Closing Recap

Wednesday, July 13, 2022

Equity Market Recap

·     Stocks finish lower on a day that saw fresh 40-year high inflation (raising bets the Fed will go big on future rate hikes), the biggest yield curve inversion in over 20-years, the euro trade at parity to the US dollar, and positioning ahead of earnings season kick off tomorrow. The Yield inversion between the two and 10-year yields rose above 21 bps, its biggest level since 2000 and is generally seen by many as signals that a recession lies on the horizon. The move came after the U.S. government said after the consumer price index (CPI) rose 9.1% on a year-over-year basis in June, 40-year highs and above the 8.8% estimate, raising fears of a more aggressive Fed rate hike cycle, and possibly slower consumer spending. Core CPI, which excludes food and energy prices, came in at 5.9% and above the 5.7% estimate. After today’s CPI inflation data, fed-funds futures now show 67% chance fed raises fed funds rate target by 100 basis points in July (previously had expected a 75-bps hike). Futures jumped further in the afternoon following comments from Fed’s Bostic. Note the Fed does not convene again until September for its next rate meeting.

·     This afternoon, Atlanta Federal Reserve Bank President Raphael Bostic said higher than expected June inflation might require policymakers to consider a 100-basis point increase at their July meeting. “Everything is in play,” Bostic said following release of the latest CPI report, which showed consumer prices surged 9.1% last month – Reuters

·     Fed Beige Book showed economic activity expanded at a modest pace, on balance, since mid-May; however, several districts reported growing signs of a slowdown in demand, and contacts in five districts noted concerns over an increased risk of a recession. Like the previous report, the outlook for future economic growth was mostly negative among reporting districts, with contacts noting expectations for further weakening of demand over the next six to twelve months.

·     Just to show how volatile markets have been, and how careful markets are watching inflation, Bespoke Investment noted since 2000, the S&P has opened down 1%+ on a monthly CPI data day 7 times…4 of those 7 have occurred in 2022!  (February, March, June, July).

Economic Data:

·     All about inflation data: June Consumer Price Index (CPI) data “hotter” than expected, rising +1.3% M/M vs. +1.1% est. and jumped to +9.1% Y/Y (highest since late 1981) vs. 8.8% est. The core reading, ex: food & energy, rose +0.7% vs. est. +0.6% M/M and rose +5.9% Y/Y above the expected +5.7%. June CPI energy +7.5%, gasoline +11.2%, new vehicles +0.7%.

·        U.S. June budget deficit $89 bln (consensus $76.50 bln deficit) vs June 2021 $174 bln deficit. U.S. Fiscal 2022 year-to-date deficit $515 billion vs comparable fiscal 2021 $2.238 trln deficit. U.S. June budget outlays $550 bln vs $623 bln in June 2021; receipts $461 bln vs $449 bln Y/Y

Commodities

·     Oil prices edged up on Wednesday, with Brent crude futures settle at $99.57/bbl, up 8c, 0.08% and WTI crude rose $0.46 or 0.48% to settle at $96.30 per barrel just a day after settling below $100 a barrel for the first time since April. Prices rallied despite a U.S. supply report showing rising inventories and caution ahead of U.S. inflation data. Reports indicated that the 3.3M-barrel increase in commercial crude inventories was due to a hefty, 6.9M-barrel transfer of crude from the Strategic Petroleum Reserve to the "commercial" label. Overall US crude reserves, including SPR, saw a bullish, 3.6M-barrel decline. Gold prices rise $10.70 or 0.6% to settle at $1,735.50 an ounce, rebounding off earlier 1-year lows. Natural-gas futures climbed by more than 8% on Wednesday, supported by a forecast for warmer weather; August natural gas rose 53 cents, or 8.5%, to settle at $6.689 per million British thermal units.

