Closing Recap

Friday, April 14, 2023

Index	Up/Down	%	Last
DJ Industrials	-144.38	0.42%	33,885
S&P 500	-8.71	0.21%	4,137
Nasdaq	-42.81	0.35%	12,123
Russell 2000	-15.53	0.86%	1,781

 

Equity Market Recap

·     U.S. stocks retreat from mid-February high as traders digest bank better banking earnings (JPM, Citi, WFC), weaker retail sales, and mixed Fed comments, but finish well off the lows of the session as stocks bounce into the close again. Despite tamer CPI, PPI inflation data this week and softer retail sales, rate hike expectations remain for a 25-bps hike in May then likely pause in June – while major averages remain “trapped” in a tight trading range heading into the beginning of earnings season. Large cap banks were one of the few bright spots for major averages on Friday with JPM rising over 7% and Citi, Wells, PNC, and BLK all rising after quarterly results.

·     After today’s action it appears the market is indeed moving more to view of a possible recession with retail sales now negative in 5 of the last 8 months after today’s data, LEI down 11 consecutive months and ISM data continues to hold in contraction territory. Bond markets fell despite today’s weaker economic data, giving the impression it is no longer fighting the view of a May FOMC rate hike expectation. At the same time, JPMorgan economists said today they “expect a strong (and above consensus) 0.5%m/m rise in core [CPI.] That would represent the fourth straight month of accelerating gains…not only is likely to keep the Fed on track to hike 25bp in May, but also leaves open the door for a June move.”

·     In another sign the concerns in the banking sector are abating after two major bank failures a few weeks ago (SBNY, SIVB), the Fed’s Emergency Loans to banks fall for fourth straight week. Fed emergency lending falls to $139.5b from $148.7b the prior week; discount-window loans $67.6b in week ended April 12 after $69.7b; term funding loans $71.8b in week after $79.0b. Big week of earnings coming up next with GS, MS, BAC, SCHW, USB, ZION, just a handful to watch.

·     The picture for the economy shows continued weakness; at what point does the market turn its attention from inflation to recession. U.S. retail sales increased 1.5% over the last year, the lowest growth rate since May 2020 & well below the historical average of 4.8%. After adjusting for inflation, though, the story is far worse. Real retail sales fell 3.3% over the last year, the 7th consecutive YoY decline according to @CharlieBilello. Meanwhile, U.S. import prices fell more than expected in March, leading to the biggest year-on-year decline since mid-2020, further evidence that inflation pressures were subsiding.

 

Economic Data:

·     March Export prices fell (-0.3%) vs. est. (-0.1%) and vs Feb +0.4%; March import prices fell (-0.6%) vs. consensus (-0.1%) and Feb (-0.2%)

·     March Retail Sales fell a greater (-1.0%) vs. est. decline (-0.4%) and vs. Feb (-0.2%) from prior (-0.4%); Retail Sales Ex-autos fell (-0.8%) worse than est. (-0.3%) and Feb unchanged; March cars/parts sales fell (-1.6%) vs Feb (-1.3%).

·     Industrial output for March rose +0.4%, topping consensus of +0.2% and vs. Feb +0.2% while Capacity utilization rate 79.8%, above Feb 79.6% and consensus 79.0%; U.S. March motor vehicle assembly rate fell to 10.11 mln units/year from Feb 10.31 mln units/year.

·     University of Michigan sentiment reported at 63.5 vs. est. 62.0; consumers current conditions index prelim April 68.6 (consensus 67.3) vs final March 66.3 and consumers expectations index prelim April 60.3 (consensus 60.0) vs final March 59.2

·     Michigan 1-yr inflation expectations reported at 4.6% (vs. prior reading was 3.6%) and 5-yr reported at 2.9% (vs. prior 2.9%)

·     Business Inventories for February rises +0.2% to $2,471.6B vs. 0.3% expected and -0.2% in January (revised from -0.1%).

 

Commodities, Treasuries and Currencies

·     Oil prices finished the day higher, with WTI crude rising +$0.36 or 0.44% to settle at $82.52 per barrel and up 2.26% for the week. Brent Crude rises $0.22 or 0.26% to settle at $86.31 per barrel. Prices at the pump have risen for 17 straight days and are now up $0.46/gallon since the end of 2022: currently at $3.66/gallon. Natural gas prices rebound after falling as much as 2% to $1.967, lowest since September 2020 before rebounding to settle at $2.114M btus.

