despite this, the market on Monday was pricing around 60 basis points of cuts by December 2024, albeit starting in the second half of the year.

BNP Paribas economists on Thursday noted an “eye-catching” addition to the MPC’s guidance, which said its latest projections indicated that “monetary policy was likely to need to be restrictive for an extended period of time.”

Watch CNBC's full interview with Bank of England Governor Andrew Bailey

“Governor Andrew Bailey’s comments at the press conference indicated that this guidance was not intended as push-back on the market-implied policy rate path that underpins its latest forecasts, where a 25bp cut is not fully priced in until the second half of 2024,” they said.

“Instead, the intention was to indicate that cuts are not likely to feature as part of the conversation any time soon.”

At Thursday’s news conference, Bailey emphasized the upside risks to the bank’s inflation projections, rather than entertaining any suggestion of cuts on the horizon.

“While we don’t think it is necessarily indicative of a high risk of further hikes in the near term, we read it as a further sign that the MPC is not considering rate cuts and will not do so for a while,” BNP Paribas added.

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Jim Cramer’s top 10 things to watch in the stock market Friday

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My top 10 things to watch Friday, Nov. 3

1. U.S. stocks climb higher in premarket trading Friday, with S&P 500 futures up 0.46% after rising nearly 5% over the previous four sessions. Equities remain on track for their biggest weekly gain of the year. Government bonds also continue to rally this week, with the yield on the 10-year Treasury pulling back to around 4.5%. Oil prices tick up 0.78%, bringing West Texas Intermediate crude to just above $83 a barrel.

2. U.S. employment growth slows in October, with the economy adding just 150,000 jobs, according to the Labor Department’s monthly nonfarm payrolls report. That compares with September’s revised gain of 297,000 jobs and a Dow Jones estimate for October of 170,000 jobs. The news could take further pressure off the Federal Reserve in its ongoing battle to bring down inflation through higher interest rates.

3. Club holding Apple (AAPL) delivers an uneven fiscal fourth-quarter, with shares falling on lower-than-expected guidance for the current quarter. Analysts are using the results to reset expectations and lower price targets. Apple stock is down 1.7% in premarket trading, at $174.57 a share.

4. Semiconductor firm Skyworks Solutions (SWKS) reports a weak quarter as a result of Apple’s slowdown, prompting a slate of price-target reductions Friday. Barclays lowers its price target on the stock to $90 a share, down from $115, while maintaining an overweight rating on shares.

5. The takeaway from Club holding Starbucks‘ (SBUX) fiscal fourth-quarter beat is that the coffee maker needs so many more stores both in the U.S. and in China, while it’s barely begun to tackle India. Baird on Friday raises its price target on Starbucks to $110 a share, up from $100, while reiterating a neutral rating.

6. Barclays on Friday raises its price target on Club name Eli Lilly (LLY) to $630 a share, up from $590, while maintaining an overweight rating on the stock. The call seems like a good idea after Eli Lilly delivered solid quarterly results on the back of its blockbuster drug Mounjaro.

7. Shares of cybersecurity firm Fortinet (FTNT) plunge nearly 20% in early trading after its third-quarter results miss on analyst expectations, while providing a weak outlook for the current quarter. Multiple Wall Street firms downgrade Fortinet Friday on the weak quarter and signs secure networking is seeing slower growth.

8. Barclays lowers it price target on Clorox (CLX) to $115 a share, down from $118, while maintaining an underweight rating on the stock — and that seems harsh. The firm calls Clorox’s reduced outlook “prudent given the uncertainty ahead.” Clorox warned last month that an August cyber attack had significantly weighed on sales and profits.

9. KeyBanc upgrades Uber Technologies (UBER) to overweight from a neutral-equivalent rating, with a $60-per-share price target. The firm says Uber’s expense discipline should continue to drive earnings and free cash flow, while advertising “provides a lever to keep prices low to drive volumes.” Uber is set to report third-quarter results on Nov. 7.

10. Gordon Haskett upgrades Ross Stores (ROST) to buy from accumulate, with a $135-per-share price target. The firm says its third-quarter proprietary store manager survey “paints a positive picture” for both Ross and Club name TJX Companies (TJX).

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Fed holds rates steady, upgrades assessment of economic growth

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The Federal Reserve on Wednesday again held benchmark interest rates steady amid a backdrop of a growing economy and labor market and inflation that is still well above the central bank’s target.

In a widely expected move, the Fed’s rate-setting group unanimously agreed to hold the key federal funds rate in a target range between 5.25%-5.5%, where it has been since July. This was the second consecutive meeting that the Federal Open Market Committee chose to hold, following a string of 11 rate hikes, including four in 2023.