Currencies & Treasuries

·     The U.S. dollar extended its gain early against rival global currencies, as the euro dropped to parity for the first time in 20-years against the buck following the “hot” CPI inflation data. The dollar however did finish the day lower. The U.S. dollar index (DXY) is up roughly 17% YTD, buoyed by monetary policy as the Fed interest rate hike cycle is expected to continue and get more aggressive to fight inflation, while the impact of the Ukraine and Russian war and its impact on global food and energy markets pushes investors to the haven of the US dollar.

·     Treasury yields spike initially on CPI data, then fall sharply. Yield inversion widens to 21bps between the 2s-and 10’s (seen as recessionary signal). Treasury yields fell further following a better 30-year auction (much better than yesterday 10-yr auction). The 10-year yield fell to 2.92% after hitting highs this morning of 3.07% after the CPI data. The U.S. Treasury sold $19B in 30-year notes at a yield of 3.115% vs. 3.133% when issued prior, with the bid-to-cover at 2.44 (vs. 235 prior auction), indirect bidders awarded 73.2%, directs 16.34% and primary dealers 10.46%.

Sector News Breakdown

Consumer

·     Retailers; Hugo Boss (BOSSY) raised its FY EBIT to EU285M-EU310M from prior EU250M-EU285M; GPS downgraded to Hold from Buy at Deutsche Bank and cut tgt to $9 from $12 as sees low visibility around a sales recovery at Gap’s largest brand Old Navy and said the elevated promo environment is likely to have an outsized negative impact on Old Navy and Gap; VSCO announced a new corporate leadership structure focused on streamlining the business and better positioning the company moving forward; SFIX rises after filing last night showed 1M share purchase by company Director; Goldman Sachs downgraded SWIM to Neutral from Buy citing early evidence of a deceleration in housing and weakening macro backdrop

·     Housing & Building Products; the weekly MBA mortgage data showed the US mortgage market index falls 1.7% to 300.0 in week ended July 8, the purchase index falls 3.6% to 224.3, the refinancing index rises 2.2% to 685.3 and the 30-yr yield unchanged at 5.74%; in building products, AWI was upgraded to Buy at Goldman Sachs given their well-established history of pricing power, digital initiatives to tap under-served customers, and balanced approach to capital allocation and strong cash generation, while firm removes AZEK from conviction buy list

·     Consumer Staples & Restaurants: ABEV upgraded from Neutral to Overweight at JPMorgan as see commodity prices alleviating (indicating a margin turning point in 23E) as being the missing piece of the puzzle for a tactical upgrade; KR rises early as defensive stocks/staples outperform while also launched Boost membership for customers nationwide today as well; strength midday in several staples such as PG, CL another defensive name moving higher, caught an upgrade at Redburn today

·     Casinos, Gaming, Lodging & Leisure sector; recession fears impacting the sector today after 40-yr high CPI data; CZR, HAS, SEAS, VSTO, YETI all downgraded to Sector Weight from Overweight at KeyBanc and cut tgts on BC to $85 (from $100); BYD to $70 (from $78); CHDN to $280 (from $300); FUN to $55 (from $65); MBUU to $70 (from $80); MTN to $300 (from $330); ONEW to $40 (from $55); PATK to $65 (from $90); RRR to $45 (from $60); SIX to $30 (from $45) – We started 2022 off with the fewest number of top picks/long ideas in recent memory, and now that list gets even shorter; Deutsche bank lowered tgts on BYD, GDEN, RRR and lower 2H22 and 2023 forecasts; lodging, travel, theme parks, casinos, cruise lines all feeling the impact

Energy

·     Energy stock movers; one of the few S&P sector bright spots early before slipping as oil prices moved between gains and losses; in stock news, TELL agrees to spend $125M to buy natural gas assets in the Haynesville shale region from privately held EnSight IV Energy Partners LLC and EnSight Haynesville Partners LLC; SLCA upgraded from Underweight to Equal Weight wat Morgan Stanley as think many of the factors that drove their UW rating are relatively fully priced at current levels.

