Analysis: DE

In addition to better-than-expected quarterly results from Deere & Co. (DE) that simply crushed consensus expectations, we also have S&P Global's Flash US November PMI data in hand, and it came in far weaker than the market was looking for.

Shares of Deere are moving nicely higher in response, moving past our $425 price target. We'll have more comments on DE once the company's earnings conference call has concluded, but let's make sense of what the Flash PMI data has to say about the direction of the economy and more likely than not revenue and earnings expectations ahead.

As we get ready to dig into the Flash November US PMI data, let's first set the table.

The market consensus called for the Flash Manufacturing figure to fall to 50 from October's final print of 50.4, while the Services component was thought to improve vs. October but remain in contraction territory. The data published by S&P Global showed month-over-month declines for both sets of data with the Manufacturing PMI falling to 47.6 for November and the Services component falling to 46.1 from 47.8 in October.

From the report, "The overall fall in activity was the second-fastest since May 2020 as inflation, rising borrowing costs and economic uncertainty weighed on demand... The rate of contraction signaled was the sharpest since August and among the quickest since 2009."

Members know we also tend to watch the new order component contained in the various PMI reports as well because they are a harbinger of what's likely to come the following month. In this case, new orders fell in November at the fastest pace since the initial pandemic wave in May 2020.

Given our earlier comments for the Flash November PMI data for the Eurozone and UK, we're not surprised to see the rate of decline in new US export orders also accelerating in November.

This reinforces our view we're likely to see downward pressure on revenue and earnings expectations. Naturally, we'll look for confirmation in not only the final November PMI data from S&P Global but also in the November PMI data from the Institute for Supply Management. We start to get those figures next week.

If there was one positive contained inside the S&P Global Flash November PMI report it would be that inflationary pressures eased further in November. Although still rising at a pace well above the series average, firms surveyed noted that decreases in the price of some key components including lumber, steel, and plastic, as well as reduced freight costs, led to a softer overall uptick in expenses. This led to firms raising their prices "at the slowest rate for just over two years."

The bittersweet message to be had is while the overall rate of inflation has slowed, there are still inflation pressures being felt. We suspect that will keep the Fed on the path for "going bigger, for longer" and the thought the Fed could cut rates in late 2023 remains a premature one.