Closing Recap

Wednesday, June 15, 2022

Equity Market Recap

·     Stocks rebounded in choppy/volatile trading, with the S&P 500 snapping its 5-day losing streak, as markets digest the Fed’s 75 bps interest rate hike and commentary by Fed Chairman Powell who tried to assure investors that the Fed has the tools to get inflation down. The Federal Open Market Committee (FOMC) boosted interest rates by 75-bps to a range of 1.5%-1.75% in a vote of 10-1 (Fed’s George wanted 50-bps hike), its sharpest single meeting move in 30-years, and in-line with recent fed futures action called for, to slow the disruptive surge in inflation that has slowed the economy. The Fed flagged a faster path of increases in borrowing costs to come as well. The statement continued to cite the Ukraine war and China lockdown policies as sources of inflation. The median projected the rate increasing to 3.4% by the end of this year and to 3.8% in 2023 – a substantial shift from projections in March that saw the rate rising to 1.9% this year. Officials projected 1.7% GDP growth this year and next, down from March projections of 2.8% and 2.2%, respectively. The unemployment rate is projected by all but one official to rise over the next two years. U.S. Rate futures price in 93.4% chance of 75 bps hike in July; 55% probability of 50 bps rise in September after Fed decision. Fed’s Powell did say during his press conference that another hike of 50 or 75 bps next meeting is likely.

·     European bond yields fell sharply after the ECB held an unscheduled meeting to discuss the plunge in bonds, sending yields to highest levels in 8-years in some cases (Italy). The Euro also benefited, up from a one-month low hit earlier this week. The ECB discussed a broader strategy to protect the integrity of the euro region as well as whether to use reinvestments of their pandemic asset-purchase program flexibly as a first defense.

Economic Data (weak):

·     NY Fed Empire Manufacturing for June showed current business conditions index -1.2 in June vs -11.6 in May but below the estimate +3 as new orders index +5.3 in June vs -8.8 in May, prices paid index +78.6 in June vs +73.7 in May, employment index at +19.0 in June vs +14.0 in May and six-month business conditions index +14.0 in June vs +18.0 in May

·     Retail Sales for May fell (-0.3%), its first decline of the year, below estimate +0.2% and April’s +0.7% while core retail sales (ex-autos) +0.5% vs. est. +0.8% and April +0.4%; May gasoline sales +4.0% vs April -1.9% and Retail Sales Ex-autos/gasoline +0.1% vs April +0.8%

·     Import Prices MoM for May rose +0.6%, below the forecast +1.1% and above prior 0.0%, while export prices MoM rose +2.8% vs. estimate +1.3% and prior +0.6%; increase was driven by higher prices for both nonagricultural and agricultural exports

·     April inventory/sales ratio 1.29 months’ worth vs March 1.28 months; U.S. April Business Inventories +1.2%, in-line with estimates and business sales +0.4% vs March +1.6%

·     June NAHB Housing market index 67 versus 69 in May; June index of home sales over next six months 61 versus 63 in May; June index of prospective buyers 48 versus revised 53 in May; June housing market index at lowest since June 2020

Commodities

·     Oil prices fall -$3.62 or 3.04% to settle at $115.31 per barrel, while Brent falls -$2.66 or 2.2% to settle at $118.51 per barrel. A volatile day in commodity land after bearish inventory data, and mixed moves in the dollar and Treasury yields. Gold prices rise $6.10 or 0.3% to settle at $1,819.60 an ounce ahead of Fed (high of day was $1,838.50 and low $1,808.40) – spot gold extended gains after the release of the Fed results.

Currencies & Treasuries

·     U.S. Treasury yields were initially higher after the Federal Reserve’s interest-rate decision of a 75-bps hike, touching highs of 3.45% (off yesterday highs around 3.48%), but faded as Fed Chairman Powell press conference continued. The shorter-term 2-yr yield, which had jumped over 40 bps in the last 2-days alone, fell 15bps to 3.287%. The Fed largely met investors’ expectations, lifting its benchmark federal-funds rate by 0.75 percentage to 1.50%-1.75% and signaling that it could reach 3.8% at the end of 2023.

·     The U.S. dollar index (DXY) jumped initially to highs around 105.75 after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation. The buck pulled back following the press conference by Powell after multiple days of upward momentum (but the expectations and sell the news). No rebound yet in crypto assets, as Bitcoin dropped to lows just above $20K (roughly 70% off all-time highs), while other crypto assets also tumbled amid rising fears of safety in the space.

