The stock market rally came under pressure this week as the 10-year Treasury yield rose above 3% and inflation unexpectedly ramped up to a fresh 40-year high. The major indexes broke below their 21-day moving averages on Thursday and then plunged Friday. Shipping stocks plunged and many breakouts failed even before the major indexes sold off hard. Apple unveiled new software, laptops and a chip at its WWDC. Tesla China sales are rebounding, while China EV giant BYD reportedly will supply batteries to its rival Tesla. Nio topped views but guidance was weak. Chinese stocks soared on growing optimism about easing restrictions and regulation, but then slashed gains as those concerns returned. Target warned for the second time in three weeks.
Stock Market Rally 'Under Pressure'
The stock market rally came under pressure as the major indexes broke below key levels while leading stocks sold off hard. The 10-year Treasury yield surged above 3% while crude oil prices ran above $120 a barrel. A hot inflation report signals the Federal Reserve will be aggressive for even longer.
Inflation News Grim
Nearly everything about Friday's CPI report was bad news. Not only did surging food and gas prices unexpectedly push the inflation rate to a new 40-year high of 8.6%, but nonenergy service prices — the sticky categories that make up 57% of consumer budgets — rose 5.2%, the most since June 1991. Costs for rent and the implied cost of owning a home rose 4.8% from a year ago, also 30-year highs. Goods price inflation, excluding food and energy, did ease to 8.5% from 9.7%. But the data seemed to underscore that the gradual slowing of the economy and healing of supply-chain woes won't happen fast enough to avert stepped-up Federal Reserve tightening through most of the year. As of Friday morning, markets were pricing in expectations of 50-basis-point rate hikes at each of the next four Fed meetings through November.
Initial jobless benefits claims rose 26,000 to 227,000 in the week through June 4. While still historically low, it was the highest number since mid-January. That would be consistent with a slowing jobs market. But the data may have been skewed by the Memorial Day holiday.
Target Warns Again
Target issued its second earnings warning in three weeks amid rising costs and shifting consumer demand. It'll cull excess inventory and cancel orders before the end of the second quarter, but will also raise prices on some other goods. Target cut its Q2 operating margin forecast to 2%, down from 5.3%. Target shares fell solidly, but did not undercut their late May lows following the discounter's first earnings warning.
Apple Debuts New Laptops, Software
At its Worldwide Developers Conference, Apple unveiled a second-generation Mac processor, M2, which will be available next month in the MacBook Air and MacBook Pro laptops. The consumer electronics giant also showcased features of its upcoming operating systems for iPhone, iPad, Mac and Apple Watch. Apple's upcoming iPhone iOS 16 includes new personalization options for the lock screen and updates to the Messages, Wallet and Maps apps. But there were no hints of a rumored augmented reality/virtual reality headset.
AMD Presents Financial, Product Roadmap
Advanced Micro Devices painted a bright picture of its growing market opportunity, especially in data centers, at an analyst day presentation. The chipmaker said its total addressable market is now $300 billion, vs. $79 billion at its 2020 analyst day. It forecast improved profit margins and free cash flow with compound annual sales growth of 20%. It also previewed its latest chips for PCs, gaming, servers and data centers. Meanwhile, Intel sold off after management commented that the near-term business outlook is worsening.
Nio Tops Earnings Views
Nio reported a Q1 loss of 13 cents a share vs. a 49-cent loss a year earlier, while sales climbed 24% to $1.56 billion. Both slightly beat views, but rising battery costs squeezed margins. Nio sees Q2 deliveries of 23,000-25,000 vehicles, up 5%-14% vs. a year ago, but down slightly from Q1. Nio has already reported 5,074 EV deliveries in April and 7,024 in May, so that forecast implies June deliveries of roughly 10,900-12,900, as production rebounds toward pre-lockdown levels. Nio said it will begin deliveries of its ES7 SUV in late August, followed by its ET5 sedan in September, expanding its lineup to five EVs. Nio, which sells in the premium EV space, says it'll release mass-market EVs starting in 2024.
Tesla China Sales Improve
Tesla sold 32,165 made-in-China vehicles in May, well below normal, but up from just 1,512 in April. Tesla Shanghai produced 33,544 vehicles vs. typical production of 60,000 vehicles or more. Still, that's up from 10,757 in April, when the Shanghai plant was shut down for most of the month as part of citywide Covid lockdowns. Tesla is reportedly back to 100% daily production, with workers still staying on site. Shanghai largely ended lockdowns on June 1. Of the May vehicles sold, 22,340 were exported and 9,825 were sold locally.
The NHTSA upgraded an ongoing probe of Tesla Autopilot to 830,000 vehicles. The agency reportedly will release some accident data on Autopilot and all other driver-assist systems in the next week or two.
A BYD executive confirmed on state TV that the China battery and EV giant will supply batteries to Tesla. Tesla currently gets batteries from its Panasonic joint venture in Sparks, Nevada, as well as Chinese battery giant CATL.
News In Brief
Coupa Software reported Q1 earnings of 8 cents per share, up a penny from a year earlier. Revenue rose 18% to $196 million. Both topped views. For the current July-ending quarter, the business spending management software maker guided up on EPS but slightly lower on sales. Shares fell.
Smartsheet reported a Q1 adjusted loss while revenue rose 44% to $168.3 million, both edging by estimates. The software maker gave a worse-than-expected Q2 loss target. Shares fell.
Five Below fell after reporting first-quarter sales that missed views and the teen-centric discounter gave a weak full-year forecast.
Ollie's Bargain Outlet reported first-quarter results and a full-year outlook that came up short of Street forecasts. But the closeout retailer noted "improved" demand for Q2. Rising retailer inventories could lead to big opportunities for Ollie's. Shares jumped.
United Natural Foods beat Q3 views and raised full-year guidance. But shares of the food wholesaler plunged.
Eli Lilly said its experimental obesity treatment led patients to lose 35-52 pounds, or about 16%-22.5% of their body weight. Shares rose on the news, but pared weekly gains.
Novavax sold off as investors awaited an official FDA decision, even though an advisory panel recommended its Covid vaccine.
