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Bounce-back Deflates on Inventory, Fed Issues

Market indices opened today’s session pretty lousy, and those were the daily highs. It’s been another ghoulishly ugly trading day, with the Dow -458 points or -1.54%, the Nasdaq -314 points, -2.84%. the S&P 500 was -2.11% on the day and the small-cap Russell 2000 is -2.56%. The Nasdaq has fallen more than -9% in the month of September alone; the S&P is -25% from all-time highs posted in the first sessions of 2022.

This means yesterday’s bounce-back has been deflated, and then some. Inventory reduction has been both a sticking point on some inflation metrics as well as a hindrance toward company earnings, and will take some time to wear completely off. We saw this week in Pending Home Sales a sixth-straight monthly drop, partly on inventory issues. (Aside, of course, from average 30-year fixed mortgage rates breaching 7%+ for a moment.)

We see this inventory issue in the earnings reports out after the closing bell today, as well. Micron MU posted mixed fiscal Q4 results — earnings of $1.45 per share beat the Zacks consensus by 5 cents, while revenues of $6.64 billion came up short of the $6.88 billion expected. Shares initially fell -4% on the news before recovering somewhat.

The reason for this sell-off, though, likely has much more to do with the paltry guidance for fiscal Q1: expected earnings of 4 cents per share on $4.2 billion is a far cry from the 72 cents and $5.90 billion our analysts had penciled in. Expect estimates to come down from all analysts on this already Zacks Rank #5 (Strong Sell) stock. Burning through extensive inventory is a major parameter of Micron getting back to full strength.

Nike NKE reported fiscal Q1 earnings this afternoon, as well. In their case, a two-cent beat to 93 cents per share on revenues of $12.69 billion outpaced the 91 cents and $12.27 billion in the Zacks consensus. North American growth of +13% was partly offset with -13% growth in China. Gross margins have come way down, +44.3%, and the company means to work down inventories of its own by lowering prices on existing merchandise.

We appear to be at the crossroads of “Buy Low” and “Don’t Catch the Falling Knife.” Tomorrow morning we’ll see a full, comprehensive report on Personal Consumption Expenditures (PCE) for August, though as these numbers are partial amalgamations of other economic data reported previously, we don’t expect to see any big surprises. Core PCE month over month is expected to jump to +0.5% from the previous month’s +0.1%, with year over year ticking up to +4.7% from +4.6% last time around.

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