·     Gold prices slide -$39.50 or 1.9% to settle at $2,015.80 an ounce after coming within striking distance of all-time highs as the dollar and Treasury yields rebounded despite weaker U.S. retail sales, import/export prices. Gold ends the week lower by around -0.5% after today’s pullback.

·     The U.S. dollar turns higher even after data showed U.S. retail sales fell by more than expected in March, although the previous month’s figures were revised higher. Retail sales dropped 1.0% month-on-month in March, versus the 0.5% decline expected. The dollar index (DXY) rises to 101.60 from 100.931 before the data.

·     Treasury yields rose sharply after March retail sales came in weaker than expected. The 10-year is at 3.52% after hovering around 3.45% ahead of the data. The two-year rises to 4.08% from below 4%. Overall sales shrunk 1% in March, after declining a revised 0.2% in February.

 

Fed Speakers:

·     Federal Reserve Governor Christopher Waller said despite a year of aggressive rate increases U.S. central bankers "haven’t made much progress" in returning inflation to their 2% target and need to move interest rates higher still. Important measures of underlying inflation have "basically moved sideways with no apparent downward movement," Waller said in remarks that continue the Fed’s steady discounting of the immediate economic risks posed by recent bank failures. Chicago Fed President Austan Goolsbee in CNBC interview a more dovish take on rates.

 

 

Macro	Up/Down	Last
WTI Crude	0.36	82.52
Brent	0.22	86.31
Gold	-39.50	2,015.80
EUR/USD	-0.0055	1.0989
JPY/USD	1.21	133.78
10-Year Note	0.069	3.52%

 

 

Sector News Breakdown

Consumer

Autos:

·     In electric vehicles: LCID produced 2,314 vehicles, delivered 1,406 vehicles during Q1 vs. est. 1,835; RIVN downgraded to neutral from overweight at Piper saying the company’s capital-intensive model may discourage investors in the current macro environment; TSLA slashed prices for its electric vehicles in Europe, Israel, and Singapore, expanding a global discount drive it began in China in January while raising concerns about industry-leading profit margin – Reuters. NKLA shares fell to record lows, dropping below $1.00 per share.

·     Other auto news: RACE making new all-time highs after company Chairman flagged strong orders and shareholders approved all resolutions–including a dividend proposal of EUR1.81 a share.

 

Retailers, Consumer Staples & Restaurants:

·     @charliebilello: US retail sales increased 1.5% over the last year, the lowest growth rate since May 2020 & well below the historical average of 4.8%. After adjusting for inflation, though, the story is far worse. Real retail sales fell 3.3% over the last year, the 7th consecutive YoY decline.

·     ELF introducing our FY25 EBITDA estimate of $156M and raising our price target to $100 from $75 at Truist citing pricing actions and shelf space opportunity.

·     EXPR and global brand management firm WHP Global announced a definitive agreement to acquire menswear brand Bonobos, Inc. from WMT for $75M, six years after buying it for $310M.

·     MCD paring gains after rising 14 of the last 15 trading days.

·     PRPL announced that it has reached a memorandum of understanding with Coliseum Capital Management (PRPL’s largest shareholder with a ~44% ownership stake) to establish a cooperative governance framework that effectively ends the dispute between the two parties.

·     VFC double upgraded to Buy from Sell at Goldman Sachs and raise tgt to $28 as expects VFC’s strategic initiatives, including better inventory management, and unexpected CEO change to improve execution and drive stock’s outperformance.

 

Energy, Industrials and Materials

·     In the E&P sector: TD Cowen said they expect few capex and production surprises for large cap universe. Payout yields likely decline in 1Q23 with lower pricing, but recent OPEC cuts have helped put a floor in crude pricing while gas macro remains precarious as rig drops have been limited. They anticipate most names looking through to 2H for higher oil pricing and hopes for cost abatement. For large caps they like CHRD and FANG and OXY, and we prefer PR and MTDR for SMIDs. PT Changes: CPE $52 (Prior $65) DVN $61 (Prior $69) EQT $37 (Prior $48) MTDR $70 (Prior $78) PDCE $97 (Prior $93) PR $14 (Prior $15) SM $30 (Prior $35)

·     In oil services: the weekly Baker Hughes (BKR) rig data showed the U.S. rig count was down 3 from last week to 748 rigs, with oil rigs down 2 to 588, gas rigs down 1 to 157 and miscellaneous rigs unchanged at 3. The U.S. rig count is up 55 rigs from last year’s count of 693.