Sector News Breakdown

Consumer

·     Retailers; FIVE announces $100M stock repurchase plan; SKX upgraded from Hold to Buy with $44 tgt at Argus saying supply-chain initiatives and strong brand are likely to boost revenue and earnings over the next two years; for NKE, Morgan Stanley with Q4 EPS preview saying the mkt expects a 4Q EPS miss & ’23e guide below consensus – firm doesn’t expect any resolution on the China debate N-T, which means investors likely continue to wonder when NKE will return to delivering its L-T targets; in denim, Bank America said they maintain Buy on LEVI as ANF Investor Day reaffirms bullish view on denim category; TPR assumed coverage/upgraded to Buy at Jefferies with $45 tgt from $30 citing improved margin and sales growth outlook

·     Auto sector: auto suppliers slipped after APTV exec said at a conference starting to see some supply chain tightness on semiconductors, impacting production and says we’re probably in the bottom half of our guidance range (LEA MGA VC movers on news); HTZ announces new $2.0B share repurchase program; Ford Motor (F) has recalled 2.9M vehicles over a faulty gear system, Reuters reported, citing the National Highway Traffic Safety Administration; in the EV sector, Mizuho said BEV remains a bright spot amidst macro headwinds (could benefit TSLA ), led by China rebounding up ~80% m/m in May. Global LVP C22E projections remain at ~4% y/y (IHS May’22), with BEV, we believe, UP 60-80% y/y in 2022E to >8M units and almost 10% of 2022 Global auto production of an ~80.4M estimate

·     Housing & Building Products; more negative signs for the housing industry (LEN ) as Total mortgage application volume were 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. Refinance demand rose 4% for the week but was 76% lower y/y. Mortgage applications from homebuyers rose 8% for the week but were 16% lower y/y; in building products (TILE ), Truist said commentary from a commercial flooring industry trade show points to continued excellent growth in most all end-user markets, with no slowing of momentum

·     Restaurants & Consumer Staples: CLX falls a 5^th straight day, PG hits fresh 52-week lows and CL a 9^th as consumer product stocks pressured; MNST at its annual meeting authorizes new $500M share repurchase program, announced 6% US list price increase for Sep followed by Red Bull’s 7% and in EMEA MNST is planning a smaller price increase for 2H; for SG Cowen lowers tgt to $22 from $28 but reiterates Outperform saying restaurant P&L’s still lack visibility, but believe SG’s 2022 guidance will prove conservative; DRI tgt cut to $136 from $160 and lower ests as see a greater likelihood of a pullback in consumer spending in the months ahead, but data suggests F4Q22 sales trends held strong; for CMG, Truist said improving avocado supply could support margin improvement in 2h22

Energy, Industrials and Materials

·     Energy stock movers; after leading the S&P 500 index all year, with the XLE up about 50% YTD. Energy stocks took a breather as investors rotated into beaten up sectors such as TMT and out of energy and defensive sectors such as utilities and consumer staples

·     Inventory data: the EIA said weekly crude stockpiles rose an unexpected +1.96MM barrels vs. est. drawdown of -2.2MM barrels, Gasoline fell -710K barrels and Distillate rose +725K. Overnight the API reported a weekly crude build of 736K barrels, while Cushing inventories fell -1.067M barrels, gasoline with a drawdown of -2.159M barrels and distillates with a build of +234K barrels

·     Defensive utilities underperformed broader markets for a second day, with sharp declines in AEE and others as rising treasury yields denting interest in high dividend paying stocks

·     Industrials, Aerospace & Defense; PL posts wider-than-expected EPS loss, tightened its annual revenue guidance (to $177M-$187M from $170M-$190M) and forecast Q2 revenue below market estimates; MEI lowers FY22 EPS view to $2.68-$2.72 from $3.05-$3.15 and narrows FY22 revenue view to $1.164B from $1.160B-$1.170B (est. $1.17B)

·     Metals & Materials; In steel producers, NUE said it expects a record quarterly profit during Q2, driven by increased profitability in its steel products segment, as guides Q2 EPS of $8.75-$8.85, above $8.44 consensus (and prior quarter record of $7.97); AA announced a $51M project to increase production capacity at its Mosjøen smelter in Norway by 14,000 metric tons per year

Financials

·     Bank movers: strong gains initially this morning ahead of the FOMC rate hike; at Truist, revising estimates & pts for more growth and credit cost conservatism offset by better NIM and say favorite ideas are Buy rated SNV, HWC, WAL, and EWBC upgrade from Neutral to Overweight w/ $115 PT from $143 at JPMorgan; in brokers, HOOD downgraded to Underweight from Neutral and cut tgt to $5 at Atlantic Equities

·     Bitcoin: U.S. cryptocurrency dealer Genesis Trading said its balance sheet is strong and its lending business continues to meet client demand, days after rival lender Celsius Network froze client withdrawals this week. Bitcoin prices extend losses early, falling over 8% to $20,200, lowest levels since 2020 and Ethereum dropped as much as -13% to $1,030 before paring losses and rebounding along with other crypto leverage stocks such as COIN, MSTR, SI, SBNY, MARA, RIOT after a brutal few weeks). MSTR said it has not received a margin call against a bitcoin-backed loan and can withstand further volatility. MicroStrategy borrowed $205 million from crypto bank SI in March, with the three-year loan mostly secured against some 19,466 bitcoins.

