Closing Recap

Wednesday, April 10, 2024

U.S. stocks were broadly lower, with NYSE breadth more than 6 to 1 decliners outpacing advancers and nearly all eleven S&P sectors fell following the third straight month of “hotter” inflation in consumer prices (CPI), an unwanted development for the Federal Reserve which seems determined to cut rates this year. Rate-sensitive stocks/sectors saw the biggest declines on the day following the higher CPI reading including Real Estate Investment Trusts (REITs) down around -4% (XLRE) and Utilities (XLU) down over -1.7% as the hotter-than-expected inflation data sent benchmark yields higher, pressuring shares of dividend-paying stocks, and drives up borrowing costs. Smallcaps saw the brunt of selling pressure as well as the Russell 2000 fell -2.5! The Consumer Price Index (CPI) rose 0.4% monthly in March, compared with the 0.3% increase expected and annually it increased 3.5% versus a 3.4% estimated growth. Excluding volatile food and energy components, the core figure rose 0.4% month-on-month in March, against expectations of a 0.3% advance and annually, it gained 3.8%, versus the estimated 3.7% increase. As Bespoke Invest noted, “CPI in the 24 months prior to the start of the tightening cycle: +11.4%. while CPI in the 24 months since the start of the tightening cycle: +8.6%.” (not exactly progress). Next potential catalysts include China PPI/CPI data tonight, the European Central Bank policy meeting tomorrow, and the Producer Price Index (PPI) inflation data tomorrow before some attention turns back to earnings with big banks reporting Friday before big tech next week.

• Energy prices shot up 1.1% last month after a 2.3% increase in February. The last two months have seen the biggest back-to-back increases in energy prices since last summer. Rents rose 0.4% in March, as did a proxy for the cost of homeownership known as OER, or owner equivalent rent. Other notable increases included car insurance (2.6%), clothes (0.7%) and medical care (0.5%).
• The Bank of Canada (BoC) kept its key rate unchanged at a near 23-year high of 5% and ruled out a cut until it sees more signs that a recent drop in inflation will be sustained. In its quarterly Monetary Policy Report, the bank also hiked its growth forecast for 2024 on the back of strong immigration flows and increased household spending. Inflation has been falling in recent months but at 2.8%, it is still above the bank’s 2% target.
• Wholesale inventories for February unrevised at +0.5% (vs. consensus +0.5%); U.S. Feb wholesale sales +2.3% (consensus +0.4%) vs Jan -1.4% (prev -1.8%); Feb stock/sales ratio 1.34 months’ worth vs Jan 1.36 months.

• Oil prices got a late day pop on a Bloomberg report that the U.S. forecasts missile strike on Israel by Iran, proxies as imminent. Earlier, energy prices were lower following bearish weekly inventory data as the EIA said weekly crude stockpiles were up 5.8M bbls to 457.26M, vs forecast of 2.4M bbl build and weekly gasoline stocks up 715,000 bbls to 228.53M, vs forecast of -1.3M bbl draw. U.S. crude oil futures settle at $86.21/bbl, up 98 cents, 1.15% and Brent prices finished higher by $1.06, or 1.19% to settle at $90.48 per barrel.

• Hot prices and the prospect of a longer period of tight monetary policy send the dollar higher as well as the greenback jumped around 1% versus the euro, the pound, and the Swiss franc and 0.6% against the yen to its highest levels in over 30-years. It was also stronger compared to emerging market currencies, including 1% versus the Brazilian real and 0.4% against the Mexican peso.
• The benchmark 10-year yield rose over 16-bps to 4.56% at its peak, its highest since November last year while the two-year yields, which more closely reflect monetary policy expectations, spiked by nearly 20 basis points and were last seen at 4.937%, also their highest level since November. Fed funds futures traders trimmed their expectations for interest rate cuts to a total of 43 bps for 2024, down from 67 bps ahead of the inflation data.

• In Retailers: DECK was downgraded to Hold from Buy at Truist and cut tgt to $864 from $983 saying credit card data indicates that Hoka’s direct-to-consumer growth decelerated in mid-February and remained softer through March (Truist lowers its segment growth forecast from 40%, where the Street currently is, to 25%). Macy’s (M) agreed to appoint two Arkhouse Management director nominees to its board, ended its proxy contest.
• In Consumer Products: HNST shares pressured after its founder, actress Jessica Alba, said she would step down from her role as chief creative officer; HNST says Alba plans to pursue new projects and would continue to deliver leadership as a member of its board.

• In Building Materials: Loop Capital raised price tgts on EXP to $310 from $290, MLM to $710 from $585, SUM to $53 from $44 and VMC to $305 from $295, remaining Buy on all citing its Q1 aggregates and cement survey indicating stronger pricing and margin assumptions, stating that while it expects mostly in-line Q1 earnings as poor weather hampered the start of the year, it is also anticipating positive tones on earnings calls for the group.

• In Auto Parts Suppliers: Barclay’s downgraded its sector view for US Autos & Mobility to Neutral from Positive while downgrading ADNT to EW from OW to reflects its view of challenges in achieving significant margin expansion amid a flat LVP environment. VC was upgraded to Overweight from Equal Weight saying its outgrowth narratives should accelerate in a flat production environment. For GM, they see strong beat expected as mix and cost tailwinds offset price headwinds, further share buybacks.
• In Car Rental: Morgan Stanley took a more cautious view on the rental backdrop heading into Q1 as Reiterate Overweight on CAR, lower PT to $187 from $190 and Reit EW on HTZ, lower PT to $9 from $10 following a Mark-to-market of their Q1 and FY24 rental expectations and drivers of price target reductions. They see CAR as a superior operator and capital allocator.