·     Aerospace & Defense: BA said it will pause deliveries after identifying a non-conformance in the fuselage aft section of certain 737 MAX units; BA named SPR as the supplier of the faulty part, which involves two of eight fittings that attach to jet’s vertical tail. Importantly, this is not a safety of flight issue. The implication is that there is pressure on 2023 deliveries at both companies/how much TBD.

·     In Defense Gov’t Services: TD Cowen previews quarter as ups tgt for CACI $345 (Prior $330) LDOS $115 (Prior $120) saying they like the group into the Q1 print as results likely were on track. Said their favorites are BAH, CACI and KBRSolid underlying demand and easing attrition support 1-7% defense IT organic growth in 2023 with below-avg. risk from inflation, supply chain, and pension issues. Yet the group sells for a 16% discount to slower growing primes.

·     Materials & Industrials: gold miners took it on the chin today following a more than 2% roll in gold prices as the dollar bounces along with Treasury yields; gold prices fell just short of all-time highs – NEM, GOLD, AUY, AEM among weak names as well as silver stocks.

 

Financials

Banks, Brokers, Asset Managers:

·     Big banks earnings get ball rolling – mostly upside surprises:

·     JPM posted a 52% increase in Q1 profit and record revenue (rose 25% y/y) as Q1 EPS $4.10 vs. est. $3.41; Q1 revs $38.3B vs. est. $36.23B (net income of $12.62B from $8.28B y/y); deposits at JPMorgan surged by $37 billion from December to $2.38 trillion at the end of March. Q1 net interest income (NII) was $20.8 billion, up 49%; Q1 provision for credit losses $2.3B, Q1 credit costs of $2.3B included a $1.1B net reserve build and $1.1B of net charge-offs.

·     Citigroup (C) Q1 adj EPS $1.86 tops consensus $1.67 on higher revs $21.45B up 12% y/y vs. est. $20.03B with Q1 ROE 9.5%, RoTCE 10.9%, CET1 capital ratio 13.4% and tangible book value per share $84.21. Q1 net profit rose 7% from a year earlier; said Q1 cost of credit is about $2 bln vs $0.8 bln a year earlier.

·     WFC Q1 profit and revenue top the Street as EPS of $1.23 topped estimates of $1.13 and above prior year of $0.90 as revenue rose 17% y/y to $20.73B tops $20.08B expected; Q1 net interest margin on a taxable-equivalent basis was 3.20% vs 2.16% reported last year; Q1 CET1 capital ratio 10.8%; Q1 ROE 11.7%; Q1 net charge offs $564M.

·     PNC Q1 EPS $3.98 vs. est. $3.67 as NII weaker and the beat drive by non-NII; Q1 revs $5.60B vs. est. $5.61B; Q1 provision for credit losses of $235M; Q1 average loans $325.5B vs $290.7B y/y; Q1 average deposits of $436.2B, increased $1.3B, or 0.3%. vs Q4; guides FY23 revs up 4%-5%, down from prior view of up 6%-8% and average loans up 5%-7%.

·     WAFD posted operating EPS of $1.04 that was below consensus of $1.08 due to lighter NII (EPS: -$0.06) and higher core NIE (-$0.01) partially offset by a lower tax rate (+$0.02) as core fees and LLP were largely in line.

·     Investment sector: BLK Q1 adj EPS $7.93 vs. est. $7.73 as profit dropped 18%; Q1 revs $4.24B vs. est. $4.25B; Q1 AUM $9.09T, down 5% y/y; today’s crisis of confidence in the regional banking sector will further accelerate capital markets growth; Q1 had $110B of quarterly total net inflows – long term flows ahead and a small adj margin beat. SCHW investor GQG Partners sold their entire stake amid banking turmoil, the FT reported.

·     In P&C Insurance: HIG pre-announces Q1 core EPS of $1.68, a miss versus consensus of $1.99 as analysts note elevated catastrophe losses and poor performance of its personal lines’ unit and other sources unidentified. RBC Capital previews Q1/23 earnings and notes the set-up into Q1 is favorable for both P&C and Life insurers. Checks suggest P&C pricing remains robust and even strengthens a bit in property lines. Says favorite P&C names into the quarter include AIG, CB, and WRB remains their best broker idea and favorite life ideas are RGA, MET, and CRBG.

