Morning Wrap: US markets flat, Fed survey flags weaker demand for all loan types, ASX to fall

Major US benchmarks were relatively flat amid a rather uneventful session, the Fed's quarterly Senior Loan Officer Option Survey flags tightening loan standards and weakening demand, US earnings season is winding down and results have so far been much better than expected and China is set to continue to clamp down on efforts to lower steel output.

Let's dive in.

S&P 500 SESSION CHART

Choppy session with the S&P 500 falling sharply after SLOOS data was released at 4:00 am AEST (Source: TradingView)

MARKETS

The Overnight Summary, US Sectors and ETF tables were incorrect for the previous two Wraps. This problem has been solved and I apologise for any inconvenience.

• S&P 500 falls 0.34% on the SLOOS data but V-shapes back up to breakeven

• Markets lacking directional driving catalysts so far this week

• Fed’s quarterly Senior Loan Officer Option Survey (SLOOS) said requirements are getting tougher for commercial loans as well as many household debt-products such as mortgages and credit cards

• Goldman strategists say Fed unlikely to match market pricing for rate cuts (Bloomberg)

• Markets expect Fed to finish tightening policy, but ECB expected to lift borrowing costs up to two more times this year (FT)

STOCKS

• Binance halts bitcoin withdrawals for several hours due to heavy volumes (Reuters)

• Occidental shares tumble as Buffett knocks back speculation that Berkshire Hathaway would take full control of the oil company (CNBC) 

• PacWest slashes dividend, says business remains "fundamentally sound" (CNBC)

EARNINGS 

US earnings season is starting to wind down, with 85% of S&P 500 companies having now reported first quarter results.

• Blended growth rate for first quarter S&P 500 EPS is down 2.2% compared to expectations of a 6.7% decline

• 79% have beaten EPS expectations, above the one-year average of 73% and five-year average of 77%

• Earnings have been 7.0% above expectations, better than the 2.8% one-year average rate but below the five-year average of 8.4%

Zscaler (+20.6%): Double beat, raised full-year revenue outlook to US$1.59bn vs. US$1.56bn expected, sees full-year EBIT at US$220-224m vs. US$213-215m expected but several analysts viewed the billings guide as a sign of weakness.

PayPal (+0.7%): Double beat, Q1 payment growth of 10% to US$354.5bn, Q1 adjusted EPS of $1.17 vs. $1.10 expected, expects Q2 revenue growth of about 6.5% to 7.0%, raised full-year guidance.

• “PayPal had a very good start to  2023 and delivered stronger than expected performance in the first quarter … We are confident in our momentum and are raising our full-year EPS guidance as a result.” – CEO Dan Schulamn

Tyson  Foods (-16.4%): Double miss and surprise loss, volumes for processed food and beef down 2.9% year-on-year but chicken and pork higher, downgraded full-year guidance to US$53-54bn vs. prior US$55-57bn.

• Tyson is the world’s second-largest processor and marketer of chicken, pork and beef

• "We knew Q2 was going to be challenging and it was... I've never seen this highly unusual situation where Beef, Pork, and Chicken were all experiencing challenges at the same time.” – COO Donnie King  

ECONOMY

• House, Senate and Biden to meet at White House to discuss debt limit crisis with only three weeks to expected 1 June government default date (FT) 

• German industrial production misses expectations (Reuters)

• South Korea likely to slash 2023 growth forecast on plunging exports (Korea Times)

• Private equity dealing with a wave of bankruptcies (Axios)

• Deposits at US commercial banks fell toward lowest level in nearly two years while overall credit available by banks moved up (Reuters)

Deeper Dive

SLOOS: What you need to know

The market didn't like the SLOOS data. Here are a few key takeaways:

• Sharp drop in demand for Commercial and Industrial loans by firms of all sizes

• Tighter loan covenants and increased collateral requirements moving forward

• The trend of tightening standards continues to gather momentum

• 46% of banks tightening vs. 44.8% in prior period survey

• Sizable portion of banks reporting tighter lending standards on credit cards, auto loans and other consumer credit issuance

• Broadest share of banks with weaker loan demand since the Global Financial Crisis

Source: Federal Reserve, RSM

Market views: JPMorgan and Morgan Stanley

Two interesting quotes from JPMorgan's Marko Kolanovic and Morgan Stanley's Mike Wilson.

• Wilson: "The equity market continues to expect the best of both worlds — rate cuts and durable growth. We view the likelihood of both of those outcomes playing out in concert this year as low ... equities are priced for an optimistic and lower probability outcome."

• Kolanovic: “… if rate cuts happen this year, it will either be because of the onset of a recession or a significant crisis in financial markets. The gap between the bond market, equity market and the Fed is likely to close at the expense of equities.”

Sectors to Watch

It was a rather uneventful overnight session. Lots of our Resource and Tech related ETFs managed to extends gains overnight, including Rare Earths/Strategic Metals (+1.9%), Cloud (+1.75%), Copper (+1.0%) and Uranium (+0.70%). ASX 200 futures are pointing towards a flat open, so I guess we're in wait and see mode ahead of the next market moving catalyst, which is likely the US inflation data on Wednesday night.

Iron ore: China's cutting steel output

Iron ore prices are down around 10% in the past month, driven by various downbeat catalysts such as declining Chinese steel mill margins, China's NDRC clamping down on iron ore trading activity and plans to curb steel production.

There was an interesting update from China's commodity index provider Mysteel, which notes:

"Steel producers in Fengnan district of Tangshan city, China's top steel-producing hub, have been officially required by local authorities to beef up efforts to rein in their crude steel output by rolling out reasonable production plans throughout the course of this year, making them the first batch of mills in China to observe another administrative on-year reduction in crude steel output after consecutive cuts in 2021 and 2022."

Singapore iron ore futures (Source: TradingView)

ASX corporate actions occurring today:

• Trading ex-div: None

• Dividends paid: Duratec (DUR) – $0.01 

• Listing: None

Economic calendar (AEST):

• 10:30 am: Westpac Consumer Confidence

• 1:00 pm: China Balance of Trade