FedEx blames weak Q1 on manufacturers’ outlook

FedEx shocked investors on Thursday by broadly missing quarterly expectations and issuing more cautious guidance, blaming a pullback from manufacturing customers no longer willing to pay top dollar for priority shipping.

The company’s shares are set to open more than 10 percent lower when trading begins Friday, snapping nine straight days of gains. If current indications prove correct, FedEx shares could fall to levels not seen since late June, when they positively surprised markets with fourth-quarter results.

“The soft industrial economy is clearly weighing on (business-to-business) volumes. And it was certainly much weaker than we expected,” FedEx CEO Raj Subramaniam told analysts during a call with investors.

FedEx is often seen as an economic benchmark. Its business cycles serve as an indicator of aggregate demand. Its poor rating comes just as the e-commerce sector begins preparations for the seasonal peak in parcel shipping ahead of the December holidays.

After missing expectations for its fiscal first quarter that ended Aug. 31, FedEx warned that both full-year revenue growth and adjusted earnings would come in at the lower end of its forecast range, with the latter exceeding $21 per share instead of of $22 previously. .

“This was a challenging quarter: customers globally opted for cheaper deferred shipments, which affected demand for priority services,” acknowledged investment bank Bernstein, reaffirming its outperform rating. This shift hurts because shipments related to industrial production are the most profitable, according to FedEx.

However, Bernstein urged clients to see any weakness as an opportunity to add to their position, expecting the market to eventually reward their costs of reducing progress.

The US manufacturing sector contracted for the second month in a row

For months, economists have debated whether the Fed will end up making the same mistake it did after the pandemic — only instead of waiting too long to raise rates amid signs that inflation is heating up, this time it would take too long much to decrease them.

On Wednesday, Fed Chairman Jay Powell cut rates for the first time since the spread of the COVID pandemic in the US in March 2020. In addition to this week’s half-point cut, the FOMC’s policy-setting committee predicts a total of 1, 5 percentage points further. relaxation until the end of next year.

This would reduce overnight borrowing costs to around 3.5%. Even then, however, monetary policy would still be slightly accommodative, assuming the annual inflation rate remains around the last reported 2.5%.

With real rates still significantly positive, capital-intensive producers who must continually invest in property, plant and equipment are cutting back elsewhere.

“We now do not expect a significant rebound in the industrial environment for the remainder of this calendar year,” Subramaniam told analysts. “The magnitude of yesterday’s Fed rate cuts signals weakness in the current environment.”

The FedEx chief cited as an example the recent US PMI reading, which hit a record low since December and signaled a contraction in the sector for the second month in a row.

At the time, S&P Global Market Intelligence chief economist Chris Williamson warned that the outlook for the industrial sector was indeed bleak.

“The combination of falling orders and rising inventories sends the bleakest advance indication of manufacturing trends seen for a year and a half and one of the most worrisome signals seen since the global financial crisis,” he wrote.