The decision included an upgrade to the committee’s general assessment of the economy. Stocks rallied on the news, with the Dow Jones Industrial Average gaining 212 points on the session.

“The process of getting inflation sustainably down to 2% has a long way to go,” Fed Chair Jerome Powell said in remarks at a news conference. He stressed that the central bank hasn’t made any decisions yet for its December meeting, saying that “The committee will always do what it thinks is appropriate at the time.”

Powell added that the FOMC is not considering or even discussing rate reductions at this time.

He also said the risks around the Fed doing too much or too little to fight inflation have become more balanced.

“This signals that while there is a potential risk for the Fed to do more, the bar has become higher for rate hikes, and we are clearly seeing this play out with two consecutive meetings of no policy action from the Fed,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

Economy has ‘moderated’

The post-meeting statement had indicated that “economic activity expanded at a strong pace in the third quarter,” compared with the September statement that said the economy had expanded at a “solid pace.” The statement also noted that employment gains “have moderated since earlier in the year but remain strong.”

Gross domestic product expanded at a 4.9% annualized rate in the third quarter, stronger than even elevated expectations. Nonfarm payrolls growth totaled 336,000 in September, well ahead of the Wall Street outlook.

There were few other changes to the statement, other than a notation that both financial and credit conditions had tightened. The addition of “financial” to the phrase followed a surge in Treasury yields that has caused concern on Wall Street. The statement continued to note that the committee is still “determining the extent of additional policy firming” that it may need to achieve its goals. “The Committee will continue to assess additional information and its implications for monetary policy,” the statement said.

Wednesday’s decision to stay put comes with inflation slowing from its rapid pace of 2022 and a labor market that has been surprisingly resilient despite all the interest rate hikes. The increases have been targeted at easing economic growth and bringing a supply and demand mismatch in the labor market back into balance. There were 1.5 available jobs for every available worker in September, according to Labor Department data released earlier Wednesday.

Core inflation is currently running at 3.7% on an annual basis, according to the latest personal consumption expenditures price index reading, which the Fed favors as an indicator for prices.

While that has decreased steadily this year, it is well above the Fed’s 2% annual target.

The post-meeting statement indicated that the Fed sees the economy holding strong despite the rate hikes, a position in itself that could prompt policymakers into a prolonged tightening stance.

In recent days, the “higher-for-longer” mantra has become a central theme for where the Fed is headed. While multiple officials have said they think rates can stay where they are as the Fed assesses the impact of the previous increases, virtually none have said they are considering cuts anytime soon. Market pricing indicates the first cut could come around June 2024, according to CME Group data.

Surging bond yields

The restrictive stance has been a factor in the surging bond yields. Treasury yields have risen to levels not seen since 2007, the earliest days of the financial crisis, as markets parse out what is ahead. Yields and prices move in opposite direction, so a rise in the former reflects waning investor appetite for Treasurys, generally considered the largest and most liquid market in the world.

The surge in yields is seen as a byproduct of multiple factors, including stronger-than-expected economic growth, stubbornly high inflation, a hawkish Fed and an elevated “term premium” for bond investors demanding higher yields in return for the risk of holding longer-duration fixed income.

There also are worries over Treasury issuance as the government looks to finance its massive debt load. The department this week said it will be auctioning off $776 billion of debt in the fourth quarter, starting with $112 billion across three auctions next week.

During a recent appearance in New York, Powell said he thinks the economy may have to slow further to bring down inflation. Most forecasters expect economic growth to tail off ahead.

A Treasury Department forecast released earlier this week indicated that the pace of growth likely will tumble to 0.7% in the fourth quarter and just 1% for the full year in 2024. Projections the Fed released in September put expected GDP growth at 1.5% in 2024.

In the wake of the Fed’s comments, the Atlanta Fed’s GDPNow growth tracker slashed expectations for fourth-quarter GDP almost in half to 1.2% from 2.3%. The gauge takes in data on a real-time basis and adjusts its estimates with the latest information.

Whitney Watson, co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said it’s likely the Fed will keep its policy unchanged into next year.

“There are risks in both directions,” Watson said. “The rise in inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike. Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts.”

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These 10 portfolio names outperformed the stock market amid the October decline

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., October 26, 2023. 

Brendan Mcdermid | Reuters

Despite a downbeat month for stocks and mounting macroeconomic uncertainty, several Club names outperformed the market in October — and landed in the green.  

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