• In Chemicals: LIN downgraded to Neutral and IFF upgraded to Buy at Citigroup in chemicals sector and said new top picks are SHW, APD and OLN as the firm is adjusting Q124 chemical estimates +1% and decreasing FY24 estimates by 1%. ALB (tgt to $156 from $137) upgraded to Buy at Bank America noting inventory levels in China for lithium carbonate were elevated in February, but started to trend down in March while they downgraded CF (tgt to $88 down from $96), turning "somewhat more cautious" on the agriculture space as sees risk of lower crop prices as U.S. ending stocks to use for corn that fell to a decade low in 2021 have steadily climbed.
• In Aerospace & Defense: HXL announced that Tom Gentile, former CEO of Spirit AeroSystems, will become CEO and President of HXL effective May 1, 2024. Bank America downgraded HXL to underperform noting the surprising nature of this announcement as they did not communicate that it had been pursuing new leadership. Jefferies out with its Q1 preview for A&D saying HEI is top pick in aftermarket (AM) due to concerns around BA’s 737 supply chain volatility, which may keep rates flat-to-down this quarter and expects upside from GE AM, where it believes 20% Services growth could push total rev. growth to the mid-teens.
• In Oil E&P: EQT was upgraded from Underperform to Market Perform at Bernstein and raise tgt to $34 noting its underperform thesis has played out over the last six months, though the medium term commodity price was never reflected as much as Bernstein had anticipated in gas equity valuations.
• In Metals & Mining: Gold prices slip on rising yields/dollar leading to some early profit taking in gold miners NEM, GOLD, AEM, HMY, KGC. In steels, Baosteel notes to cut hot rolled coil prices for May delivery by 100 yuan per metric ton and to cut cold rolled coil prices for May delivery by 150 yuan per metric ton.

• In Consumer Finance: TDCowen upgraded FCFS to Buy from Hold and raised tgt $145 from $130 while saying SYF is now its top pick in credit cards noting developments around the CFPB’s credit card late fee rule (particularly for BFH and SYF) and the progress of rolling out potential mitigants are likely on top of investors’ mind. TDCowen made several price tgt changes in the sector raising for ALLY, AXP, BFH, CACC, COF, DFS, ENVA, FCFS, NNI, OMF, PRG, SLM, and SYF.
• In Insurance: Title insurance stocks weak (FAF, FNF, STC) after a report that the U.S. weighs a ban on charging homebuyers for lender title insurance as the draft plan by CFPB is aimed at cutting home closing costs; said required policies protect lenders but are paid by borrowers.
• In Asset managers: AB preliminary assets under management increased 2% to $759 billion during March 2024 from $746 billion at the end of February; APAM preliminary assets under management as of March 31, 2024, totaling $160.4 billion; BEN preliminary month-end assets under management (AUM) of $1.64 trillion at March 31, 2024, compared to $1.62 trillion at February 29, 2024; IVZ preliminary month-end assets under management of $1,662.7 billion, an increase of 2.0% versus the previous month-end; TROW prelim month-end assets under management of $1.54 trillion as of March 31, 2024; VCTR prelim AUM of $170.3 billion and VRTS prelim assets under management increased to $179.3 billion as of March 31, 2024.

• DNA announced the expansion of its strategic partnership with NVO under a framework agreement that initially is contemplated to run over five years. Together, the partners aim to improve the manufacturing of Novo Nordisk’s medicines for serious chronic diseases, including diabetes and obesity medications.
• ILMN announced departure of CFO Joydeep Goswami; appoints Ankur Dhingra as new CFO, effective 15-Apr; reaffirms Q1 and FY24 guidance. Goswami to serve as adviser through June 30.
• INAB announced new preclinical data from its non-signaling gamma-delta T cell based Chimeric Antigen Receptor-T cell, nsCAR, platform, known as INB-300, that demonstrated improved selectivity to target leukemia cells while preserving healthy ones.
• PHG announced that it and FDA have agreed on the final terms of the CPAP consent decree that was announced in late January this year marking a worst-case outcome from the June 2021 recall. Mizuho says RMD is now definitively positioned to maintain $450mn+ of US share gains for much longer than anticipated.
• Healthcare IT: Keybanc upgraded GDRX and CERT to Overweight and downgraded HCAT and RCM to Sector Weight from OW. GDRX raised due to its increased estimates and increased conviction around MAC (monthly active customers), subscriber green shoots, and tailwinds and CERT to reflect its increased estimates and higher conviction of top-line trends; RCM, HCAT cut as Keybanc sees potential risks emerging to hospital end markets in the form of potentially decelerating utilization as measured by its proprietary credit card data; and increased record hiring levels at compounded levels of wage inflation to likely compress margins and spend for solutions.

• MNDY downgraded to Neutral from Buy at Citigroup as recent partner convos and web traffic outlined slowing demand with more muted impact from price increases, adding risk to the NT outlook vs what it views as elevated investor sentiment and valuation.
• PARA shares fell to a fresh 4-year low after three members on the board are expected to exit the entertainment giant amid merger talks with Skydance Media, Wall Street Journal reported. PARA declined to comment on the report that said former Spotify executive Dawn Ostroff, Sony Entertainment ex-president Nicole Seligman and Redstone attorney Rob Klieger were expected to step down in coming weeks.
• SGH reported Q2 EPS upside with IPS (Intelligent Platform Solutions) revenue slightly better, while Memory and LED slightly below, netting in line; guided for incremental revenue/EPS improvement in F3Q, reflecting IPS flat-up and Memory/LED up high-single digits.
• TSM reported a 16.5% rise in Q1 revenue to $18.54B, towards the high end of prior expectations of $18B-$18.8B and up from $16.72B in the year-ago period, as its sales boom on demand for artificial intelligence applications. For March alone, TSMC reported revenue rose 34.3% year-on-year to T$195.21B.