·     Consumer Finance; COF May domestic credit card net charge-offs rate 2.40% versus 2.19% in April; May auto net charge-offs rate 0.63% versus 0.40% in April; 30+ day performing delinquencies rate for domestic credit card 2.22% at May end versus 2.18% at April end; DFS credit card delinquency rate edged down again to 1.71% in May from 1.73% in April, but up from 1.50% in the year-ago period; net charge-off rate of 2.03% in May increased from 2.02% in April and 1.50% in May 2021; JPM credit card charge-off rate 1.27% in May vs 1.24% in April and credit card delinquency rate 0.67% at May end vs 0.70% at April end; SYF credit card net charge-offs 2.53% in May vs. 2.19% in April and credit card delinquency rate 1.38% vs. 1.45% in April; AXP loans net write-off rate-principal only 0.9% at may end vs 0.9% at April end and 30 days past due loans as a % of total 0.7% at may end vs 0.7% at April end; BAC May charge-offs 1.42% vs. 1.46% last month and reports May 30-plus day delinquencies 0.84% vs. 0.88% last month

Healthcare

·     Pharma movers: ACAD shares jumped after the FDA published briefing documents on antipsychotic therapy pimavanserin targeted at patients with Alzheimer’s disease; DAWN 10M share Secondary priced at $15.00; PFE said it would stop enrollment in its phase 2/3 EPIC-SR study of its COVID-19 pill Paxlovid in standard-risk patients due to a low rate of hospitalization or death observed amongst them

·     Biotech movers: ALNY 90-day catalyst watch opened at Citigroup as company disclosed that vutisiran (Amvuttra) was approved for ATTR-PN as a Q3M SQ administered by HCP, saying it removes one overhang and is expected mid-2022; Truist said based on greater mean TTR knockdown achieved by NTLA-2001 vs vutisiran without the peaks and troughs associated with repeat injections, they think NTLA-2001 will outperform in clinical outcomes

Technology, Media & Telecom

·     Media & Internet; SPOT upgraded from Underweight to Equal weight at Wells Fargo and raise tgt to $124 saying its recent investor day laid out a more profitable company than they have modeled historically; VMEO May 2022 monthly metrics show total revenue was up 16% and the average revenue per user for May 2022 up 11%; Reuters reported BIDU is in talks to sell its controlling stake in IQ in a deal that could value all iQIYI at about $7 billion (BIDU owns 53% of iQIYI and holds more than 90% of its shareholder voting rights); NFLX has approved a reality TV series inspired by its hit show “Squid Game” which will see 456 players compete in a series of games inspired by the show compete for $4.56M; FWONK upgraded to Overweight at Morgan Stanley and raise tgt to $72 from $65

·     Semiconductors; QCOM won its fight against a 997 million euro ($1.05 billion) fine imposed by EU antitrust regulators four years ago, for allegedly pressuring Apple to only buy its 4G chips; in research, B Riley downgraded wight names in the sector AOSL, INDI, MRVL, SMTC, TGAN, LRCX, CAMT and ICHR and lower tgts across the sector to reflect increased 2H22 and 2023 estimate concerns from slowing demand, rising input costs and are despite numerous positive secular Semi and Semi Cap force

·     Software movers; SNOW upgrade from Hold to Buy at Canaccord with $185 PT after its Analyst Day was held in conjunction with a customer conference that management characterized as its most significant event from an innovation standpoint in several years; ZEN is in talks to settle with activist investor Jana Partners LLC, days after the software company ended an unsuccessful bid to sell itself, the WSJ reported https://on.wsj.com/3mQkRqy ; RBLX reported a 17% Y/Y growth in daily active users for May to 50.4M, while hours engaged climbed 10% Y/Y to 3.6B but said bookings for the month decline 9%-11% y/y; IRNT reported lower than expected top line and bottom-line results but maintained revenue and ARR guidance for FY23.

·     Telecom, Hardware, Components & Services; in cable, CHTR shares slipped after CFO said at CSFB conference today expects to lose 60k-70k broadband customers in 2q; Morgan Stanley said consumer spending intentions are turning more cautious, even for high-end consumer, with inflation at 40-yr highs. They cut estimates and PTs across our consumer HW coverage and are below consensus by 5% for FY23 revs & 8% for EPS/EBITDA while downgraded SONO to EW (from OW), leaving AAPL as their only Consumer OW.