·     The Energy Information Administration (EIA) reported that U.S. crude inventories rose by 3.3 million barrels for the week ended July 8, above the 1.4-million-barrel estimate. The EIA report also showed supply increases of 5.8 million barrels for gasoline and 2.7 million barrels. Gas prices slide as Bloomberg noted about a month ago, close to half of U.S. states had gasoline prices higher than $5/gallon; now it’s just 9 states as national average continues to decline

Financials

·     Bank movers: the economy-sensitive U.S. bank stocks pressured on hotter-than-expected inflation data, offsetting the benefit of rising yields ahead of earnings season kick off tomorrow with JPM and Friday with BK, BLK, C, PGR, PNC, STT, USB, and WFC; although bank profits are typically boosted by rising rates, they are also very sensitive to economic fluctuations with concerns about bad loans or slowing loan growth in a recession

·     Asset Managers: out with monthly Assets Under Mgmt (AUM) data: AB said preliminary assets under management decreased to $647 billion during June 2022 from $687 billion at the end of May; BEN reported prelim month-end assets under management (AUM) of $1,379.8 billion at June 30, 2022, compared to $1,445.9 billion at May 31, 2022; IVZ preliminary month-end assets under management (AUM) of $1,390.4 billion, a decrease of 4.2% versus previous month-end; LAZ prelim AUM as of June 30, 2022 totaled approximately $216.6 billion; VRTS preliminary assets under management of $155.4 billion as of June 30, 2022. The decrease from March 31, 2022, primarily reflected market depreciation and net outflows in open-end funds; APAM said its preliminary assets under management as of June 30, 2022, totaled $130.5 billion; TROW preliminary month-end assets under management for June 2022 of $1.31 trillion

·     Insurance: for the insurance sector, Jefferies lowers 2Q22 EPS estimates by a median of 12% driven by market depreciation and modestly higher COVID claims/weaker VII and FX and lower PTs by a median of 8% (continue to focus on select relative value pairs including JXN over BHF, MET over UNM and RGA over CNO)

Healthcare

·     Pharma movers; ATRA shares tumble as announces completion of the ATA188 Phase 2 EMBOLD study interim analysis in patients with progressive MS – based on the analysis there was not a sufficient dataset to draw conclusions about the predictive value of six months EDSS improvement for 12 months EDSS improvement; HGEN plunges after the biotech firm said that its Covid-19 drug trial didn’t achieve statistical significance on the primary endpoint; TXMD shares slide after the company said that Athene Merger Inc., an affiliate of EW Healthcare Partners, didn’t buy the required majority of shares by the extended offer deadline; AGIO said Jackie Fouse is stepping down as CEO and to be replaced by former Alexion executive Brian Goff; HRMY downgraded to Neutral at Goldman Sachs as valuation now reflects the market opportunity for Wakix in narcolepsy and key expansion indicators; MRK and Orion Corporation to partner on the development and commercialization of Orion’s investigational candidate ODM-208 aimed at treating metastatic castration-resistant prostate cancer

·     MedTech Equipment; ILMN downgraded to Underweight from Equal Weight and slash tgt to $150 from $350 at Barclays citing competition headwinds and the Grail acquisition and says Illumina has too many overhangs at these valuations to entice investors if/when they come back to Tools; APEN said the FDA had granted De Novo marketing authorization for several of its new endoscopic systems to be used in weight loss procedures for patients with obesity; DGX said that it developed a monkeypox test that is now available.

·     Healthcare Services: earnings season around the corner for managed care as Credit Suisse raised tgts across the board: CI to $315 (was $300), CNC to $97 (was $88), HUM to $548 (was $521), MOH to $321 (was $293), and UNH to $575 (was $540) saying managed care companies are set for another positive quarter as utilization has seemingly come in lighter than expected. Intra quarter commentary from MCOs has generally pointed towards less-than-expected utilization, particularly as it relates to COVID; HIMS named Best Idea at Guggenheim, raising 2Q22 and full year revenue estimates after reviewing 2Q22 web traffic and mobile app download data.