 

Healthcare

Biotech & Pharma:

·     CURLF slips after a New Jersey regulator declined to renew the annual license for the cannabis producer, which allows the company to cultivate and sell adult use cannabis within the state.

·     EXEL announced its board would be recommending two new members to the board that were previously nominated by activist shareholder Farallon.

·     LLY announced that the FDA issued a CRL for mirikizumab in UC, stating issues related to the proposed manufacturing of mirikizumab with no concerns about the clinical data package, safety, or label for the medicine.

·     TEVA announced that the FDA has issued a complete response letter to its partner ALVO for the Biologics License Application for AVT02.

 

Healthcare Services & MedTech movers:

·     Managed care: UNH beat and raise as Q1 adj EPS $6.26 tops est. $6.13; Q1 revs $91.93B vs. est. $89.77B; raises FY23 adjusted EPS view to $24.50-$25.00 from $24.40-$24.90 (est. $24.94); Q1 2023 medical care ratio at 82.2% compared to 82% last year.

·     In Medical Equipment: STE downgraded to Neutral at Piper as multiple factors have them concerned margin expansion may be tough to realize in FY’24, which has the firm bracing for a below-consensus EPS guide from management next month; VRAY downgraded by two research firms (BTIG, Stifel) following announcement of its plan to explore strategic alternatives. QDEL preannounced 1Q revenues of $840M-$850M (above $747M est.), with both non-respiratory (mostly driven by labs business unit, incl $21M non-recurring) and COVID respiratory sales.

·     In Medical Services/Manufacturing: CTLT shares tumble after the co flagged productivity issues and higher-than-expected costs experiences at three of its facilities, including two of its largest during the quarter will materially and adversely impact F3Q and FY outlook.

 

Technology

Internet, Media & Telecom

·     JPMorgan upgrades this Chinese social media platform, says it can surge more than 50%, raising its rating on MOMO to Overweight from Neutral with a price target of $13 from $5 as sees a better outlook for the China live streaming industry in 2023; cut tgt on YY to $30 from $35 and keeps a Neutral rating and upgraded DOYU to Neutral from Underweight saying China’s reopening should drive better virtual tipping consumption demand versus 2022 and increased game supply will to drive game streaming traffic.

 

Hardware & Software movers:

·     Software: NOW shares underperform as UBS said ahead of ServiceNow’s 1Q print on Wed, Apr 26th, they caught up with 9 checks (7 partners, 2 customers) to better assess how ServiceNow’s momentum tracked in 1Q23. Overall, this round of partner checks down-ticked from 3 months ago, with 3/7 partners missing their 1Q23 ServiceNow practice growth target & the majority of partners citing incremental demand softness beginning in late-Feb/early-Mar.

·     Security software: CHKP downgraded to Market Perform from Outperform in conjunction with our 1Q tech checks at Raymond James. Said early 2022 thesis was predicated on checks suggesting the company was about to enter an unusual period of inflation that would enable growth acceleration that was not reflected in estimates.

·     In video gamers: TDCowen said they remain bullish on the video game space as believe Q2 will represent a return to y/y growth for both the console/PC and mobile sides of the industry, with both segments also set to grow for the year as a whole. Reiterate Outperform ratings on TTWO (top pick), PLTK, SONY, and EA, and Underperform on RBLX.

 

Semiconductors:

·     NVDA shares popped midday after the Financial Times reported Elon Musk plans artificial intelligence start-up to rival Open AI: Elon Musk is developing plans to launch a new artificial intelligence start-up to compete with ChatGPT-maker OpenAI.

·     Bank America said NVDA, AMD, ASML are top longs in semis and top shorts INTC, WOLF, TXN tie, saying mixed views on ’24 WFE, memory and INTC optimism rises. Apr’23 survey more upbeat vs. Dec’22, 46% now overweight (vs. 41% prior), though majority 54% still neutral or underweight. HF optimism biggest swing with 43% now overweight (vs. 30% prior), though LO flattish overweight while underweight ticked up.

·     In Foundries, Wedbush said generally set a low bar for 2023 with TSM, GFS, and UMC all guiding for the industry to decline modestly this year. Said they believe that this initial conservative outlook will serve the vendors well.