Coming in on Tuesday morning, investors were expecting to sift through earnings from the largest banks and the data. Instead, stunned investors by pre-releasing its earnings 8 days in advance. Its earnings were much weaker than expected, with revenue well below expectations and EPS declining 2% year over year. As shown below, IBM fell by nearly 25% in pre-market trading.
Its CEO, Arvind Krishna, was blunt in his assessment of the quarter, stating, “This quarter we faltered.”
Beyond IBM’s earnings-specific details, they had an industry-wide message with potentially far-reaching implications for other companies. Specifically, IBM said clients shifted:
their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases, adding it did not anticipate the magnitude of the capex reprioritization.
Per IBM, enterprises are now hoarding inventory to front-run the surge in memory prices and some hardware devices. Such behavior is typical shortage psychology, and it is self-reinforcing: panic buying tightens supply further, which raises prices further, which triggers more panic buying.
The implications of these actions benefit some companies to the detriment of others. Memory and hardware suppliers like Micron () and SanDisk () are seeing a surge in demand from the industry. However, a pull-forward today often becomes an air pocket tomorrow. Thus, earnings over the next few years may remain unaffected in aggregate, but the timing may be significantly altered. Meanwhile, IT budgets at large enterprises are largely fixed, so every dollar diverted toward memory and scarce hardware is a dollar taken from software and consulting, precisely IBM’s core business.
Fed Speakers
Chair Kevin Warsh delivers day two of the semiannual monetary policy testimony, before the Senate Banking Committee at 10:00 a.m. ET, following Tuesday’s House appearance. The Fed is not yet in its pre-FOMC blackout, so his tone on the cooler June CPI and sticky is the read to watch.
CPI Surprises
June’s CPI report delivered the biggest downside surprise in years as the disinflation trade hit the data. fell 0.4% in June, versus forecasts of 0.0%. As a result, the annual rate fell sharply from 4.2% to 3.5%. The monthly decline was the largest since April 2020. , excluding food and energy, was flat on the month against expectations for a 0.2% rise, pulling the annual down to 2.6% from 2.9%. Core goods declined for the second straight month, down 0.09%; housing was up just 0.12%; and core services ex-housing was -0.2%, the lowest in four years. The graph below shows that the share of CPI components rising above the Fed’s 2% goal is 59.2%, the lowest since inflation started rising in 2021.
Energy prices fell 5.7% after rising 3.9% in May, with gasoline prices down 9.7% and fuel oil down 9.2%. The data confirms that the BLS’s three-week measurement lag finally caught up with the oil decline from $110 to the high $60s.
The Fed’s newly hawkish tilt is likely to remain intact despite today’s soft headline. A July hike is probably off the table, but September will likely keep odds alive.
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