Industrials & Materials

·     Transports, Aerospace, Industrial, & Machinery; airline earning season gets underway with a profit miss from DAL, reporting Q2 adj EPS $1.44 vs. est. $1.64 on slightly better revs as Q2 cost per available seat mile of $20.89 vs $14.51 in Q2 2019, but sees September quarter capacity down 15%-17% vs September 2019; FAST reports Q2 sales of $1.78B, slightly below ests of $1.79Bwith in-line quarterly profit saying it took actions over the past 12 months to mitigate the impact of inflation on its products

·     Metals & Materials; FCX downgraded to Neutral, SCCO to Sell, FQVLF to sell at Citigroup and lower tgts on the copper producers saying they will likely struggle against falling copper prices; gold miners fall (NEM, AEM, AUY, GOLD) as precious metals prices fall to 1-year lows, no longer benefiting as a hedge against inflation, as rising rates and a stronger dollar weigh; China’s iron ore imports in June fell modestly from a year earlier, as the world’s top iron ore consumer imported 88.97 million tonnes of iron ore last month, easing 0.5% from 89.42 million tonnes in June 2021; China, the world’s largest rare earth exporter, sold 4,265.3 tonnes of rare earths in June, down 12.3 % from May

·     Chemical movers: CE downgraded to Sector Perform at RBC on anticipated peak acetic/VAM prices, higher natural gas costs, and higher expected leverage; SHW and ECL both downgraded to Neutral at Bank America and trimming estimates and tgts for much of their specialty chemical coverage on account of 1) slower macro growth, 2) tougher FX backdrop, and 3) lower valuation multiples (higher interest rates)

Technology, Media & Telecom

·     Semiconductors: a nice recovery off lows for chip stocks, led by TSM after TF International Securities analyst said his latest survey indicates TSMC will be the sole supplier of QCOM flagship 5G chips in 2023 & 2024. It’s a super win-win for these two companies; Citigroup said they expect at least another 15% downside driven by estimate cuts, and when the downturn ends, prefer to own stocks with secularly increasing EPS such as MU, ON, GFS and AMD saying they should offer the most upside

·     Software movers; Unity Software (U) agreed to acquire IS in an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock valued at about $4.4B; Unity announces $2.5B share buyback after deal while sees Q2 results ‘slightly higher’ than top end of guidance range but lowers FY22 revenue view to $1.3B-$1.35B from $1.35B-$1.425B (est. 1.47B) https://bit.ly/3o1cOaK ; Goldman Sachs lowers estimates across Emerging Software Coverage anticipating some softness in 2Q and a potential slowdown in leading indicators (bookings, billings) in the 2H – upgraded CCCS, PWSC and cut DOCN, CWAN

·     Hardware, Components & Services; VERI downgraded to Neutral from Buy at Bank America and cut tgt to $10 from $14 on higher than previously anticipated risks for its PandoLogic segment, and the potential for a longer than expected ramp in its Veriverse initiative; Piper downgraded CVLT, FFIV to Neutral and JNPR to Underperform saying 1H22 was one of the toughest times to be invested in technology, as multiples had become as elevated as the dot.com bubble for growth-tech names – though continue to believe growth-tech names are becoming relatively attractive at these levels, and our top picks are FIVN, NTNX, and TEAM; Goldman Sachs downgraded DOCN from Buy to Sell saying recent datapoints suggest that demand in key end markets may be pressured over the next 12 months after COVID-catalyzed acceleration over the last 2 years, including DO’s commentary on slowing at its Investor Day on June 9

·     Internet, Media & Telecom movers; TWTR sued billionaire Elon Musk over his abandoned $44 billion takeover bid; KLR said after careful consideration and with the assistance of its advisors, the Board of Directors of the Company unanimously concluded that the unsolicited, non-binding proposal from TCR Acquisition LLC significantly undervalues The Campaign Registry and its strong prospects as they rejected the offer; NFLX chooses MSFT as partner for ad-supported service; Netflix to offer a lower-priced service with ads this year